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DoJ expert sums up case against Microsoft

Fisher's testimony might have been more contemporary, but it's still a serious charge-sheet

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Professor Franklin Fisher many times states the obvious and contributes little that is new in his direct testimony, which was prepared in September before the trial started. It would have been more valuable had he prepared it more recently. He reiterates that Microsoft has monopoly power with Windows (which Microsoft obstinately refuses to admit, despite the fact that this in itself is not illegal). Fisher says that Microsoft foresaw the threat to Windows from a browser platform and from Java, and took many anti-competitive actions as a result to protect its monopoly. Microsoft's profits will come not from IE, but from the adverse effect that Microsoft has had on competition. So far as barriers to entry into the PC operating system market is concerned, Microsoft has taken a number of steps to maximise these barriers, including tying IE to Windows; largely excluding browser competitors from distribution channels; having agreements with OEMs such that they may not remove IE; having agreements that boycott or disfavour Netscape; and making IE "free" "forever" in a deliberate move to harm Netscape. Microsoft tries to show that it is easy for a competitor to enter the PC OS market, but avoids explaining why there are no effective competitors in the world's greatest monopoly market (although Fisher omits to make this observation). Other barriers include economies of scale, which are significant in the software business, and network effects, which can be briefly summarised as less-informed people thinking it is safe to do the same as most others - essentially a herd instinct. Again, the presence of network effects is not illegal per se, but it does make monopolisation easier. Fisher points to the absence or ineffectiveness of competitive constraints on price, output, product decisions and quality. It seems that Fisher overlooked the small amount of work that Microsoft claims to have done with focus groups, for example over Windows 98 pricing. He briefly considers substitutability from the point of view of consumers and OEMs, and concludes there are no reasonable substitutes for Windows on Intel-compatible PCs (but had he written his report a little later, he might have had a better understanding of Linux). In discussing predation, he defines it as an act that is not expected to be profitable unless supra-normal profits are made as a result of the adverse effects on competition. Fisher quotes a telling passage from the deposition of Joachim Kempin, Microsoft VP of OEM sales, in which Kempin admitted he set Windows 98 royalty rates without reference to other vendors, which of course confirms that Microsoft does not have to look over its shoulder to set prices. The work Microsoft did with focus groups was to find psychological pricing points for revenue recognition. Unfortunately, most of the 90 or so depositions in the case will not be entered into evidence in their entirety. It is ironic that Microsoft's major competitor is itself, but even here Microsoft has taken steps to ensure that Windows licences are not transferable, and virtually all PCs have Windows whether the user wants it or not. The outcome of a case to test Microsoft's end user licence agreement (EULA) against the UK unfair trading terms act would be very interesting - a case that Microsoft would no doubt do its best to avoid. Microsoft's licence prohibits the development of a secondary market in Windows licences unless it is challenged in this way. Fisher opines that Microsoft will obtain monopoly power in the browser market, and says there is a substantial market for browsers separate from operating systems. He quotes from the deposition of Cameron Myhrvold, VP of the Microsoft Internet customer unit, that Microsoft markets IE to ISPs as a browser: "If you're selling tyres, you probably don't want to sell them as a piece of a Ford." Fisher highlight's the section in Gates' Internet Tidal Wave report from May 1995 where he outlines the plan to change Microsoft's HELP command to a format that requires the use of IE. This was a disservice to users that has received little adverse comment. Fisher summarised the market-splitting arrangement that Microsoft proposed to Netscape and which has made Microsoft wriggle very uncomfortably. Andreessen's forwarding of his very detailed account of the Netscape-Microsoft meeting to David Kaiser the very next day gives the story the ring of authenticity that makes it very hard for Microsoft's department of fiction in its ministry of truth. An aspect of this that appears to have passed without comment, including from Fisher, is that when Microsoft is turned down in a courtship, it has a long history of doing its utmost to bring about the demise of the vendor, as Digital Research DR-DOS, Stac (compression), Adobe (font technology), Apple (QuickTime) and many others know to their cost. Gates' and other Microsoft communications to Intel detail the extent of Microsoft's bullying and market power. Although it can be expected that Microsoft will offer an alternative explanation with its witnesses, the damage has been done since the first account tends to get believed in the absence of a compelling alternative. Microsoft will not easily be able to use any documents that it has not already produced to the DoJ in response to its CIDs (civil investigative demands), lest it be accused of the criminal offence of withholding evidence. Microsoft's post hoc verbals cannot be as convincing as contemporary documents. Few students of Microsoft doubt that a number of smoking-gun Microsoft documents might just have never made it as trial exhibits, or that there are others that may be lurking around and not have been produced. Even had there been a real will to produce documents, this is likely to have happened. It is rumoured that in Germany, Microsoft the sudden arrival of new PCs resulted in email messages between Microsoft and Vobis being destroyed. Fisher usefully summarises the evidence of threats by Microsoft to competitors where the threat makes no sense from a business viewpoint other than to harm a competitor. The best example of course is with Apple's multimedia authoring tools. Fisher calls this the essence of predatory anti-competitive conduct. Paying companies to take IE, and spending an estimated $100 to £200 million on browser development made IE pricing negative, in reality, not zero, and is prima facie evidence of predation against Netscape. When Netscape finally had to stop charging for Navigator, although Netscape's revenue from it was only around 13 percent of its revenue at the time (an important detail that Fisher missed), it was forced on Netscape despite Microsoft's attempts at establishing an alternative story. Gates is known to have directed that studies of Netscape's sources of revenue be undertaken. When Microsoft decided to offer IE at no charge, between 20 and 50 percent of Netscape's revenue came from its browser. Fisher resurrected Gates' rather candid comment to the FT (10 June 1996): "Our business model works even if all Internet software is free . . . We are still selling operating systems. What does Netscape's business model look like? Not very good." Cameron Myhrvold said in his deposition that Microsoft's ISP referral service "doesn't even pay for itself, much less generate any profits . . . so no, we don't make any money from IE." If Microsoft made a mistake in its pricing policies, it was the failure to claim in its internal documents that the purpose of its predatory pricing of IE was to increase the sales of Windows. If this had been true, Microsoft would have been happy that any browser could have helped its objective of selling Windows, but as is well appreciated, Microsoft "cared greatly", as Fisher puts it, "who made the browsers used with Windows." In addition, making a version of IE for Apple actually encourages a reduction in the sales of Windows. Microsoft's desire was very clearly to disable Netscape and increase Microsoft's share of browser sales so that the potential threat to the Windows monopoly was dissipated. It will be tough for Microsoft to talk itself out of these conclusions. Fisher repeats that Microsoft's predatory pricing "lost money in order to raise rivals' costs and exclude them from the market". Microsoft also sought to deprive Netscape of revenue "by inducing ICPs to agree not to pay Netscape for carrying or promoting the ICP's content or logos . . . Microsoft was prepared to give away valuable concessions to ICPs to secure such agreements." Then there was Microsoft's threat to Apple to cancel Office 97 for the Mac if Apple did not "prefer" IE, and Microsoft's disabling of Apple's QuickTime with IE4. The evidence that Microsoft deliberately tied (or bundled – in this context there are elements of both) IE with Windows for anticompetitive reasons rather than for genuine efficiency reasons will be hard to disprove. Microsoft forces users to take IE, whether it is required or not. There is some irony about this since there are some logical reasons to bring increased functionality to the operating system, except that the way that Microsoft combined IE and Windows was to make the separation as difficult as possible, and not to help users. Microsoft decided to combine IE and Windows to foreclose competition rather than to achieve efficiencies, Fisher opines, quoting a number of Microsoft emails that give evidence of this. In addition, Microsoft has designed interdependencies between IE and Windows, claiming this to be a rationale for bundling. Fisher concludes that "the anticompetitive effects are large and that the technological benefits appear to be very small or non-existent". Microsoft's arguments about desiring users to be able to have a uniform experience with Windows/IE is unsustainable. Fisher quotes a deposition from Joseph Kanicki of Dell in which he says that "Dell negotiated and obtained an exception to this requirement for instances in which a customer requested a Windows 95 or Windows computer without Internet Explorer." Fisher notes that Microsoft would not have allowed this if it were really true that doing this would undermine the quality of the operating system. It is a pity that there is no information on the record as to how Dell achieved this: whether Microsoft helped, or Dell just removed the icon in some way similar to Felten's procedure. Michael Cusumano and David Yoffe quote in "Competing on Internet Time" a remark by Gates in March 1996, just after Microsoft agreed to give AOL favourable access to Windows for preferring IE: "We have three options for how to use the ‘Windows box': first, we can use it for the browser battle, recognising that our core assets are at risk. Second, we could monetize the box, and sell the real estate to the highest bidder. Or third, we could use the box to sell and promote internally content assets. I recognise that, by choosing to do the first, we have levelled the playing field and reduced our opportunities for competitive advantage with MSN." Fisher says very little about the Adknowledge data sets that were used to analyse how Microsoft's share of the browser market varied across ISPs, and user hits by ISP and browser type. The data support Fisher's summary of evidence about the effect of Microsoft's practices on Netscape. The chilling conclusion is that the message sent to developers is that "Microsoft will impede any innovation that threatens Microsoft's monopoly in operating systems. This will lessen developers' incentives to develop products that provide alternatives to the Windows platform. . . . If Windows were truly a superior product, it would succeed on its merits. The actions Microsoft is taking will prevent that from being necessary." Fisher's final conclusion is: "Microsoft has engaged in anti-competitive conduct that has no compelling economic justification but for its effect of restricting competition. These actions will allow Microsoft to protect its monopoly in the market for operating systems and establish a monopoly in the market for browsers. This situation can never make consumers better off than they would be with unfettered competition, and is likely to make consumers worse off." The last sentence is legally important, since it provides an expert opinion that satisfies a primary criterion of the Sherman antitrust act: that there must be an adverse effect on consumers. Complete Register trial coverage

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