America Online Inc.'s recent $10 billion acquisition of Netscape Communications Corp. could reduce the importance and value of Microsoft Corp.'s monopoly in personal computer operating systems, the government's chief economic expert conceded yesterday at the Microsoft antitrust trial.
The acknowledgment by Massachusetts Institute of Technology professor Franklin M. Fisher, delivered at the end of a grueling day of cross-examination by a Microsoft attorney, could play an important role should the software giant lose the case and find itself subjected to court-ordered sanctions. If Microsoft can show that the dominance and clout of its Windows operating system is on the wane, it could receive less severe sanctions, according to legal specialists.
But Fisher's comments were not entirely helpful to Microsoft, which is trying to argue that the deal demonstrates that there is so much competition in the computer industry that it cannot possibly have monopoly power, and therefore cannot have violated antitrust laws. Fisher forcefully maintained yesterday that the AOL-Netscape deal does not change the fact that Microsoft has a monopoly in the PC operating system market with its Windows software.
Fisher gave his analysis after Microsoft attorney Michael Lacovara displayed an electronic-mail message between two Microsoft employees, written just after the deal was announced in November, in which one employee called the transaction "a very scary thing." Microsoft believes the AOL-Netscape alliance will lead to the development of more Internet-based software applications, such as online word processors and calendar programs, that would reduce people's reliance on Windows.
"Microsoft unquestionably cares about any of the things that would reduce the demand for a PC operating system," Fisher said in response to a question about the e-mail. "That would make the monopoly less valuable."
Fisher, the government's first rebuttal witness, elaborated in response to a follow-up question from Lacovara. "I do not believe the transaction is going to have much of an effect on Microsoft's monopoly power for the PC operating system," he said. "To the extent it will have an impact, it will be on how important that monopoly is."
Fisher's comments yesterday weren't the first time he has made an admission at the trial. In January, when he was asked whether consumers had been harmed by Microsoft's actions -- a key prerequisite for an antitrust violation -- he said that "on balance, I think that the answer is no, up to this point." Yesterday morning, before the discussion about the AOL-Netscape deal, government attorney David Boies gave Fisher a chance to recast his earlier remark.
The witness argued that Microsoft indeed has injured consumers by building its Internet browser with Windows, thus preventing people from buying PCs without a browser. Microsoft's inclusion of its browser in Windows also has dissuaded many PC manufacturers from including Netscape's browser on their machines, which has further limited consumer choice, Fisher said.
"Consumers have been injured by having their choices restricted," he said. The government alleges that Microsoft, which feared that the Netscape browser could threaten the dominance of Windows, added its browser to Windows to crush Netscape.
Fisher also sought to cast other allegedly anti-competitive behavior on the part of Microsoft -- such as bullying rivals in the computer industry -- as harmful to consumers. "Any injury to competition is an injury to consumers," he said.
Much of the day, however, focused on the AOL-Netscape deal. Displaying a document from AOL's investment banker, Goldman Sachs & Co., Lacovara tried to cast doubt on Fisher's statements on Tuesday that the alliance would not affect Microsoft's dominance of the operating system market.
The document, a presentation justifying the price AOL would pay for Netscape, listed under the heading "strategic rationale" that AOL could "extend browser to be a more comprehensive desktop application, bundling communications and productivity applications to absorb more share of computing time, with the goal of becoming user's de facto [computing] environment."
Lacovara gave U.S. District Judge Thomas Penfield Jackson a half-dozen documents about the deal that were written by Netscape, Netscape banker Morgan Stanley & Co., and Sun Microsystems Inc., a partner in the transaction. The documents were submitted under a court seal.
Eventually, Jackson called an end to Lacovara's questioning of Fisher about the deal, saying that he wanted an AOL executive who has been called to testify later in the proceedings to interpret the documents. "If the point is to call into question his [Fisher's] prognostication, the point has been made," Jackson said.