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AOL deal overshadows witness testimony

America Online's plans to purchase Netscape once again dominates testimony as Microsoft seeks to use the deal as another reason why the government should drop its case.

WASHINGTON--Microsoft's top lawyers called on the government to drop the antitrust case against it in light of America Online's $4.2 billion agreement today to purchase Netscape, and vowed to seek dismissal of the case.

As Microsoft's antitrust trial under way here Microsoft's day in court was finishing its sixth week, the company's senior general counsel, William Neukom, said the government "ought to drop this case [and] ought to stop wasting public resources."

He added that the proposed deal, which also involves Sun Microsystems, shows just how unneeded the government's case is, because the merger would profoundly shape the future direction of browser technology, online services, and electronic commerce.

"This deal shows that the government has always been and will always be--in a dynamic, innovated industry like ours--five steps behind the industry," Neukom said. Microsoft attorney John Warden added that he would seek dismissal of the case--a common defense maneuver--at an appropriate time.

But Justice Department (DOJ) lead prosecutor David Boies said the government had no intention of dropping the case, adding that the merger was not likely to have a "material effect" on the case his agency and 20 states brought against the software giant in May. Nonetheless, Boies seized on the deal as more evidence of Microsoft's alleged anticompetitive acts in the market.

"To the extent that it is relevant, it demonstrates the truth of what the witnesses have been saying, which is that this is a market in which companies simply can not compete with Microsoft in areas where Microsoft is free to use its monopoly over the operating system to frustrate consumer choice," Boies said. There's "a lot of evidence that what you see here is an exit strategy for Netscape."

Boies added that AOL's buyout of Netscape might affect the remedies portion of the case--should U.S. District Judge find Microsoft engaged in anticompetitive behavior--but declined to elaborate.

In a third day of sometimes painstaking cross-examination, Microsoft attorney Michael Lacovara asked Frederick Warren-Boulton, a private economist, if the deal colored his opinion that the software giant holds a monopoly and has unfairly used its power to hurt Sun, among other competitors.

"You don't think there are any resource limitations as a practical matter on Sun, do you?" Lacovara asked.

Warren-Boulton, who was the top antitrust economist under the Reagan administration, said he did not know enough about the deal to answer, but that in any event, Microsoft's effect on Netscape had clearly been felt, "at least prior to the events of yesterday and the day before."

"In software we don't live in the world of yesterday or the day before, we live in the world of today," Lacovara shot back.

By far, Lacovara spent most of his time today poking holes in a number of economic theories Warren-Boulton has made in earlier testimony.

Lacovara zeroed in on the "network effects" that Frederick Warren-Boulton claims contribute to what he calls Microsoft's monopoly power in the operating system market.

Network effects is an economic theory that holds that the value a given user derives from a product depends on the number of other users that consume the same product. The more users a given technology has, the more momentum it will have in the marketplace, and the less likely it will be displaced by competing products, even if those competing products are superior to the established standard.

For instance, the telephone is not likely to be replaced soon, even by superior technologies, because millions of telephone users rely on the technology.

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Our Man in Washington Lacovara questioned Warren-Boulton on whether the theory can be used to explain Microsoft's dominance, "But you don't believe network effects completely explains the popularity of Windows, do you sir?" he asked.

Warren-Boulton replied that "the success of the Windows operating system has been a reflection of the success of the applications."

Lacovara countered: "Do you believe that Microsoft can essentially release an operating system, sit with its feet up, and watch the applications roll in?"

Warren-Boulton answered: "I certainly wouldn't expect them to do that. That would not be a profit-maximizing strategy."

Warren-Boulton has claimed in written testimony that Microsoft holds a monopoly in the operating system market for personal computers that run on Intel chips.

He further accuses the software giant of abusing that monopoly position through a series of predatory acts, such as shutting out competitors in the Internet space through restrictive contracts with Web sites, service providers, and computer vendors.

Late yesterday, antitrust prosecutors released new evidence documenting deals Microsoft signed with Internet service providers and Web sites to get them to distribute the Internet Explorer browser exclusively, or at least to the vast majority of their customers.

Lacovara told the court today he was "very substantially" past the halfway point in his cross-examination, and would likely finish by Monday. The next witness to be called is James Gosling, a vice president at Sun and a creator of the Java programming language.

Court will then recess for the Thanksgiving holiday, with the trial resuming on Monday. Sun executive James Gosling is scheduled to take the stand for the government next week.

Reuters contributed to this report.