Judge tangles with MS witness over ‘monopoly’

Analogies become more and more bizarre, as Schmalensee finishes up

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For Microsoft, Richard Urowsky last week conducted a redirect examination of defence witness Richard Schmalensee. His objective was to convince Judge Jackson that Microsoft was not a monopoly, that it was threatened at every turn by powerful rivals, and that the barriers to market entry in the most valuable monopoly in the world were trivial. Puzzlingly, although Schmalensee's ability to remember data earlier had been poor, this time around he was readily able to come up with information in response to most of Urowsky's questioning. The examination sounded like a Microsoft sales presentation at times. Urowsky elicited from Schmalensee a number of 'facts' that were either untrue, or carefully chosen to be just part of the truth and misleading. He said that the first graphical version of WordPerfect was written for OS/2, but did not add that it was not actually released for some mysterious reason. He gave as his non-expert opinion that there were problems with OS/2 performance, "particularly on computers that didn't have abundant memory". Evidently the breakfast cereal expert had not tried running Windows 95 with the minimum hardware suggested. Schmalensee also related a story as to how a VP for information systems of a "large utility company" where Schmalensee was on the board chose OS/2 because the VP was of the opinion that it would be the successor to DOS. Schmalensee seemed to be rather pleased that "he is no longer with the company". Of course, it was not mentioned that writing for OS/2 was the official recommendation by Microsoft at the time. Schmalensee's arguments about higher prices for operating systems being "more than made up for by the increase in quality" is certainly questionable. Schmalensee also claims that Microsoft engages "in relentless innovation", something he says is not typical of monopolists. What innovation could he mean? Microsoft seems to have bought-in every significant development that works. Several times Judge Jackson questioned Schmalensee: "Why must you always assume that the monopolist maximises the price?" he asked at one point. Since the previous response had been about how reasonable it would be if Microsoft charged $2,000 for Windows, the judge's use of "monopoly" strongly suggested he does not accept Microsoft's arguments that it is not a monopoly. He went on to consider "a cigarette company which is a monopolist. We can all conceive of reasons why a cigarette company would price at the low end of the scale, notwithstanding that it is the only source of its product." Schmalensee went on: "Microsoft wishes Windows were [as] addictive [as cigarettes]. . . . The argument that you've made that Microsoft is concerned with expanding PC usage is, I think, correct. What differentiates it from cigarettes, I think importantly, is that there isn't any evidence of that kind of addiction. One can expand the market for computers that isn't necessarily Microsoft's market ten years from now." At this point, Judge Jackson asked a very strange question of Schmalensee that did not follow from the preceding remarks: "Do you have kids?", to which Schmalensee replied affirmatively. The judge pursued the matter no further, but it was a mystery as to why he asked. [No it's not. He's worried about DirectX 7 - Ed) Surely he wasn't considering amelioration for a custodial sentence? Perhaps he holds strong views about smoking. Another interjection by Judge Jackson occurred when the subject of differing airline prices for the same seat was brought up. The judge found it "exasperating" and went on to relate his experience in this matter. After Schmalensee had opined that Microsoft did not have monopoly power, but did have the ability to affect the distribution of products through pricing, the judge said "Answer that question again. The ability to affect distribution is no indicium of monopoly power?" The rhetoric was clear. Schmalensee launched into a theoretical example of the distribution of canned corn in supermarkets and the suggestion that a parking lot for the supermarket would not be paved if the supermarket sold a rival's corn. The judge didn't buy it: "Isn't that, in essence what is being alleged here?" After an unsatisfactory attempt to disagree, the judge said: "As I understand some of the testimony here, it has been, in effect, precisely to that objective, that by use of the operating system and its alleged monopoly in the operating system and its refusal to extend its operating system to potential competitors or potential distributors of applications, other software, except upon unfavourable terms, it has done exactly what you were doing with your supermarket or, rather, let's say, your parking lot, your paving monopoly." Schmalensee tried another example, suggesting that the monopolist said that the parking lot would not be paved unless the paver's own brand of toothpaste was distributed. He then, foolishly, said "I'm not trying to do law here" but the judge carried on, attaching theoretical conditions to the distribution of the toothpaste: "Rival brands would have to be on the bottom shelf, and only for three days a week" to which Schmalensee said that that would not constitute a material disadvantage. The judge said "I'm saying that it is, and you can make the argument that there are other channels of distribution. You could go through pharmacies or through convenience stores and things like that. But the fact that toothpaste is not - your competitor's toothpaste is not being distributed except on very unfavourable terms in your supermarkets . . . " He did concede, apparently without believing it, that a non-monopolist could try to impose such conditions. It was a grave mistake by Microsoft's defence to stray into legal areas with a witness who was clearly not an expert in understanding the legal definition of a monopoly. Urowsky compounded the problem by not having the flexibility to adjust his redirect after these colloquies with the judge. He invited Schmalensee to consider a series of theoretical questions assuming that Microsoft did have monopoly power. It was then claimed that the meetings between Microsoft and Netscape, Apple and Intel (at which monopolisation was discussed) could be ignored. The judge interjected again: "Is it not also important to your having ignored them that they are of consequence only if you start from a premise that there is monopoly power? And your whole thesis is predicated on the absence of monopoly power." Using conjuring tricks with data, and not giving all the assumptions, Microsoft's witness claimed that Netscape would have 60 million total users in 2002. Judge Jackson was cynical about the simplification that was being attempted (disguising Microsoft's considerably greater market share), and said: "This is simply a rising tide that raises all boats". Schmalensee seemed to think that PCs had fallen in price in the US from $5,000 to "closer to $3,000". He certainly hasn't done any research in the matter, and nor had his helpers from NERA. He apparently did not realise how foolish it was to compare prices for operating system software and utilities in 1989 with today, to claim that Windows is a bargain because it has incorporated utilities. Schmalensee was also wrong when he said that the DoJ's economists had seen his direct testimony. Fisher said he had not, and it was not released at the time Warren-Boulton was giving his evidence. Furthermore, the judge directed that Fisher should not see it until he had finished giving evidence. Microsoft had released Schmalensee's testimony earlier than had been agreed, probably in an attempt to take headlines from Fisher. It was denied that Microsoft's practices increased Netscape's distribution costs, or that Microsoft could foreclose Netscape from distributing through the OEM channel. It now seems that when many users had too little hard disk, OEMs were wary of distributing two browsers, but with the large disks eliminating this problem, and a desire not to offend users who preferred Netscape, OEMs are now loading it again. Netscape's decline was put down to the "superior" quality and technical superiority of IE, but religion would appear to play a greater part in these assessments than objective criteria - and who was paying the piper. Urowsky asked predictable questions about the Fisher evidence and received predictable and probably rehearsed replies. He ended with an attempt to explain away the embarrassment of the survey where Gates had asked for a 90 percent result that showed that developers thought it a good idea to have the browser welded into Windows. However, the old story still showed through the attempt at covering it with whitewash. The ending in mid-afternoon meant David Boies could not be briefed the next day by technical experts for his cross-examination. The result was that Boies missed many of the points that should have been raised in his re-cross examination. He did draw attention to inconsistencies in the data used by Microsoft to establish its view of browser share, for example when Netscape browser usage was said to have dropped from five million to four million in one quarter, and increased from four million to six million in another quarter. These extraordinary claims were derived from very small sets of data with 200 to a little over 300 respondents to a telephone survey. Microsoft had used a chart showing the number of Netscape users rising until 2002, but had omitted a chart showing that Netscape's market share was declining. Schmalensee did not think that Netscape would be offering a platform to compete with Microsoft in the foreseeable future. There will be a final secret session on Monday morning, with Paul Maritz scheduled for the afternoon. ® Complete Register trial coverage

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