DoJ witness argues Microsoft prices too high

Microsoft's cross-examination of consultant economist Dr Frederick Warren-Boulton by attorney Michael Lacovara for Microsoft has proceeded tediously this week. Microsoft is attempting to show that it does not have monopoly power, and is threatened by competitors all the time. Lacovara tried to needle W-B about his consultancy work having been against Microsoft - he helped Novell in an earlier case was started by the Federal Trade Commission - but this led nowhere. W-B said he thought he was retained because he had some experience in the industry. W-B distinguished between two ways in which prices could be increased, and gave as his view that Microsoft has monopoly power as opposed to market power (where prices could only be increased by explicit or implicit coordination with competitors). W-B said that he believed that Microsoft's prices were above competitive levels by "a significant amount" and pointed to Microsoft's profit margins in its accounts as evidence. Microsoft did not like a chart produced by the DoJ, derived from IDC data, that showed that Microsoft's actual and projected share of the Intel PC operating systems market from 1991 to 2001 was between 92 and 95 per cent. Of course, "Intel-compatible" might have been a better caption for the data, but there is a great deal of imprecision in the questions and answers in court. At times it appeared that archaeologists were talking to botanists about nuclear physics. Moore's law "doubles every three years" W-B said, and Lacovara added: "And, in fact, Moore's law isn't true is it?" He continued: "Processing capacity [he presumably meant speed as capacity is something very different] may have doubled every two ears before, it now increases three- or four-fold in that same period?" W-B replied that he guessed Moore's law was speeding up. W-B gave as his opinion that market share data was one indicator of monopoly power. Lacovara tried to tempt him along the path of admitting that market share data was less significant in industries where rapid innovation occurs. W-B fell back, saying that sustainability is important, and that the market share chart showed sustainable monopoly power. W-B threw in the plan that Microsoft has been mulling over to lease the OS for a fixed period, after which the user would have to take another lease to carry on using the functionality. Lacovara quickly changed the subject, and tried to suggest that there had been some doubt as to whether Windows 95 would be a success, and quoted Steven McGeady's testimony, but the questioning got nowhere. When Lacovara brought up the issue of adding drivers to Microsoft operating systems. W-B was evidently unaware of the possibility that hardware vendors could often write these, but Microsoft is increasingly insisting that it writes these itself, so gaining further market power by not allowing other drivers to be distributed with Windows. Lacovara tried to make the case that Microsoft had always innovated, and amazingly cited MS-DOS as an example, explaining how Microsoft had "made sure that [MS-DOS] supported [hard drives]". Neither Lacovara or W-B was evidently aware that Microsoft was extremely reluctant to extend MS-DOS, and that these drivers were originally written by IBM, Compaq, and the like. W-B said that stopping innovation "is suicidal". Except that it wasn't, because Microsoft had locked OEMs in with per processor contracts. Equally ill-informed was Lacovara's implication that Microsoft had developed TCP/IP, but he persuaded W-B to agree that there was nothing wrong "in principle" in incorporating it in the operating system. There must have been people in Microsoft holding their breath that W-B didn't know much about how TCP/IP came into existence, or brought up the difference between software like TCP/IP and products like Stac's compression. Lacovara's cross-examination at times became very dull and directionless, and he failed to make the points he hoped - for example, a correlation between innovation and consumer benefit; easy entry into operating system development; and the ready availability of venture capital to write operating systems. Lacovara, conscious that Microsoft has yet to face Caldera in Salt Lake City in June, tried to put in some groundwork - that Caldera's Linux had a GUI that was a "clone of Windows". Again, W-B did not have the background to explain that Windows itself was a Mac "clone, and that the GUIs had a common ancestor. Lacovara wanted to make the point that it would be easy to switch to Linux, but again the point was not made that OEM preloading of Windows made it extremely unlikely that anyone but experienced users would make the switch - and even so, there were some costs in doing so. W-B said he might have heard of Red Hat, which was rather pathetic for an expert witness who claimed to have some knowledge of the industry. But W-B was not alone in his ignorance. Lacovara, after noting the software supplied with the Red Hat distribution of Linux, asked "You can program in all those languages in Linux - is that right? - for the Linux operating system." The "languages" Lacovara was talking about were applications like WordPerfect and Real Audio Player. W-B returned to firmer ground when he pointed out that financial markets evidently had a high opinion of Microsoft's future prospects in that Microsoft had a price earnings ration of more than 50 - twice the average. W-B therefore thought it unlikely that Linux would be a major challenger to Microsoft operating systems. He added: "If you really believe that [Linux] is going to severely constrain Microsoft's monopoly profits, run, don't walk, to your nearest broker and short Microsoft." ® Complete Register trial coverage