Economist speaks for Microsoft foes

Carl Shapiro, an economics professor with the University of California at Berkeley's Haas School of Business, called in written testimony Thursday as the remedy proceeding of Microsoft's antitrust case stretched into a fourth week. Shapiro, who is also director of the university's Institute of Business and Economic Research, served as a deputy assistant attorney general with the U.S. Justice Department in 1995 and 1996. Shapiro takes the stand later Thursday to face cross-examination by Microsoft.

"Microsoft's rallying cry in this case has been 'freedom to innovate,'" Shapiro testified. "An effective remedy will ensure that Microsoft's rivals also are free to innovate."

Shapiro is the 15th and last witness that state trustbusters will present before Microsoft begins its portion of the proceeding next week.

Nine states and the District of Columbia are seeking stiffer sanctions than the November settlement reached by Microsoft, the Justice Department and nine other states. U.S. District Judge Colleen Kollar-Kotelly has yet to rule on the settlement, which she can either approve or reject.

In their December remedy proposal, the states asked Kollar-Kotelly to restrict how Microsoft develops and releases software. One remedy provision would compel the software giant to release a version of Windows without so-called middleware, such as Web browsing and media-playback technologies.

On Wednesday, Princeton University professor Andrew Appel testified that Microsoft could technically deliver a modular version of Windows without the middleware, despite the company's protest that this would break Windows.

In his written testimony, Shapiro said three provisions of the litigating states' remedy are essential to restoring competition. The first would compel Microsoft to license through auction its Office application suite for use on competing operating systems.

"This provision directly attacks the applications barrier to entry by ensuring continued availability of Office on the Macintosh and by making Office available on other operating systems such as Linux," Shaprio said, referring directly to the litigating states' proposed remedy.

On Wednesday, Microsoft reaffirmed its commitment to Apple Computer's Mac and continued development of Office for the Mac OS X operating system. A five-year technology agreement for continued Office development expires in August.

The second important provision would ensure the appropriate disclosure of application programming interfaces (APIs), the communications interfaces and technical information essential to ensuring that third-party middleware works well with Windows.

The Justice Department and nine states' settlement contains provisions for disclosing APIs and other technical information, which is expected to happen concurrently with the release of Windows XP Service Pack 1. But the litigating states contend that the level of disclosure is inadequate.

A third provision, according to Shapiro, would ensure that Microsoft couldn't restrict through licensing agreements the distribution of third-party middleware to PC makers.

In his testimony, Shapiro noted that "competitive threats to leading products often arise from products in adjacent markets. The threats to Windows posed by Netscape Navigator and Sun's Java were of this nature: products that were not operating systems and yet could, over time, undermine the dominant position enjoyed by Windows."

He further described the threat posed to Windows by Netscape's browser and Java as "a rare and serious threat."

Shapiro went on to review the well-documented means Microsoft used to thwart the competitive threat posed by the two technologies. The economist charged that "Microsoft's illegal conduct significantly raised the entry barriers protecting its Windows desktop monopoly."

Shapiro, the second expert witness called by the litigating states, told the court that the only appropriate remedial provisions in the case are ones that "affirmatively lower the barriers to entry into the market for PC operating systems."

Looking ahead
Microsoft has attempted to restrict the vision of the case to a narrow interpretation of the June 2001 Court of Appeals ruling that found that the company illegally maintained a monopoly in Intel-based operating systems. The narrow interpretation would limit the case to Microsoft's past actions during the so-called browser wars.

But Shapiro argued that, from an economic perspective, only a remedy that looked beyond the scope of the case would adequately ensure that competition is restored. He identified what he called two defining characteristics of the Microsoft antitrust case.

"The case is about the illegal defense of a monopoly in the face of a threat that might have eliminated the monopoly power, not about the creation of a monopoly," Shapiro testified. He also focused on how the technologies that posed a threat to Microsoft's Windows monopoly had changed dramatically since the case was brought in May 1998.

He noted that the threats posed to Windows in the past by the browser and Java are different from those in the future, which could come from any number of directions.

"An effective remedy must be forward-looking and not merely focus on the particular products or technologies that posed a threat five years ago," Shapiro testified. "No remedy can be effective if confined to browsers and Java."

Shapiro used marketing analyst forecasts and other data to identify some of the potential middleware products an appropriate remedy must protect, such as media players.

He went on to describe specific ways the litigating states' remedy proposal would benefit competing products, such as the Linux operating system.

Microsoft, which enjoys more than a 90 percent market share in desktop productivity applications with its Office software, does not offer the product for Linux. The proposed auction mechanism would ensure that "the companies that are the most capable of performing the porting and those with complementary products, especially operating systems," would benefit most from Office compatibility, Shapiro testified.

The states' remedy proposal that would compel Microsoft to give away the source code to its Internet Explorer browser "will help Linux overcome the applications barrier to entry," Shapiro testified. The same provision would also benefit rival companies developing competing middleware technologies, he said.

He went on to explain how Microsoft uses its monopoly in client operating systems to the disadvantage of server rivals. Linux is one of those threats to Windows in the server market.