Microsoft Trial May Focus on AOL Deal

Microsoft Corp. faces off Tuesday against the Justice Department in the next phase of the landmark antitrust trial whose outcome is expected to transform the technology landscape.

The software giant is expected to focus on America Online Inc.’s $10-billion purchase of Netscape Communications Corp. to show that the computer industry remains highly competitive. The company will also argue that it has not harmed consumers, and it will examine AOL’s push to gain faster Internet access for its 17 million customers, contending such access will become a powerful distribution mechanism for products that could rival Microsoft’s Windows software.

But by focusing on AOL’s deal with Netscape, Microsoft is pursuing a risky strategy, some legal experts say. They contend the maneuver could attract even more attention to Microsoft’s own bout of deal making during the 13 weeks the trial has been in recess, which could undermine Microsoft’s legal arguments.

The company, for instance, has used its $20-billion cash hoard to win strategic positions in cable television, wireless telephones, telecommunications software and even the emerging online health-care industry.

Although Microsoft hasn’t taken over any new companies, its $5 billion investment in AT&T; Corp., $600-million investment in wireless carrier Nextel Communications Inc. and several smaller contributions to other concerns are a dramatic about-face from last winter, when the company remained on the sidelines while rivals eagerly struck deals.

“They face a dilemma in trying to reconcile their [own] deals,” said William E. Kovacic, an antitrust specialist who teaches law at George Washington University. “One way to depict these deals is that they help spur competition in promising new fields,” Kovacic observed. On the other hand, he added, the deals may be seen as “underscoring the need for some controls” on Microsoft.

Experts say Microsoft’s strategy also suggests the company may have begun fortifying its case against any punishing remedies, even before presiding U.S. District Judge Thomas Penfield Jackson has handed down a decision in the antitrust trial.

“Legal liability is less important than remedies” for Microsoft, said Ernest Gellhorn, an antitrust specialist and law professor at George Mason University. By arguing that big company mergers change the technology landscape, Gellhorn says, Microsoft bolsters its argument that it doesn’t have monopoly power.

“There’s certainly a defensive element in their raising the AOL-Netscape deal,” added Tim O’Rourke, a veteran Washington antitrust lawyer. “The deal helps them say, ‘You don’t need to do anything real drastic with us because look what these other guys are doing.’ ”

The Justice Department, 19 states and the District of Columbia have charged that Microsoft has used its dominance in personal computer operating software to stifle competition in emerging technologies such as browsers, which allow computer users to surf the World Wide Web.

Web browsing software is considered a key battleground for the future of computing, which is expected to become more focused on the Internet and less on the stand-alone desktop computer.

Critics say Microsoft will control that future if it is allowed to crush rivals such as Netscape. Microsoft, on the other hand, says that innovation in the Information Age will suffer if the government is allowed to determine what functions the company can include in its software products.

In returning to the courtroom for the rebuttal phase of the trial, Microsoft and the government are expected to put on a far more traditional courtroom presentation than they did previously.

Unlike the first stage of the trial, when Judge Jackson imposed rules to speed the pace of the trial, witnesses will be both directly examined and cross-examined as in a traditional case. What’s more, both sides are likely to steer clear of elaborate courtroom demonstrations that might backfire--as did Microsoft’s attempt in February to use a software video demonstration. Instead of bolstering Microsoft’s case, the video ended up casting doubt on Microsoft’s credibility.

The government’s computer-expert witness Edward Felton told a Microsoft lawyer in a deposition last week that there will be no such fancy theatrics during his return courtroom appearance. “There may have been some discussions about whether there was anything that needed to be shown in a visual way” in court, Felton said. “But after considering this for a while, we decided no.”

Government lawyers, who last month expressed confidence that they had a strong case, have remained mum about whether they might seek a last-minute settlement with Microsoft. Judge Jackson has repeatedly urged Microsoft and the government to settle the case, contending that there ought to be some middle ground that would allow consumers to have more flexibility in choosing the kind of software they want on their computers.

But despite reports of possible renewed negotiations to settle the trial, the two sides remain far apart.

“To say this case ought to be settled, you have to have a sense that there is a middle ground acceptable to both sides,” said Ronald A. Cass, dean of the Boston University School of Law and a onetime consultant to Microsoft. “But here, the two sides have quite starkly different views about what is going on in the computer industry.”

In examining the AOL-Netscape deal, Microsoft plans to call AOL executive David Colburn as a hostile witness.

In court filings, Microsoft says it plans to ask Colburn about the history of AOL’s negotiations with Netscape and Sun Microsystems Inc., which also participated in the $10-billion deal. Microsoft also said it would question Colburn about the dates when Justice officials were informed of the deal.

Although Microsoft officials say the AOL-Netscape deal is significant, they point out that it is only one element of their overall defensive strategy.

Company officials say they will also focus on alleged flaws in the government’s economic and antitrust arguments by recalling to the witness stand Richard L. Schmalensee, dean of the Massachusetts Institute of Technology’s Sloan School of Management.

Microsoft also plans to call Gordon Eubanks, a longtime ally and former CEO of Symantec Corp., maker of the popular Norton Utilities line of software. Eubanks is expected to testify that Microsoft products are innovative and offer great consumer benefits.

“I don’t think we have focused all of our time on” the AOL-Netscape deal, said Microsoft spokesman Mark Murray. “The AOL-Netscape mega-merger plays a role in each of our arguments. But the AOL-Netscape deal is just one arrow in our quiver.”

*

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