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Gates interview undermines MS witness testimony

Now Schmalensee's 'bits of paper' claims look even less plausible...

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We have found a serious conflict between what Gates said in a soft interview for a controlled circulation magazine produced by a Chicago-based management consultancy, and the evidence of Professor Richard Schmalensee, Microsoft's expert economist witness during the Microsoft trial. The evidence about Microsoft's sales records speaks for itself, when the two items are seen together. Interview by Paul Carroll, Context Magazine [Diamond Technology Partners, Chicago], Premiere Issue (November 1997): CONTEXT: In your travels, have you run across particular people or companies that are thinking about technology in an interesting way? GATES: I don't think many companies are doing it very well. ... But who's really great at using information technology? We're pretty damn good. There are some things we do, like our sales tracking system, where we can look at our sales in some incredible ways. Who else would we expect to be good? Intel? Not really. Various computer companies? Not really. They're just sort of catching up. Everybody buys SAP. How can you be differentiated when you're all buying and using SAP? So, people have decided that they're not going to be much ahead of anybody else. USA versus Microsoft, Transcript, 20 January 1999, pm, p46-47: DAVID BOIES [for the DOJ]: Did you, in preparing yourself to testify, make any attempt to determine how much of Microsoft's reported profits came from operating systems? RICHARD SCHMALENSEE: Yes, I did ask Microsoft to the extent to which the business could be broken down between operating systems and applications. And I was told the data that's separated in that fashion simply didn't exist. BOIES: And did you accept that explanation at face value, sir? SCHMALENSEE: I was surprised, but I will be honest with you, the state of Microsoft's internal accounting systems do not always rise to the level of sophistication one might expect from a firm as successful as it is. That explanation is consistent with other information I had received about the nature of their internal systems and records. . . . I was interested in the question of what's a reasonable assumption for the sort of ancillary revenues, say, from applications programs that Microsoft might expect as a consequence of Windows sales. I said, can you separate the company into the two pieces, so I might be able to address that question? The answer was there were a lot of common costs that aren't allocated between those two businesses, and the records just don't let you do it. That seemed to me consistent with the other things I knew about the company. BOIES: And just to be clear, you were told that Microsoft doesn't have any records that show how profitable their operating system is, doesn't have any records that show what ancillary revenues or profits it receives, and you accepted that on face value; correct? SCHMALENSEE: Mr. Boies, they record operating system sales by hand on sheets of paper. Under those circumstances, I accepted the absence of a detailed cost allocation system absolutely. Gates must have been referring to the other set of books that Microsoft had overlooked. Microsoft uses SAP, so it would be interesting to know which set of books is kept in that system. Microsoft was extremely reluctant to allow any access to its accounting system database, so the DoJ had to get an enforcement order from Judge Jackson at the beginning of the trial to get any information at all. We feel sure that there was no intention to mislead the court. Don't you agree? ®

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