MS economist gets fail mark from his old prof

Complete analysis of Franklin Fisher's examination

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MS on Trial Government economist witness Franklin Fisher did a better job in rebuttal than he did in his primary evidence, but he still showed that he doesn't know nearly enough about the industry. And Microsoft's cross-examination was designed to test how little he knew, rather than to counter his arguments. It was nothing but ritual silliness, a game played by highly-paid witnesses, to claim that black was white, or vice versa, depending on which side they were on. In some circles, it might have been called "bearing false witness". Most of the weaknesses in the Microsoft testimony would have been more convincingly criticised by somebody from the industry, but because of some Spanish customs in the witnessing business in antitrust cases, economists have it stitched up. Since there was no written direct testimony, Fisher was first examined by David Boies, the DoJ's special trial counsel, and already the cult figure in the case, thanks to some useful one liners on the courthouse steps, and some humour in court. Fisher hadn't been allowed by court rules to see written testimony by economist Richard Schmalensee for Microsoft before he was cross-examined, so Boies dwelt on what Fisher had found out about his former student's errors. The MS student's goofs It turned out there were quite a few mistakes, and that today, Schmalensee would not pass Fisher's course in antitrust economics. The big flaw with Schmalensee's argument had already been flagged: his refusal to accept that a market definition was needed. The danger of a definition of the operating systems market for Microsoft would be that it could be proved to be a monopoly with almost any definition. Fisher put the boot into Schmalensee for confusing entry into the applications software market as being easy (it is) with entry into the PC operating systems software market (it's almost impossible). There's no "demand substitutability" said Fisher, triumphantly - and he was right. And there's no "supply substitutability" either, he protested, because of the applications barrier. Right again, and Fisher had some reasons for this. First of all, Microsoft's customers didn't think there was an alternative to Windows. Microsoft could also change the spec of Windows and put up the price (it's already done that Prof, but never mind). Then Microsoft is not constrained by non-Microsoft operating systems. Next, Microsoft's share of the market is high and has been high for many years. Reason five was the applications barrier, and reason six, a damning one, is that Microsoft's conduct can only be explained by postulating that it behaved as it had because it was protecting its monopoly. This was all good stuff. Schmalensee, said Fisher, had been non-relevant, looking into competition generally, and comparing it with other industries. It was silly to refuse to define a market, and then to say that Netscape and Java both were in the OS market. Because Microsoft has monopoly power, which it abused, it took action against Netscape and Java, which it would not have done if they weren't a threat to its monopoly. Arguing for the danger of an unknown threat "out there" sounded rather like whistling for a wind. Fisher also thought that Microsoft might believe it would hasten the day of judgement if it charged high prices now, and did not like looking at possible future constraints as an analytically correct way to examine the nature of any constraints. This was in fact a repeat of his fourth argument, but at least Fisher was scoring points with what appeared to be rehearsed responses. Predatory pricing? Microsoft's losses from its predatory pricing would be recouped, Fisher said, and the time it might take Microsoft to recoup these losses did not relate to whether Microsoft had monopoly power. In any event, he thought, Microsoft would get its money back quickly. No new firm had entered the PC operating systems business and established a 5 per cent share since 1991, Fisher agreed, which meant that in such a profitable market there was an extreme entry barrier. Schmalensee was swatted down by Fisher for a number of misleading and non-relevant statements. No evidence of Microsoft controlling software distribution was presented, because it is not relevant to the principal claim of the case, Fisher noted. Unlike Schmalensee, he thought that "whether Microsoft has monopoly power over the OS" is relevant, in contrast with his opponent's claim: Schmalensee had failed to demonstrate the non-relevance, and had not understood the issue of predatory behaviour, his former mentor said. It was no excuse in a winner-take-all world for Microsoft to be allowed to do anything it wanted to reach that position: only competition on merits was permissible. Fisher launched into an analysis of predatory acts, and how anti-competitive actions like giving away an expensive product free - stand-alone IE - only made sense if it were done to protect a monopoly. He warmed to the issue: "Microsoft gave away Internet Explorer. It was to be forever free. Microsoft's documents describe it correctly as "a no-revenue product." This was a product which Microsoft not only gave away for free, but basically bribed people to take, giving preferred places on the desktop for which a charge could have been made. But beyond that, Microsoft also spent hundreds of millions of dollars on the development of this no-revenue product, and then gave away the technology. That is not a profitable act, except for the protection of the operating system's monopoly, Fisher opined. Allchin used as club Michael Lacovara, for Microsoft, did his best to stop the pillage by jumping up occasionally to object, but to no avail. He became very twitchy when Boies started on a line of questioning about the "advantages to consumers from the combination of Windows 98 and IE", and how that varied from having Windows 95 and IE separately. Boies dug out Allchin's trial testimony admission, to help, and asked Fisher to comment: Boies [on 1 February 1999 to Jim Allchin of Microsoft] : The question was: "And you agree that you can get those benefits either by buying Windows 98 or by having purchased an original retail version of Windows 95 to which you added IE 4, either downloaded or bought from retail or gotten in some other way; correct? Allchin: I do. [Fisher commented that the consumer benefits, such as they are, that come with the integration, the welding, the selling together, the bundling of IE - in this case IE4 and Windows operating system - don't require any of those actions. The consumer gets the same benefits if the two things come separately. In that event, there is no reason why Microsoft shouldn't offer them separately and let consumers decide.] Boies: And it was entirely practical for you to deliver these two pieces of functionality, if that's what you want to call them, separately; correct, sir? Allchin: Yes. That's the way we do development. We develop lots of different pieces concurrently, separately. [Fisher said that this suggests extremely strongly that not only are there no particular consumer benefits from getting the things together, as opposed to getting them separately, but there are no particular advantages.] Boies: It's just a distribution vehicle, correct, sir? Allchin: It's the same code out of Windows. Boies: It's the same code and all we're talking about are different distribution vehicles, in your words; correct, sir? Allchin: Yes. That's what I said, yes." Boies had trapped Allchin, and destroyed any effective argument that Microsoft might produce to defend its welding operation. Judge Jackson called "time", and the court took a break. But it was scarcely noticed that the judge asked Bill Neukom, Microsoft's head lawyer, to approach the bench for an off-the-record discussion. We have no desire to be reincarnated as a fly, but oh to have been a fly on the bench at that moment. Was the judge suggesting that Microsoft should throw in the towel? Or was he just enquiring why Neukom looked so tense? When Microsoft gave away its browser to Apple (in fact insisted that Apple took it), it made a grave mistake in that it could not have increased Microsoft's ancillary revenue, Fisher said. Nor did it help that Microsoft, according to Schmalensee, kept track of operating system sales "by hand on sheets of paper", and so could not calculate ancillary revenues or track the business: it was just protecting its monopoly. This is the kind of accounting that would normally attract attention from the IRS, since it is hard to believe that this is truly what happens. It will be interesting to see if Microsoft's auditors qualify Microsoft's accounts as a result. Fisher mentioned Gates' Newsweek article gaffe where he had said that the PC market will not be easily displaced - and agreed with him. Joachim Kempin was quoted to Fisher saying that Microsoft did not have to worry about OS competitors, effectively because of the applications barrier. The procedure used to price Windows 98 was a perfect example of monopoly pricing. Boies led Fisher into pointing out where Schmalensee had made "a big mistake" in his arithmetic that attempted to show that Windows was underpriced. After correcting Schmalensee's error, Fisher derived the actual price being charged at present. The biggest dispute concerned which data set for browser use should be used as a basis for the statistical games. The problem was between the actual usage of browsers from a large data set (the Adknowledge data), or a small survey of the browser used, according to heads of households (the MDC data). It was not hard to see that the former was better, and that the latter, used by Microsoft of course, was both erroneous from a statistical design point of view, and gave an imperfect view of browser distribution. Damned lies and statistics Unfortunately for Microsoft, it turned out that Judge Jackson had had at least one statistics course, and was quite at home with the idea that Microsoft's sample size was too small to have statistical validity, because of the confidence level at 95 per cent probability. Some previously unconsidered data from Zona was introduced by Boies. It suggested that, contrary to what Microsoft had tried to show with its data (that Netscape was gaining market share last year), in fact Netscape's browser share was decreasing amongst enterprises, and that corporations were not supporting Netscape in its ambition to dominate that market sector. Consequently, Microsoft lawyer John Warden's claim that the DoJ case was in trouble as a result of the AOL merger was ill-founded. Fisher's view was that it didn't have any bearing on Microsoft's monopoly. Fisher (undoubtedly as a result of a DoJ briefing) drew attention to errors in a Schmalensee exhibit that exaggerated Netscape's browser market share by 9 per cent, because contrary to Schmalensee's claims, Netscape's browser was not loaded on Packard Bell's consumer PCs, but only on one business line. It seemed that this was to be Fisher's revenge for having been set up. Microsoft witness Brad Chase's wild statements about the number of users that he thought had downloaded Netscape were dismissed as "foolish". As the direct examination of Fisher drew to a conclusion, Boies ensured that some key comments were added to the record. Fisher said that the case was not about Netscape, but about Microsoft's protection of its monopoly in operating systems, and the extent to which Microsoft succeeded in preventing a platform threat from materialising. The issue of where consumers stood in all this was also examined. Users were affected because their choice was limited, Fisher said. He also corrected a misquotation of his remarks about whether consumers had been injured already. He maintained that they had not, but some media did not trouble to include the reason for this, and reported the opposite of what he intended. The zero pricing of IE does not harm consumers at present, but after the predatory period, there would be harm. The central proposition of antitrust policy is that competition is good for consumers, and harm arises when competition is removed. So far as innovation was concerned, Fisher had some strong criticism of Microsoft's actions: "Microsoft has been giving out very, very strong signals that innovation is fine and they will cooperate with it. They will even assist it, if what you're doing is producing simply complements for Microsoft products. But they will take very, very aggressive action against you if what you're doing is producing innovations that might lead to something that threatens their operating system monopoly." So true. ® Complete Register trial coverage

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