The government vs. Microsoft: Round two begins

WASHINGTON -- When the Microsoft antitrust trial resumes today after a three-month break, it will feature much the same set of characters arguing about many of the same issues in the same federal courtroom. Only the computing world has changed.

The Justice Department and 19 states have charged that Microsoft sought to use its monopoly in the Windows operating system, loaded on 90 percent of the world's personal computers, to achieve dominance in the Internet browser market.

That could give Microsoft a choke hold on Internet access at a time when electronic commerce promises to reshape the economy, the government contends. But since February, Microsoft has quietly shifted its strategic stance to reduce its reliance on Windows. Using a $20 billion cash hoard and a stock market capitalization of some $338 billion, the company is investing heavily in a new generation of intelligent devices, including cable TV set-top boxes and smart phones. Also since February, America Online, the nation's leading Internet provider, has completed its $10 billion takeover of Netscape Communications, maker of a popular Internet browser. Microsoft is expected to argue in court that the deal proves that Microsoft lacks true monopoly power. The government will say the deal has no bearing on whether Microsoft broke the nation's antitrust laws. Upholding that view in his mid-trial deposition, America Online Chairman Steve Case said his service company must rely on Microsoft to include AOL sign-up materials with each installed copy of Windows. In the first phase of the trial, prosecutors offered evidence, including internal e-mail, that Microsoft had hard-wired Internet Explorer into Windows in order to throttle usage of Netscape's competing browser. But Microsoft holds that the integration of the browser into the operating system offered millions of satisfied users the convenience they craved and, in any event, caused no harm. That's hardly likely, said Robert Bork, a former federal appeals court judge who has served as a consultant to Netscape. "The fact is," Bork said last week, "that once the government demonstrates anti-competitive tactics and preserving a monopoly, consumer harm is automatically inferred. You don't go around preserving a monopoly by illegal tactics unless you expect to get monopoly profits and slow innovation -- which is consumer harm." As the case unfolds during the next month or so before U.S. District Judge Thomas Penfield Jackson, each side will put three rebuttal witnesses at the stand. In theory, the idea is to respond to the other's side's prior case, but this phase of the trial may bring out some fresh attacks and defenses. Prompted by the judge, the litigants met several times during the recess and exchanged written drafts on how to settle the case.But so far as is known, they remain far apart. No talks further talks are scheduled to resolve the lawsuit. In the opening phase of the Microsoft trial, which began last October, each side presented 12 witnesses before Jackson, who then recessed the trial Feb. 26 to preside over a complex murder case. When the trial resumes, the government will call IBM executive Garry Norris, economist Franklin Fisher and Princeton computer expert Edward Felten. Microsoft will call AOL executive David Colburn as a hostile witness, along with software industry veteran Gordon Eubanks and economist Richard Schmalensee. All but Norris and Eubanks are repeat players. Of the six, IBM's Norris could well emerge as the final star witness. In more than 200 pages of notes and other internal IBM documents that the government will introduce to support his account, Norris recounts strong pressure against IBM in 1996 and 1997, orchestrated directly by Microsoft Chairman Bill Gates. Microsoft, Norris will testify, cut IBM out of secret market- development contracts, a complex web of discounts that are given to personal computer makers, when IBM refused to drop work on its rival OS/2 operating system. But Microsoft maintains there was nothing unusual or improper about its licensing talks with IBM. Said spokesman Mark Murray: "There were tough negotiations on both sides, and I'm sure lots of strong statements made on both sides... but the bottom line is that Microsoft did license Windows 95 to IBM at a competitive price, and IBM continued to ship lots of competitor products right alongside Windows on their machines." However the trial turns out, it already has made a profound impact on Microsoft's corporate culture, as well as that of its Silicon Valley enemies. Milton Friedman, the Nobel laureate economist, believes that "Silicon Valley is suicidal in calling government in to mediate in the disputes among some of the big companies in the area and Microsoft." "The end result," Friedman adds, "will be that is that the industry is going spend in legal fees over the next 10 or 20 years money which society could benefit from much more if it were spent in the kind of research and development that have brought us the many miracles in the area of Internet, in the area of home computers, industry computers, and all the rest."

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