By William Fellows
The US Government continued its attempt to undermine the testimony of Microsoft Corp’s key witness in the antitrust trial in Washington yesterday, suggesting that in it, professor Richard Schmalensee directly contradicts some of Microsoft’s own claims about the browser market and moreover didn’t follow the normal rules of economic analysis when conducting his study. Government lead attorney David Boies also produced internal memos and Microsoft emails suggesting that it was Microsoft’s market power over OEMs and not better technology which gave IE dominance. The Justice Department and 19 states allege Microsoft maintains its market share with Windows using illegal actions and that the company used the power of its monopoly share to try to dominate the browser market. Boies argued that Schmalensee’s testimony is unable to support Microsoft’s defense – that it has not restricted users’ choice of software and it does not have market or monopoly power – because the MIT professor did not use the normal rules of economic analysis such as market, intent, alternatives and pricing. In his testimony Schmalensee says that contemporary trade press reviews of IE 4 and Netscape’s browser he looked at show IE to be slightly better than Netscape. Boies produced Microsoft’s own financial 1999 browser marketing review to suggest Schmalensee does not have the same basic understanding of the market as Microsoft does. The review concludes that 1. IE is fundamentally not compelling and not differentiated from Netscape 4 – [and is] seen as a commodity. 2. [IE] increases, does not decrease support costs. 3. No ‘grass roots’ end user demand for the browser. 4. Too many B.S. business issues (channels, AD, branding etc). Hardly the view that IE is on a par with Netscape. Moreover, a September 8 1997 email from Microsoft’s Brad Chase to other executives on the results of a web professionals tracking study says: consistent with other leading studies, Netscape is still perceived as having the best browser and setting standards on the internet.
Screen restrictions
The government argues that it is through Microsoft’s market power and the absence of alternative operating systems for PC OEMs that it has been able to achieve dominance. Backing this claim, Boies suggested the screen restrictions Microsoft imposed on OEMs about what they could show when a PC boots occurred sometime after a January 5 1996 email memo sent by Microsoft CEO Bill Gates which said winning internet browser share is a very important goal for us. In a January 22 1996 mid-year OEM sales review, Microsoft admitted that it missed control over start-up screens, MSN and Internet Explorer placement. After screen restrictions were imposed, limiting OEMs’ ability to show other icons on the Windows desktop – notably Netscape – as well as other custom appearances, Hewlett-Packard Co sent Microsoft a letter which read Microsoft’s mandated removal of all OEM boot sequence and auto start up programs from OEM licensed systems has resulted in significant problems. If we had a choice of another supplier, based upon your actions in this area, I assure you, you would not be our supplier of choice. Asked about how much Microsoft had spent on IE and what giving it away for free has cost it, Schmalensee testified he wasn’t able to calculate many of the costs because Microsoft told him it simply did not have those kinds of records. Nevertheless Schmalensee estimates Microsoft has spent in the region of $500m developing IE, or some $100m a year. He said he didn’t know how much Microsoft had spent on marketing, but admitted there are documents that provide estimates of how much Microsoft lost by deciding not to charge for IE. Because of the retail channnel’s long lead time, a version of Windows 95 which initially shipped to that channel didn’t include IE, development of which had slipped. Microsoft considered charging for IE as part of frosting, a code-name for the add-on pack of programs made available for customers purchasing Windows 95 through retailers. (OEMs, with shorter lead times, got the integrated Windows 95/IE). Boies produced a Microsoft email that said O’Hare (IE) could mean as much as $120m in incremental revenue from frosting. In the event Microsoft decided not to charge for IE, though it evidently considered charging for it as a separate product at least up until the summer of 1995, long after, Schmalensee argued yesterday, Microsoft had supposedly already made the decision to give it away for free. Schmalensee said he hadn’t studied how much Microsoft had paid ISPs to convert users to IE.
