DoJ quizzes MS ‘expert’ economist

Is Schmalensee just trotting out the Microsoft script?

The first area that the DoJ's David Boies explored in his cross-examination of Dean Richard Schmalensee, as is usual in antitrust cases, was the relevant market. But Schmalensee "didn't see any particular purpose in investigating" whether there was a relevant market. "Market is not relevant or necessary to answer the questions posed," said the man with the vast CV. This led Boies to bring up Caldera versus Microsoft, and ask about market definition in that case. Of course it also signalled to Judge Jackson that there was a another private antitrust case against Microsoft. The reason for Schmalensee wishing to avoid agreeing to the DoJ's definition that the relevant market was for PC operating systems on Intel-compatible processors was that market share effectively provided the evidence that Microsoft is a monopolist. The usual trick is for the defendant monopolist to try to extend the market to make the market share seem smaller, by including the Mac and Unix workstations on any processor, for example. Saying a relevant market definition is not, er, relevant is a risky stratagem. Every operating system still be sold or offered was a potential serious competitor for Windows, according to Schmalensee, including AOL, Netscape and Palm. Platforms were as threatening as proper operating systems, it seemed according to the expert. He also thought that a "high" proportion of the 7.5 million Linux users were using Linux as a server, but an hour or so later said that the majority of Linux sales was for desktops, not servers. In one response Schmalensee was prophetic. Boies asked: "Is it your belief and opinion that at the present time, except for specialized applications, Linux is not a viable competitive alternative to windows for OEM manufacturers because of the lack of applications?" Schmalensee replied: "By 'competitive alternative', I take it you don't mean it might make sense for a Hewlett-Packard or a Dell to offer a line of Linux machines in addition to its Windows machines, because the answer is it might." By the next day, Schmalensee had found out during a break, from the NERA bag persons (Dr Evans, Dr Nichols and Ms Holbrok), that Dell was offering Linux to corporate customers who bought more than 50 PCs. Schmalensee suggested market conditions had changed since his October deposition, in which he said that "I'm not aware of anything at present that would count as viable competition" for Windows. He wanted to add the new release of BeOS, and noted the "ploy" that Be used to make it possible to use two operating systems, since it could also stand alone. In response to Boies' question, he didn't know who the CEO of Be was. The judge asked him if Be was making any money, but although he didn't know, he said he "would be stunned if they were". It seems that quarterly accounts are like cattle food to economists, something not fit for them to consume. Boies asked Schmalensee if he was seriously trying to suggest to the court that Palm's operating system was a competitor to Windows. Schmalensee had to admit it was "the germ of a potential competitor". Clearly he did not know much about Windows CE. Boies drew attention to an apparent inconsistency in Schmalensee's evidence in Bristol vs Microsoft, where Microsoft was arguing that Bristol did not have the standing to sue because it was outside the market, although according to an earlier question, Schmalensee agreed that Wind/U was a product that enhanced Unix, a competitor of Windows. Microsoft counsel Urowsky jumped up to object, but when the judge sided with the DoJ, he did not object to the question, saying that it was a different question, perhaps to save his face. The transcript shows it was the same. Boies managed to wring the relevant market definition he wanted out of Schmalensee, after he had been shaken up by the possibility of more inconsistency in his testimony in previous cases. Schmalensee also fell back on his reserve position of wanting to include the Mac operating system in potential threats to Windows. For once, Boies missed the chance to slap him down for not keeping to the agreed relevant market definition. Schmalensee maintained the Microsoft line that there were no significant barriers to entry in the market, and no applications barrier. At least this was consistent with his view that Microsoft did not have monopoly power to discourage potential entrants. Responding to a question about ISVs (developers in the context), Schmalensee said he had "seen absolutely no evidence that suggests that in fact, 15 years ago, the ISV community was much smaller than it is today". He could have looked at the Microsoft Web site where Microsoft is always congratulating itself on increasing the number of ISVs, but evidently his bag persons at NERA had not done this. As a last resort he could even have read his own testimony where on page 20 he said: "More than 2000 firms have entered the market since 1991." When asked about the applications barrier to entry, Schmalensee slapped Apple CP Avie Tevanian, because he wasn't an economist, for saying: "As Apple has learned through experience, when one company has monopoly power in the operating system market, the symbiosis between operating system and applications programs creates significant barriers to the introduction and growth of competing operating systems." Tevanian probably wasn't an expert on breakfast cereals either, but at least he really does know about the operating system market. Schmalensee reached the bottom of the barrel when, on the subject of serious future threats, he identified "the bright undergraduate with a great idea". From time to time, Schmalensee strayed into making technical value judgements that he had no expertise to make. Microsoft would have filed a Motion to have such parts of his testimony ignored, but Boies let them go, to enrich the record with such remarks as "Mac has a good operating system technology". He also tried to make judgements about the NC. At times it was hard to tell the difference between Schmalensee's ill-founded, non-expert technical opinions and Microsoft marketing speak: "The inclusion of Web browsing software in Windows has enabled ISVs such as Intuit to write better software for Windows users." Judge Jackson referred to an article in Newsweek about Linux and its developer, Linus Torvalds. It became clear that the judge had not absorbed the real situation, since he referred to Torvald's "franchise". Boies encouraged Schmalensee to sound off what a great threat Linux was, and was then confronted by a trade press extract [not identified in the testimony] dated 25 June 1998: "'The competition,' Mr Gates said, 'is the status quo and staying with what you already have, and that popular newcomers such as Linux pose no threat to Windows. Like a lot of products that are free, you get a loyal following even though it's small. I have never had a customer mention Linux to me,' he said." Schmalensee then went on to try to disagree with Gates, and became very confused: "I can't imagine he said no long-run threat to Windows ever." Schmalensee became less confident after this and other body blows to his arguments, and said that "Microsoft began to invest in improving its platform as it relates to the Internet 93-94." -- but what's two years in nearly two thousand? Schmalensee tried to maintain that Microsoft priced Windows lower because of Netscape and Java, which controverted Microsoft internal email that made it clear that psychological barriers in pricing were more important, at least for the retail version. The OEM prices are negotiated in a cock pit. Schmalensee's cross-examination is likely to last all week. ®

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