AOL deal causes sparks at Microsoft trial

By Elizabeth Wasserman
IDG News Service, 11/24/98

Washington, D.C. - A Microsoft attorney yesterday sparred with the government's economics expert during the software giant's antitrust trial over the significance of a reported deal under which the world's largest online service, America Online, would purchase Microsoft's rival Internet browser maker, Netscape.

The AOL-Netscape negotiations, which may also involve Sun, quickly became the focus of talk inside and outside of the courtroom during the sixth week of the trial.

Before testimony began, Microsoft's vice president and senior counsel, William Neukom, told reporters the $4 billion proposed merger "pulls the rug out from under the government" in its contention that Microsoft thwarts competition in the industry.

There was a heated exchange when one of Microsoft's attorneys, Michael Lacovara, quizzed government witness Frederick Warren-Boulton, a former government economist, about whether the proposed deal says anything about the nature of competition in the software industry.

"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 the software industry?"Lacovara asked.

Warren-Boulton's answer turned the question around. "To the extent that this potential merger is a result of Microsoft's actions in these exclusive contracts and other actions, it is unfortunate to see the disappearance of a firm like Netscape," he said. He called Netscape "the brightest, newest star in this area."

"It is regretful that this has come to pass if it is in fact because Netscape has been forced to the walls as an unfortunate consequence of Microsoft's actions," Warren-Boulton added.

The tactics used by Microsoft in its competition with Netscape for control of the Internet browser market are now at the center of the antitrust case against Microsoft. Both sides tried to use the AOL-Netscape talks to bolster their arguments.

The government discounted the impact such a merger would have on the case. One Department of Justice official noted that "it will do nothing to remove the obstacles Microsoft has placed in the way of firms seeking to develop desktop operating systems."

Microsoft used the news reports to bolster its contention that the landscape of the Internet industry can change overnight and a new pairing can rival Microsoft's hold on the new, potentially vast market. In addition, the company has been trying to portray the entire case as simply being tried for the benefit of Microsoft's competitors. Last week, the company produced documents that suggested several companies that have provided ammunition for the government's case - IBM, Netscape, Sun and AOL - were talking about ways they could "collude" to challenge Microsoft.

"This proposed deal demonstrates a simple truth - there is vigorous competition in the marketplace, and Microsoft faces resourceful and creative competitors," Neukom said outside the courthouse. "From a legal standpoint, this proposed deal pulls the rug out from under the government. In fact, the mere possibility of this kind of a combination completely undermines the government's case from start to finish."

Neukom further stated that the government's case is designed to help Microsoft's competitors, not consumers. "This proposed deal shows that the government's case was and is unnecessary," Neukom said. "Microsoft's competitors have always had the ability and the resources to change the competitive landscape and to do it virtually overnight."

The Justice Department's outside counsel, David Boies, dismissed Neukom's claims. "I think if the rug had been pulled out of our case as many times as Microsoft has said over the course of this trial, then we'd all be on the floor by now," he said.

If the deal goes forward,"it is not going to remove any of the obstacles that Microsoft has placed in the path of competition in this industry," Boies said. "However many times the alliances get rearranged doesn't alter the fundamental fact that Microsoft has a monopoly of the operating system and it has used that monopoly to forestall competition."

The proposed merger is ironic, given that Netscape's meteoric rise came to an abrupt stop and started falling after AOL contracted with Microsoft to provide its browser to AOL's subscriber base, which now tops 13 million. Netscape and AOL have resumed browser negotiations because AOL can opt out of its contract with Microsoft in January if the company no longer wants the Internet Explorer browser to be its default browser. When asked about those negotiations, Warren-Boulton said he didn't necessarily see AOL casting off its partnership with Microsoft so quickly. Pointing out that Microsoft had offered AOL a placement on the Windows operating system desktop in exchange for the browser deal, the economist said, "I have no reason to believe that Microsoft won't win in the bidding again."

However, he conceded that if the Netscape-AOL deal goes through, the slope of the curve that he has been using to project and forecast Microsoft's ultimate dominance of the Internet browser software market will change.

Outside of the courtroom, Neukom reiterated Microsoft's contention that "when AOL and Microsoft were negotiating for the deal, AOL cared enormously and primarily about Microsoft's technology" - which was modular and made up of components, compared with Netscape's monolithic code.

However, Boies said that if AOL feels compelled to continue its contract with Microsoft because of the company's position in the operating system market, even after acquiring Netscape, "that is very strong evidence to support what we've been arguing."

Elizabeth Wasserman is Washington bureau chief for The Industry Standard.