3 Economists Poised to Play Pivotal Role in Microsoft Trial

This week’s videotaped testimony of a forgetful and uncharacteristically hesitant Microsoft Chairman Bill Gates gave the appearance that the government had seized the upper hand in its landmark antitrust trial against the software giant.

But while Gates’ video testimony electrified the courtroom audience and had Microsoft Corp. officials scrambling to contain the fallout, experts say it will have comparatively little legal impact on the proceedings, which center on whether Microsoft has used its Windows software monopoly to thwart its software rivals.

Instead, the trial’s outcome may well turn on the testimony of three little-known but widely respected economists: Richard L. Schmalensee, Franklin M. Fisher and Frederick Warren-Boulton.

“In a monopoly case, generally speaking, the testimony of economists has become very important,” said Donald I. Baker, a veteran Washington antitrust lawyer who headed the Department of Justice’s antitrust division in the 1970s. “The economists’ testimony will help to decide if Microsoft is attempting to use its [Windows] monopoly power to monopolize a second market [for Web browsers] and whether there is a probability that they will succeed.”

The importance of such testimony was underscored Wednesday in U.S. District Court after Apple Computer Inc. executive Avadis Tevanian Jr. declared under cross-examination that “it seems pretty clear to me that they [Microsoft] are a monopoly.”

Microsoft attorney Theodore Edelman shot back: “You have no training or education in law or economics, do you Mr. Tevanian?”

“No,” Tevanian replied.

As the trial continued Thursday, District Judge Thomas Penfield Jackson admonished a Microsoft lawyer for using “misleading language” that was “not acceptable.” It was the judge’s strongest scolding of Microsoft counsel so far in the 11-day-old trial, and he continued to criticize the lawyer as the day wore on.

“You keep mischaracterizing what he’s told you,” the judge snapped at Edelman as he was cross-examining Tevanian about his allegation that Microsoft tried to squelch Apple’s QuickTime multimedia software.

Jackson’s criticism of the Microsoft side added to the perception of many observers that the government has the upper hand at this point in the trial.

James R. Loftis, a Washington lawyer who is a past chairman of the American Bar Assn. committee on antitrust law, said the government is putting on a strong case, while Microsoft is sending mixed messages.

“What I find surprising is that Microsoft doesn’t seem to have settled on a consistent way of presenting the evidence,” Loftis said.

Loftis said Microsoft has been especially bad at explaining a key June 21 meeting with officials of archrival Netscape Communications Corp. Microsoft has been accused by Netscape and the government of proposing an illegal scheme to divide the Web browser market at the meeting.

“With the Netscape meeting, they first took [the] position that the allegation was a fabrication,” Loftis said. “Then, when the Justice Department produced corroborating e-mail, they said it was a setup. And, most recently, Microsoft has said this is the way business is done in the software business. I just don’t understand their approach.”

Microsoft and the government both selected their economist witnesses from the Massachusetts Institute of Technology.

Schmalensee, the acting dean of MIT’s Sloan School of Management, has represented Microsoft since antitrust regulators first began scrutinizing the company in the 1990s and will testify for the Redmond, Wash.-based software firm.

Fisher, who was a lead economics witness for IBM Corp. when the computer giant was embroiled in a protracted antitrust battle with federal regulators in the 1970s and 1980s, will testify for the government. Warren-Boulton, a former chief economist for the Justice Department who runs his own Washington consulting firm, also will testify for the government.

The economists will essentially serve as expert witnesses--advocating the economic merits of each side. Like the 21 other witnesses testifying in the case, they will be subject to cross-examination.

Fisher is expected to testify that Microsoft has monopoly power in the personal computer market and has used that power to try to dominate the software market for Internet browsers.

In a 13-page court filing submitted to U.S. District Court in May, Fisher argued that Microsoft’s Windows software has “network effects” like the nation’s telephone and broadcasting systems: The more people use it, the more desirable and essential it becomes for others to use.

“There is nothing inherently anti-competitive about this,” Fisher wrote. “However, network effects create high barriers to competition and entry in operating systems. This increases the risk that anti-competitive conduct by Microsoft will increase barriers even further. This will serve to entrench Microsoft’s monopoly and thus significantly injure competition.”

Schmalensee is expected to argue that the software industry is highly competitive. William H. Neukom, senior vice president for law at Microsoft, has said Schmalensee, along with Microsoft’s 11 other expert witnesses, “will refute the government’s case and prove that our inclusion of Internet technologies in Windows was designed to provide new tools and innovations for consumers and software developers.”

In addition to the testimony of Schmalensee, Microsoft has a second potentially powerful trump card to play: presenting a witness of its choice on videotape. In giving the government the green light to show Gates’ videotaped deposition, Jackson said that he would consider any equally relevant testimony from a Microsoft witness.

One probable witness is Brad Silverberg, a 44-year-old Microsoft senior vice president who is on extended leave. Silverberg spearheaded Microsoft’s efforts to develop Windows 95. He was part of Microsoft’s executive committee that reported directly to Gates.

Silverberg, a onetime Apple Computer executive, has been portrayed as a potentially much more effective witness than Gates because he is neither as argumentative nor as evasive as Gates. He would be expected to explain how Microsoft’s strategy of integrating its Internet Explorer Web browsing software into Windows was done for the benefit of consumers.

Because he once worked on development of QuickTime multimedia software at Apple, he might prove especially valuable, observers say, in supporting Microsoft’s position on its competition with QuickTime, which in recent days has emerged as a significant antitrust issue in the trial.