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Netscape Wounded, Witness Testifies

By Rajiv Chandrasekaran
Washington Post Staff Writer
Wednesday, June 2, 1999; Page E3

Though it now has the marketing heft of America Online Inc. behind it, the Netscape Internet browser has lost its chance to undermine Microsoft Corp.'s dominance of the personal computer operating system market, the government's chief economic expert argued yesterday at the software giant's antitrust trial.

The expert, Massachusetts Institute of Technology professor Franklin M. Fisher, also asserted that Netscape Communications Corp., the Silicon Valley firm that first popularized software to "browse" the Internet, was forced into selling itself to AOL because its browser business was crushed by Microsoft.

What the acquisition shows "is that Netscape's browser business was broken and Netscape had to sell out," Fisher said.

Fisher, who testified for the government earlier in the trial, took the witness stand yesterday as the proceedings resumed for rebuttal arguments after a 13-week recess. Each side will get to present three witnesses over the next four weeks.

Microsoft plans to argue that it does not have a monopoly with its Windows operating system, even though it is installed on 90 percent of the world's new PCs. It will contend that the firm faces threats from a host of emerging technologies, including some being developed by AOL.

Microsoft also has said that it could encounter new competition from the Netscape browser, particularly if AOL chooses to distribute the product to its 17 million members. AOL currently distributes a version of Microsoft's Internet Explorer browser and is contractually obligated to do so until 2001.

But Fisher called such a switch on AOL's part "very, very unlikely." And even if it happened, he said, it would not be enough to threaten Windows. "I think it's too late and I think Microsoft thinks it's too late," he said.

Government lawyers have argued that Netscape's browser, had it retained the dominance it had in its early days, could have encouraged the creation of new computer programs that would have worked with the browser and potentially supplanted Windows' market dominance. To prevent that from happening, the government argues, Microsoft bundled Internet Explorer into Windows, injuring Netscape's business.

Fisher also asserted that Netscape was acquired by AOL for $10 billion not for its browser but for its Netcenter World Wide Web site, an Internet "portal" that offers news headlines, stock quotes, electronic mail and other services, and makes money through online advertisements. Citing two other recent portal deals, Yahoo Inc.'s $2.9 billion acquisition of GeoCities Inc. and At Home Corp.'s $6.7 billion purchase of Excite Inc., Fisher said that "if one looks at those transactions . . . Netscape was acquired, if anything, cheaply."

"It's not true they were acquired for a large amount of money or an unusual amount of money," Fisher said.

A Microsoft spokesman scoffed at Fisher's analysis. "I long for the day that my four-year-old company is so irrevocably broken that it can only be sold for $10 billion," said the spokesman, Mark Murray.

Murray called the testimony of Fisher, a paid expert witness, "hardly surprising and hardly credible."

Fisher spent much of yesterday taking issue with the testimony of Microsoft's own paid economic witness, Richard Schmalensee, who happens to be Fisher's colleague at MIT and will return to testify for Microsoft in weeks ahead. Fisher, at various points in the day, called Schmalensee's testimony "muddled," "credulous," "ridiculous" and lacking in "systematic thinking."

Although the government contends that Microsoft has a monopoly in the PC operating system market, Schmalensee testified earlier in the trial that he was unable to define a discreet market in which the firm competes because in his view Microsoft faces competitive threats from non-PC devices such as hand-held computers and television set-top computing boxes.

Fisher, however, took issue with that contention, arguing that such devices should not be considered in an economic analysis because Microsoft itself doesn't view them as a threat in setting the price of Windows.

"Is Microsoft in fact constrained in its pricing . . . by various things? That is actually the touchstone test of monopoly power," Fisher said.

He also attacked Schmalensee's argument that Microsoft isn't a monopoly because it faces unforeseen threats. "The notion that a wolf might come out of the forest . . . is not a serious, analytically sound way of looking at what the constraints are," Fisher said.

Copyright 1999 The Washington Post Company

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