MS is NOT price gouging on Windows – DoJ expert

In Professor Franklin Fisher's redirect examination by DoJ attorney David Boies, the subject turned to economics. Fisher launched into a lecture on the elasticity of demand, using an OEM price for Windows of $50 and assuming that Microsoft put the price up $10. He concluded that Microsoft was not profit maximising, and that something else was going on. Judge Jackson paid close attention and had Fisher's mathematical jottings entered as court exhibits. At one stage he quoted Koko in the Mikado: "It is nice to have my opinions verified by a competent authority", complimenting himself, it seemed, for having derived this conclusion from first principles. Fisher was puzzled as to why Microsoft was not exercising its monopoly power to a greater extent, and suggested that Microsoft has not at present chosen to charge the highest possible monopoly price. Fisher concluded that Microsoft's price for Windows was unrelated to the fact that it was a monopolist, since Microsoft was taking profit in other ways, such as the protection of its monopoly by imposing conditions on OEMs. This appears to be a weak aspect of the DoJ case, and some analysis of the consequences of Microsoft raising Windows prices substantially might have led to better insight into a possible stampede to stop pre-loading Windows by an increasing number of OEMs (especially with Linux looking better and better). The danger to Microsoft, and the probable reason for Microsoft's restraint, was that this would inevitably result in unlicensed copies of Windows being loaded by users. What has received little mention is the effect of OEM Office licences on Windows prices, especially as Office costs more and has a greater potential for upgrade revenue. The states' case had included monopoly leverage aspects of Office, but it was withdrawn in its revised Complaint, possibly as the result of the DoJ's desire for a simpler case. Fisher made the interesting observation that when AOL signed the deal with Microsoft for IE and AOL icon placement, AOL was in a position to pay OEMs (and ISPs) less since it was getting the exposure anyway. Boies drew Fisher out to press home points that had mostly been made earlier: how Microsoft was using the OS to exploit monopoly power. As Gates put it in an email: "We have had three options for how to use the 'Windows box'. First, we can use it for the browser battle, recognizing 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 recognize that, by choosing to do the first, we have leveled the playing field and reduced our opportunities for competitive advantage with MSN." The outcome was that Gates used the monopoly mostly in the browser battle because he was concerned that the monopoly was at risk. Fisher called this "monopoly protection - gaining profits thereby presumably at a later date, but protecting its profits rather than choosing to take them out in the short-run in the price that it charged for that asset." Lack of industry knowledge by Fisher (and probably Boies) meant that from time to time the record was marred. In view of Microsoft's high-profile denial that IE would be "free forever" (at least so long as it exists in separate form), Fisher's suggestion that Microsoft might start charging for IE is rather unlikely, as Microsoft would be severely wounded by the vilification it would receive for such a reverse. Boies turned to consumers and elicited from Fisher that they had been harmed. One consequence is that the world (or at least the US part) would no longer be "a consumer-driven society" Indeed, Fisher mused, Microsoft's slogan "Where do you want to go today?" would be "where Microsoft was willing to take you or where you choose to go, given the way Microsoft has restricted your choice. And you are certainly going to have to use the means of transportation Microsoft provides. Those may be nice means of transportation. You may, in fact, want to go to these places, but that's not consistent with the kind of market-driven choices - consumer-driven market choices - rather, that a competitive policy relies on." Fisher drew attention to Microsoft's lack of a business plan for spending so much money on browser development for no direct return, and in effect paying organisations to occupy Microsoft's real estate. The only source for the information that Microsoft spent hundreds of millions of dollars doing this appeared to be the answer of Microsoft staff to questions during deposition. Fisher was asked about a Gates' internal email about Intuit sent on 24 July 1996, a year after a merger had been blocked by the DoJ on the grounds of it being anti-competitive. Gates related what happened in a phone call he had with Scott Cook, then CEO of Intuit. Fisher interpreted it as an offer by Microsoft to give Intuit a million dollars if they favoured IE. Boies drew attention to the passage in which Gates said: "I was quite frank with him that if he had a favour we could do for him that would cost us something like $1M to do that in return for switching browsers in the next few months I would be open to doing that." Fisher said this was evidence that Microsoft was prepared to pay organisations to use IE. The amount was not particularly great (and in the event was not paid), since only a year earlier, Microsoft had to pay Intuit a $46.25 million termination fee for breaking off the deal. Lacovara later suggested to Fisher that Intuit had in mind development costs that Netscape would incur to incorporate IE, but a reading of the whole email in context does not confirm this to be a reasonable explanation at all. Gates wrote immediately after the $1M offer: "Scott said he will try to think of something that will help their long term business." Cook had made it clear that it would be hard to incorporate IE in 1996, so Microsoft would need to have something exciting to propose. Gates emailed his troops: "I made it clear to him . . . that we were only willing to do [sic] some very modest favors in addition to [giving Intuit IE for no fee]." A 31 January 1995 internal Microsoft email from Alec Saunders suggested that O'Hare (then being described as "one-button access to the Internet, including internal email, newsgroups, and an integrated World Wide Web browser") could be licensed for a substantial sum, Fisher said. The opinion apparently came from two focus groups. In re-cross-examination, Lacovara tried to suggest that Saunders held a minority view, which was not adopted - but the point that charging $50 for IE was being considered by Microsoft as a possibility remains a serious problem for Microsoft since it decided to forego such a possibility in its desire to harm Netscape. The part of the Gates' memo that seems not to have been quoted is Gates telling Cook that the componentized browser was "a great thing" and then noting: "I really believe Money should [take advantage of this componentisation] although I don't know when we will get around to it." It's the tale of the shoemaker's shoeless children again. A memo from Brad Chase on 4 April 1996 entitled "Winning the Internet platform battle" urged worldwide recipients "go for maximum browser share. "This is a no-revenue product, but you should worry about your browser share as much as BillG." Fisher's analysis of the document was that although it referred to corporate licensing as one of the "biggest potential revenue opportunities for Netscape". Microsoft's interest was in winning the browser battle, not in revenue opportunities. Both sides in the trial seem unaware as to how important senior Microsoft execs regard "winning". Since not one of them needs to work ever again, a considerable part of their motivation for remaining must be concerned with power and ego enhancement, especially by winning against competitors. At last Boies clarified the two meanings of "integrate". He put it to Fisher that one sense was that two software products could be run together seamlessly, without the user being aware they were two different products. In the second meaning, the products were integrated ("welded") so that it was impossible or very difficult to split the integrated product. Was Microsoft's approach to integration anti-competitive, Boies asked. Fisher had a firm response: "The consumer benefit doesn't come from the way the code is designed . . . The consumer benefit comes from the seamless operation. Microsoft, in Windows 95, designed Internet Explorer, particularly Internet Explorer 4.0, and Windows 95 to work seamlessly together and be integrated in that form. And there is, you know, evidence that they could have perfectly well-designed Windows 98 and Internet Explorer to also work seamlessly without having the what I have referred to the other day as the welded feature, the difficulty of taking it apart feature. . . . it was anti-competitive, to design Windows 98 and Internet Explorer in the way that they did it because they could have done it in a way that is less restrictive. They could have designed it in a way in which it is much easier for people to get rid of Internet Explorer than it is now, while providing the same benefits. . . . Because software can be designed in different ways, to design it in such a way that it can't be taken apart or it's difficult to take it apart, and then to argue that for that reason alone, this is a pro-competitive thing to do, or that one can't regard this as anti-competitive provided it provides any advantage in the course of that, strikes me as a rather peculiar argument." Fisher let loose some capitalist chants when he was asked whether this was an industry where competition would benefit consumers: "Well, of course I believe competition would benefit consumers. That is the general proposition - that's the central proposition of microeconomics. That is the central proposition - if I may be so grand, that is the central proposition of western capitalism, and it's based on some very deep theorems. It is true that those theorems mostly ignore the question of innovation, but by and large there is a presumption that competition increases consumers' choice, that competition leads to lower prices, and usually the competition leads to better products." Boies led Fisher into the subject of the percentage of PC shipments with Netscape on the desktop. "On the order of about half of one percent," Fisher replied. Lacovara pounced on this in his subsequent examination. Using data from Compaq's website obtained on 12 January, and verified at a CompUSA store, it appeared that all Compaq's new models now have Netscape Communicator pre-loaded. Lacovara chided Fisher for using old data in his analysis. It emerged that Compaq had evidently changed its policy since the trial began, since Barksdale in his evidence in October had told a much-different story. This may have happened as a result of the trial, and could be a prelude for many more changes in the industry as users become more aware. Fisher agreed that there was evidence of significant price discrimination and price increases for Windows - evidence of Microsoft's market power. This had been discussed in a secret session. Fisher did not think it was significant when Netscape knew that Microsoft proposed to give away IE, or tie it to Windows. "This isn't the case about damages to Netscape, in which case one could argue, I suppose, that Netscape ought to have known what was going to happen. This is a case about damages to competition. Microsoft's actions, as regarded its browser, including the bundling and giving it away for free, were directed at preserving its platform monopoly. Whether Netscape believed that was actually going to happen or not, Microsoft threatened to do it, Microsoft did do it, and the result was to blunt, at least, that particular threat. "Suppose, for instance, that Netscape had, in fact, believed it very early and that it, therefore, decided to stay out of the browser business? That wouldn't have made it any less anticompetitive." Michael Lacovara was then given the chance of re-cross-examination and tried, unsuccessfully as it turned out, to discredit Fisher's work in other cases, claiming that a jury rejected Fisher's evidence in one case concerning display bias in airline reservation systems. Fisher told him that he had confused two cases, and that the case was settled while the jury was out on terms favourable to his client. Lacovara did not apologise for his error. Fisher, whose knowledge of Linux looked very thin a few days earlier, said in response to a question from Lacovara, that he had heard of Linus Torvalds, but ruined it with narrow economist-think by assuming that Torvalds was an entrepreneur with a financial motivation: "If he thinks he's going to take over enough to be more than a minor irritant to Microsoft as opposed to taking over enough to be profitable himself, I would be (a) somewhat surprised that he thinks that; and (b) I would think that he's obviously wrong." Lacovara continued: "Now, using whatever mode of analysis that led you to label the prospect of these operating systems taking significant sales from Windows as a joke, I would like to ask you what you would have said in 1994, in July of 1994, if I said the following to you There is a six-person startup in silicon valley. Five of its employees had just graduated from college. They don't have a commercial product yet. They are building something called a browser. And a year from now, that browser will be the biggest threat to Microsoft Windows." Fisher said it was true that particularly in software firms can start small and become extremely successful. He missed the chance to quip that it didn't say much for Microsoft's much-vaunted research and development organisation sending billions of dollars that it had missed the initial browser opportunity, which had cost hundreds of millions of dollars and an antitrust case, and was now concerned at what it might miss next. Lacovara put a question to Fisher about entrants into the operating systems market. He asked: "Is it a fair statement that every single entrant into the operating-systems market has not attempted to replicate a very wide number of applications initially, but rather to focus on a core suite of applications and to begin to evangelize the new operating system and platform from that core suite?" He probably had not been briefed by Microsoft that when Tim Paterson at Seattle Computer Products wrote QDOS (and subsequently sold it to Microsoft), it was written so that CP/M applications could easily be ported to it. So the premise of Lacovara's question was wrong, but from ignorance rather than guile, it would seem. Lacovara brought up the subject of price discrimination, and mentioned a textbook on the subject. Fisher noted that the two authors had been his students. Fisher was asked to name a single vendor that did not discriminate on price. Again Microsoft was using the "they all do it" argument when the case concerned just Microsoft. Netscape was put under the cross wires for originally giving the browser away to students, but this reached no useful conclusion, and nor did the subject of Netscape being forced to stop charging by Microsoft arise. This led to questioning on negotiating style, with Lacovara - again unsuccessfully - probing the idea that non-price concessions could play a role. After some sarcastic questioning about whether Fisher knew anything about bookkeeping and accountancy, Lacovara asked if there were any significant errors in the data he had seen. There were Fisher said, but they did not affect the outcome of his analysis. Fisher scolded Microsoft for not having drawn attention to these errors in the first place, since they knew about them. Extracts from Fisher's 1983 book on the outcome of the IBM antitrust case were introduced by Lacovara in an attempt to claim that what he had written in the past was precedent - that it was the price adjusted for product quality that mattered. This should have been fertile ground, especially in assessing Microsoft's product quality, but for both sides the seeds fell on the stony ground of ignorance. Fisher had not tried to undertake any quality-adjusted price comparisons (and the idea that this could be undertaken by economists is amusing since their understanding of quality issues alone would be inadequate). Fisher pointed to hedonic regression as the way to do it. Boies then had another round with Fisher, and he elicited some useful points. In the past 12 years there had not been a successful entrant into the OS market that had become a significant competitor to Microsoft. Fisher's ordeal ended with some questions from Judge Jackson on the subject of harm to OEMs, which in turn led to Fisher saying that consumers were harmed when Microsoft raised prices. ® Complete Register trial coverage