By Rachel Chalmers
As the US government’s antitrust trial against Microsoft Corp creaks back into gear in a sweltering, deserted Washington DC, Microsoft officials can be heard in corridors loudly repeating what they have long maintained about the government’s first rebuttal witness. They say that MIT economics professor Franklin Fisher was damaged in the long cross-examination to which he was subjected by Microsoft attorney Michael Lacovera, and that he needs rehabilitation. They say his arguments are circular and that he knows little about how the industry really works. A few representatives of little-known industry associations betray their affiliations by repeating exactly the same assertions to reporters whenever the court adjourns for a break.
Why has Microsoft invested so much in discrediting this witness? Perhaps because Fisher’s testimony is itself so damaging to their own economic expert, Richard Schmalensee, also of MIT. To add piquancy to the situation, Schmalensee is a former student of Fisher’s. Indeed, Fisher’s most subtle and devastating technique for undermining Schmalensee is to adopt the demeanor of a kindly teacher and shake his head sorrowfully over his errant pupil’s failings. It was a technique he had plenty of opportunity to trot out on this, the first day back in school.
Prompted by lead prosecutor David Boies, Fisher commenced with the observation that Schmalensee has refused to define any market in which Microsoft might have a monopoly. Perhaps because he found it difficult or impossible to do. Stemming from that is a lack of systematic thinking, which has led him to some muddled results, he said. Expanding on this, he set the theme of the day: The question of whether Microsoft has monopoly power in PC operating systems is crucial. Refusal to define that market is a way of getting muddled.
Schmalensee, however, wouldn’t talk about the putative market for PC operating systems in his written or oral testimony, preferring to talk about the microcomputer software industry in general. This is, of course, a highly competitive sector and one in which Microsoft obviously has no monopoly. Fisher says Schmalensee has willfully missed the point. It’s a great mistake to think we are talking about competition in software in general, he asserted, we’re not.
Fisher’s argument can be summarized roughly thus. First, customers – by which he means, in this case, OEMs – do not believe they have serious commercial alternatives to Windows as a PC operating system. Second, Microsoft can thus raise prices without fear that those customers will turn elsewhere. Third, Microsoft is therefore not constrained in its pricing by the existence of other PC operating systems. So, fourth, its market share of PC operating systems is high and stable, has been for some time and is expected to remain so.
Fifth, there is a very big barrier to the entry of other competitors to the PC operating systems market – that is, the difficulty of attaining critical mass in desktop applications. Finally and crucially, Microsoft has taken actions that only make sense if they believe they have a monopoly to protect. Taken together, these facts strongly suggest that Microsoft does have a monopoly in the PC operating systems market and that it has engaged in anti-competitive conduct in order to keep it. That’s Fisher’s story, anyway, and whatever Microsoft says about him, he’s sticking to it.
By contrast, Fisher’s overview of Schmalensee’s evidence is as follows. Schmalensee looked at the software industry in general. Fisher deems this irrelevant. Schmalensee also behaves rather peculiarly about the market, Fisher says, by defining Java and Netscape as competitors to Windows, which, since they are not PC operating systems, they cannot be. Third, Fisher says Schmalensee regards the fact that Microsoft took action against threats as evidence that Microsoft doesn’t have a monopoly. That can’t be right, he said. If it were, any monopolist could take action against any threat, however trivial, and point to that action as disproof of its own monopoly.
Fourth and finally, there exist unknown threats that limit the prices Microsoft can charge for Windows, according to Schmalensee. Fisher counters that these putative threats do not constrain Microsoft from the exercise of monopoly power today. It might be true that some future unknown innovator will someday produce a platform threat that will erode Microsoft’s power, he acknowledged, but the real question is whether that constrains Microsoft now. Will setting high prices hasten the day of its demise? It’s like the old man in Peter and the Wolf, saying ‘What if a wolf comes out of the forest? What then?’ It’s not a serious analytical way of looking at things.
Schmalensee pointed out that many software categories are naturally winner-take-all niches. While that’s interesting, Fisher conceded, it’s not the point. The issue is not whether the winner of a winner-take-all category has monopoly power, but what that firm is then permitted to do to ensure that it continues to be the winner that takes all. The economics of competition and of anti-competition theory, on which this case is based, are themselves based on a presumption that competition ends up being good for the consumer, he argued. That’s a well- founded assumption. It’s a mistake to suppose, as Schmalensee does, that you can do whatever you like to become a winner. How ironic that Microsoft should be using its most naked smear tactics against a witness so adamant in his insistence upon fair play.
