Microsoft Trial Shifts to Impact on Consumer

Touted as the biggest business case since the breakup of AT&T; Corp., the antitrust trial of Microsoft Corp. has taken on more of a consumer focus in recent days as lawyers home in on whether Microsoft helps or harms buyers of its products.

After months of testimony about Microsoft’s market dominance and the impact of its business practices on competitors like Netscape Communications, America Online and Apple Computer, the trial has begun to focus on two simple questions: Do consumers who purchase Microsoft products get a good deal, and what kind of deal are they likely to get in the future?

“The question of consumer harm is very important because it goes to the principle of ‘no harm, no foul,’ ” said Ernest Gellhorn, antitrust expert at George Mason University Law School in Fairfax, Va.

This month, after the Justice Department, 19 states and the District of Columbia rested their case, Microsoft opened its defense by trying to give consumers more prominence in the proceedings. Microsoft has introduced surveys showing that its products are embraced by consumers and applauded by the computer industry press because they perform better than rival products. The company has also attacked the notion that it is a monopoly, claiming that if that were the case, consumers would have to pay as much as $2,000 for Windows software.

Responding on the witness stand last week to questions from Microsoft attorney Richard Urowsky, Microsoft economic expert Richard Schmalensee said the company has refrained from charging such stratospheric prices “not . . . because of charity or because it’s not concerned with profits, but because in a business in which dynamic competition is important . . . charging low prices, expanding the markets, spreading the use of new technology, bringing consumers into the computer age, is providing benefits to consumers.”

Although experts say the government has presented strong evidence that Microsoft faces little competition and engages in aggressive business practices, showing consumer harm remains the weak spot of the antitrust case. Some of the consumer harm the government has outlined has yet to manifest itself, so it has been difficult for the government to demonstrate that Microsoft’s software is not as good or cheap as it would be if the company faced robust competition.

“Each side in this case is engaged in a dance with the future,” explained William E. Kovacic, an antitrust expert and visiting professor at George Washington University Law School. “The government argues that the real effects of consumer harm haven’t taken hold, but will; Microsoft argues that it doesn’t have a potent competitor right now but could have in the future. In essence, each side is asking the court to look over the horizon and make a prediction.”

Several government witnesses agree that Microsoft has not stopped innovating nor engaged in the kind of price gouging typical of a monopolist. But they warn that without rivals, the company will eventually write its own rules of competition.

“If Henry Ford had a monopoly, we’d all be driving black cars,” government economic expert Franklin Fisher said on the stand earlier this month. “That’s not what competition is about. That’s not what helping consumers is about. . . . We’re going to live in a Microsoft world,” continued Fisher. “It might be a nice world, but it’s not a competitive world.”

Microsoft is expected to continue to keep the court’s focus on consumers this week when Paul Maritz, the company’s executive in charge of developing all versions of Windows, takes the stand.

In written testimony released Friday, Maritz said Microsoft spends more than double the percentage of revenues on software research--some 17%, or $2.5 billion annually--than such rivals as IBM and Sun Microsystems Inc.

“The popularity of Windows, owing entirely to Microsoft’s efforts to innovate, evangelize and license the software cheaply to promote wide distribution, is derided as ‘monopoly,’ ” Maritz scoffed in his 160-page written testimony.

“Microsoft’s low prices for Windows are called ‘high’--though competitors such as Apple have generally refused to license their operating system at any price,” he continued. “The large base of Windows-compatible applications that Microsoft has nurtured for years is called a ‘barrier to entry’--though the benefit to consumers is plain.”

Still, unlike past antitrust blockbusters involving monopolies like AT&T; or Standard Oil, experts say resolving the Microsoft case will involve a lot of educated guesswork about just how “plain” the benefits to consumers are now as well as in the future, since even Microsoft has admitted the competitive landscape can change quickly.

Judge Thomas Penfield Jackson must decide if deals like AOL’s purchase of Netscape will produce enough competition to ensure Microsoft plays by the rules or, conversely, whether innovation will wane and price hikes ensue once Microsoft fully dominates its markets.

The task confronting Jackson recalls that faced by the U.S. Supreme Court in 1986, when it decided the controversial television-set dumping case of Matsushita Electric Industrial Co. vs. Zenith Radio.

In that case, the high court rejected claims that Japanese television makers were selling TV sets below cost in the U.S. in an attempt to drive U.S. set makers out of business. The Supreme Court ruled that American companies must have substantial evidence that foreign firms conspired to monopolize the market before there can be a finding of antitrust violations.

Since the decision, the U.S. consumer electronics industry has all but disappeared. The last U.S. TV set maker, Zenith--one of the original plaintiffs in the TV dumping case--has since 1995 been controlled by LG Electronics Inc. of South Korea, though Zenith remains a leading TV brand name.

“The modern trend has to put a heavier burden on the plaintiff to demonstrate consumer harm,” said George Washington law professor Kovacic. “Courts are less willing to assume future marketplace” detriment.

To head off a similar treatment of their case, government lawyers in recent weeks have examined Microsoft’s profit levels in hopes of unearthing evidence of present-day consumer harm.

After Microsoft announced last week that its profits skyrocketed 74% over the same period a year ago, for example, the Justice Department’s lead lawyer, David Boies, grilled Microsoft’s chief economic witness about whether that indicated Microsoft already exercised sufficient monopoly power to gouge consumers.

“You can’t infer monopoly power from quarterly profits,” Schmalensee said, referring to Microsoft’s $1.98 billion in second-quarter earnings. But Schmalensee said under further questioning that valuable intellectual property like software “can indeed yield a long string of profits.”

Microsoft won’t detail its pricing policies. But an internal company document introduced earlier in the trial found that while Windows accounted for 0.5% of the cost of a personal computer in 1990, it quintupled to 2.5% in 1996. Yet other key parts of personal computers--monitors, hard drives, memory and other components--have fallen 50% or more in price over the period, government economist Frederick Warren-Boulton pointed out in his testimony.

“Microsoft’s unrestrained monopoly is literally a license to print money that comes directly out of the consumer’s pocketbook,” concluded a report issued this month by the Consumer Federation of America and two other watchdog groups. They contend consumers have been overcharged $10 billion by Microsoft.

Microsoft economics expert Schmalensee disagreed, testifying Thursday that Windows is priced competitively with other products. He said a recently conducted survey found that Windows was priced far below IBM’s discontinued OS/2 Warp operating system and just 90 cents more than Apple’s Mac OS 8.5 upgrade.

“The Microsoft prices do not stand out as being unusually high,” Schmalensee said.

Times staff writer Jube Shiver Jr. can be reached via e-mail at jube.shiver@latimes.com