DoJ expert – how MS pricing, market share climbed

The court transcripts show Warren-Boulton redeeming himself after a bad start

Now that the transcript of the fifth and final day of DoJ witness consultant economist Dr Frederick R Warren-Boulton is available, it can be seen that there was a sea change in W-B's evidence. He was rejuvenated, and gave as good as he got from Michael Lacovara, a counsel for Microsoft. W-B responded well to government attorney Richard Schwartz's redirect, which was well-conducted and allowed some useful additional points to be made. Since his direct testimony was prepared, it transpired that W-B and colleagues had been working on data obtained by the DoJ under contract from Adknowledge, the Web advertisement market analysis firm. Schwartz focused on Microsoft's monopoly power in the PC OS market. W-B said there were two parts to the definition of monopoly power: the ability to control prices, and the ability to exclude competition. Microsoft's 90 per cent market share and high prices gave evidence of Microsoft's ability to control prices. In the upgrade market, Microsoft evidently used a focus group to help it decide on the price for the Windows 98 retail upgrade: $49, $89 or $129. W-B said that the fact that Microsoft could consider such a wide range of pricing was evidence that Microsoft enjoyed a monopoly. An unidentified Microsoft document (probably redacted -- ie. with the data withheld from the public) showed that if Microsoft charged $89, the sales would fall by only 30 per cent, giving a greater income at $89. In the case of OEMs, Microsoft could charge effectively what it wished, since OEMs had no real choice -- it was a case of very inelastic demand, in economists' argot. W-B also looked at prices over time and found, from Microsoft documents, that in 1991 the OS cost around 0.5 per cent of the cost of the PC, but this rose five-fold to 2.5 per cent by 1996 (with Intel's share tripling in the same time period). Even more startling, however, was the revelation that since 1996, from Microsoft's admission on its web site on 19 November -- the day W-B started testifying -- Microsoft said its share of PC cost was "only" five per cent, meaning that it had doubled in the last two years, and increased ten-fold since 1991. This is information that will probably come to haunt Microsoft in the years to come. Schwartz took W-B through a an exercise to show that the increase could not fairly be attributed to an improvement in Windows, because all aspects of the PC had improved. As to the exclusion of competitors, W-B drew attention to the barriers to entry and the conduct of Microsoft. An unsuccessful entrant would lose all its investment, since there is no other use to which the code could be put, but the greatest barrier is the lack of applications. W-B said that the barriers to entry were "very, very large and increasing". He pointed to the evidence from Apple and Intel as to Microsoft's efforts to force the exclusion of rival products. Part of the deposition of Microsoft VP Jim Allchin was read into the record. In it, he noted that Marc Andreessen of Netscape had said that Navigator would replace the OS. Allchin also admitted that it would be an advantage if, where there were two competing products, the distribution of the rival product was prevented. It was not necessary to spell out the implication. Allchin also admitted that early versions of IE were unsuccessful. Allchin put both feet in when he admitted that "when [browsing] started, it was just an application". Microsoft has been denying that browsing was anything but integrated. The point of the extract was for W-B to note that Microsoft saw Netscape as a direct competitor, a threat to its OS, and a potential distributor of Java Virtual Machines (JVMs). A videotaped extract of the deposition of Bryan Sparks, CEO of Caldera, was introduced. Sparks explained that Caldera at first thought that through its Linux distribution it could be a desktop competitor to Windows 95, but now saw it as a complementary product in a dual boot. Indeed, Caldera did not see Windows 95 as a competitor to its Linux distribution. Sparks said that Caldera was prevented from competing by Microsoft's control of the APIs in Windows -- Microsoft could add and change them at will, instantly making anything that Caldera might do incompatible. On the subject of Sun's Wabi, it was not a clone of Windows, Sparks said, because it required a copy of Windows 3.x. Andreessen appeared in the next video extract. He said that from 1994 to early 1996, Netscape was trying to develop Navigator into a platform to launch applications, but realised this was not possible. He now regarded Communicator as a platform for a class of network-centric software applications accessed with a browser, just as a relational database is a platform for a certain class of business applications, like a general ledger. Andreessen did not recognise that IE was part of the Windows 98 platform, of course. Later, in his re-cross, Lacovara brought up Andreessen's throw-away remark that Netscape would "reduce Windows to a set of DLLs", and introduced an extract from CEO Jim Barksdale's testimony in which he (Barksdale) put it down to jocularity, which did not help the Microsoft case. W-B's least successful testimony was about his idea for market testing, which seemed to be impossible in the market. But much more powerful evidence was introduced in the shape of a series of graphs analysing the gain of market share by IE. Lacovara objected strongly to their inclusion, demanding at one time another two hours to conduct a re-cross-examination should the exhibits be admitted. Microsoft had had the data, recently worked up by W-B and colleagues, for some two weeks but had not chosen to question any aspect of the methodology during that period. He was overruled. A particularly telling analysis was a caching study, using Adknowledge data. Schwartz said in response to an objection by Lacovara that caching had been mentioned during W-B's cross, but in fact this was not true. Nevertheless, Lacovara's objection to the introduction of new material was overruled. When a Web page is accessed, Adknowledge registers it, recording the browser and operating system in use. However, AOL's browser (and others) tend to cache frequently accessed pages, so that Adknowledge under-registers advertisement access. If this is allowed for, the evidence of Microsoft's browser dominance is even greater. W-B showed that in various groupings of ISPs, the relative dominance of Microsoft exactly followed theoretical predictions. Lacovara then undertook a tedious re-cross of W-B. His main useful point was that Microsoft would have to be told to stop innovating if competitors were going to develop a rival OS. W-B was ready for this one, and pointed out that this only applied to clone OSes, and had not been tried since DR DOS. It seemed that Microsoft's recent propaganda about attempts to stop "innovation" suggest that Microsoft has redefined "innovation" to be "tying to stop competition". So far as pricing was concerned, Lacovara showed that OS/2 and MacOS were more expensive than Windows. Judge Jackson took a strong line over Lacovara's desire to continue his re-cross the next day, and formally ruled that he had to finish at 5pm that day. Again, with an eye on the court of appeals, he also said that W-B could be recalled at the end of the case "if the record would be incomplete" without further evidence. Schwartz was given the chance for a last question in a further direct examination. He asked if the caching study of AOL were extended, what would be the result? W-B said the results "would have gotten stronger and stronger". Judge Jackson ruled perhaps a dozen times against Lacovara, and allowed him just one appeal against DoJ counsel Richard Schwartz's leading the witness. It was indicative of the judge's view of the case, it would seem. From his interjections, it is clear that Judge Jackson is reasonably on top of the technical issues. One of his relevant questions was the reason for having two operating systems, in a dual-boot situation. At the end of the day, Judge Jackson told W-B: "You are liberated." ® Complete Register trial coverage

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