E-mail gives peek at Microsoft strategies

In the trial in Minneapolis, which began this week, lawyers who filed a class action suit on behalf of state residents claimed that Microsoft overcharged consumers for its Windows operating system and its Office application software. The suit, which asks for damages of up to $425 million, is one of a handful of class actions Microsoft has not been able to settle.

The seven plaintiffs, representing a class of 1 million homes and businesses in Minnesota, have about seven weeks to present their case, after which it will be Microsoft's turn.

Chairman Bill Gates and Chief Executive Steve Ballmer are on Microsoft's list of witnesses and are likely to testify, according to Microsoft spokeswoman Stacy Drake.

Numerous e-mails and other information are likely to find their way into evidence during the trial in front of Hennepin County District Court Judge Bruce Peterson. The court expects the first documents to be released Thursday.

One such document could be a 1997 e-mail note from Jeff Raikes, a Microsoft group vice president, asking billionaire Warren Buffett to consider investing in the Redmond, Wash.-based software company. Some observers have likened Microsoft's lucrative operating system dominance to a "toll bridge," Raikes wrote in an exchange that The Wall Street Journal first reported Wednesday. With a worldwide sales force of just 100 to 150 people, Raikes wrote, "this is a 90%+ margin business."

Buffett is the CEO of Berkshire Hathaway, a kind of umbrella company that owns the Geico insurance company and portions of other businesses, including 11.8 percent of American Express, 18.1 percent of The Washington Post Co. and 8.2 percent of Coca-Cola. One of the world's most successful investors, Buffett is famous for his aversion to technology stocks.

Raikes, who noted in the e-mail message that his own net worth was "well into" the hundreds of millions of dollars thanks to Microsoft, tried to convince Buffett to change his mind. "A PC is just a razor that needs blades, and we measure our revenue on the basis of $ per PC," Raikes wrote. "In FY96, nearly 50 million PCs were purchased and Microsoft averaged about $140 in software revenue per PC or $7 billion...I don't really see our business as being significantly more difficult to understand than the other great businesses you've invested in."

On the other hand, Raikes acknowledged, one difference between Microsoft and Coca-Cola is the width of the "moat" protecting the entrenched company from upstart rivals. "With Coca Cola, you can feel pretty confident that there won't be a fast shift in user preferences away from drinking sodas, and in particular Coke. In technology, we may more frequently see 'paradigm shifts' where old leaders are displaced by new. Graphical user interface replaces character user interface, the Internet explodes, etc.," Raikes wrote.

In his reply, Buffett said that compared to Coca-Cola, Gates "has an even better royalty--one that I would never bet against but I don't feel I am capable of assessing probabilities about, except to the extent that with a gun to my head and forced to make a guess, I would go with it rather than against. But to calibrate whether my certainty is 80 percent or 55 percent, say, for a 20-year run would be folly."

Since then, Buffett has not changed his mind. He continues to talk about the "economic moat" that successful companies must have. In Berkshire Hathaway's 2003 annual report released this month, Buffett said he was still interested in buying businesses, but only simple ones: "If there?s lots of technology, we won?t understand it."

Other internal memos and e-mail correspondence may become public in the trial, which is taking place in state court before a jury. Microsoft denies the allegations and is planning a vigorous defense.

Representatives of Microsoft and Berkshire Hathaway were not immediately available for comment on the e-mails.

In the courtroom
Microsoft argued in court Tuesday that it never overcharged customers for software, denying allegations that it abused its operating system monopoly to hike prices.

"Microsoft's high market share is the result of choices made by millions of people to buy Microsoft software," David Tulchin, the company's lead lawyer, argued in his opening statement. "There have always been choices for consumers."

Tulchin told the jurors that in the 1990s, the price of Windows "has stayed about the same while the quality has gone up. In the other two markets (Word and Excel) the prices have actually gone way down."

The plaintiffs' lead attorney, Richard Hagstrom, said he would prove that "Microsoft's prices are higher than what consumers would have paid in a competitive market."

"They lied, cheated and deceived to get monopoly-level profits," Hagstrom told the jury.

To render a guilty verdict, 10 of the 12 jurors will need to determine that a "preponderance of the evidence" proves that Microsoft engaged in anticompetitive conduct that harmed the competitive process and consumers.

Any verdict may or may not involve monetary damages, but would not affect Microsoft's business practices.

Hagstrom said Microsoft engaged in overpricing from 1994 through 2001 by charging more than necessary to make a fair profit, pricing its Windows, Word, Excel, and Office products in excess of prices charged by similar, competitive products, failed to lower prices on obsolete products and engaged in price discrimination among its customers.

In his presentation, Hagstrom offered a graph showing that, from 1992 through 2001, the prices of Microsoft's operating systems and applications rose while prices for similar, competitive offerings fell.

Tulchin, in turn, cast doubt on the plaintiff's pricing data by contending that the plaintiffs used mostly retail prices, "the highest prices," in reaching their conclusions.

Tulchin maintained that most sales are not done through retailers but rather via hardware manufacturers, which make up 90 percent of Windows sales and 68 percent of Word and Excel sales.