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Trial focuses on AOL, Netscape talks

Microsoft used merger talks between AOL and Netscape to discredit a witness' testimony, painting the potential union as an example of the software giant's precarious place in the industry.

WASHINGTON--Microsoft used merger talks between America Online and Netscape Communications to discredit the testimony of a government witness, painting the potential union as an example of the software giant's precarious place in an industry that can radically change very quickly.

As the trial here entered Microsoft's day in court its sixth week, Microsoft attorney Michael Lacovara used the talks to challenge economist Frederick Warren-Boulton's assertions that the software giant has abused its monopoly power by signing exclusive contracts with Internet service providers, Web sites, and computer sellers.

The monopoly charges by Warren-Boulton, who was the top antitrust economist in the Justice Department under the Reagan administration, are a crucial part of the government's case, which the DOJ and 20 states brought in May. Without them, the exclusionary acts are probably not illegal.

As earlier reported, AOL and Netscape confirmed that they were discussing a possible merger. The union reportedly could involve the online giant paying as much as $4 billion to acquire one of the leaders in Web browsing technology. Sun Microsystems reportedly is also considering acquiring a piece of Netscape's business.

"As an economist who claims to have studied the business, the fact that overnight the structure of the market can change...does that say anything about the nature of competition in software?" Lacovara asked.

"To the extent that this potential merger is the result of Microsoft's actions in these exclusive is unfortunate to see the disappearance of a firm like Netscape, the brightest, newest star," Warren-Boulton answered. Although he said such a merger could have a "material" effect on the computer industry, he maintained there was no guarantee that Microsoft wouldn't win another exclusive deal with AOL to distribute the software giant's Internet Explorer browser.

An earlier deal between the two companies--under which AOL's software was distributed with Microsoft's Windows in return for the online giant distributing Internet Explorer exclusively--is a key piece of the government's case. Antitrust prosecutors claim it is just one example of Microsoft using its Windows monopoly to get a choke hold on the emerging market for Internet software. Microsoft claims it was Internet Explorer's "modular" design that persuaded AOL to choose the technology.

Outside of court today, both sides used the potential merger to support their positions in the case. Microsoft's general counsel William Neukom said the development "pulls the rug out from the government" because it "demonstrates a simple truth that there is vigorous competition in the marketplace."

But David Boies, the Justice Department's lead prosecutor, said "if the rug had been pulled out of our case as many times as Microsoft said during the trial, we'd all be on the floor by now." He added that the merger--should it go through--would not "fundamentally affect the case" unless AOL decides to continue using Internet Explorer even after acquiring Netscape.

Such a scenario, he explained, would be "a pretty strong indication of the kind of barriers to competition that...has arisen."

In any event, Boies said, the core issue in the case "is whether Microsoft has a monopoly in the operating system and whether Microsoft has improperly used its monopoly power to forestall new competition. That issue is going to exist regardless of whether one of the companies gets acquired."

In written testimony, Warren-Boulton claims Microsoft holds a monopoly in the operating system market for personal computers that run on Intel chips. He further accuses the software giant of predatory acts, such as shutting out competitors in the Internet See CNET Radio: 
Our Man in Washington space through restrictive contracts with Web sites, service providers, and computer vendors.

Today's cross-examination delved in painstaking detail into economic theories, such as "price earnings ratios" and "switching costs." Lacovara picked apart Warren-Boulton's assertions that the software giant in fact controls a monopoly in the operating system market for Intel-based computers and that it has used that power to restrain the ability of other companies to distribute competing products.

Pointing to recent study that showed an increase in the use of Netscape's Navigator browser among large corporations, for instance, Lacovara challenged Warren-Boulton's contention that the Mountain View, California has suffered as a result of Microsoft's contracts.

But Warren-Boulton refused to back down from his earlier testimony, adding that the October Zona Research report reinforced his testimony that the Microsoft contracts affect Netscape's large corporate use the least.

"If they're holding the fort anywhere, it's in large business, in which these practices in fact have no effect," Warren-Boulton said.

Lacovara also pointed to Netscape's distribution of hundreds of millions of copies of its browser via the Internet and "carpet bombing" techniques, in which Navigator is distributed to consumers.

Lacovara also challenged Warren-Boulton's assertions that the costs of switching to a non-Microsoft operating system is too high to be considered seriously by computer suppliers and end users. While Warren-Boulton eventually conceded that computer suppliers would incur relatively few costs in installing the Linux operating system on the machines they sell, he said that consumers would pay a high price in terms of having fewer applications to run on the machine.

The Microsoft lawyer said in court today that he expected his cross-examination of Warren-Boulton to last until next Monday, prompting some displeasure from U.S. District Judge Thomas Penfield Jackson. "A word to the wise," replied Jackson, who at times today appeared to have trouble staying awake. "I'm urging you to be concise."

There will be no trial on Wednesday or Thursday of this week, due to the Thanksgiving holiday. Trial is not in session on Fridays.