October 20, 1998 1:05 AM PDT

DOJ assault opens Microsoft trial

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WASHINGTON--Government attorneys wasted no time in laying into Microsoft in the landmark antitrust trial that got under way here yesterday, detailing a series of business acts that allegedly demonstrate the software giant's attempts to illegally maintain a Windows monopoly and to create a new one for Internet software.

In opening arguments lasting more than three hours, Justice Department special prosecutor David Boies outlined scores of documents detailing Microsoft's dealings with numerous partners, including America Online, Intel, and Apple Computer. Microsoft attorneys are expected to present a rebuttal argument when trial reconvenes today.

Boies cautioned that Microsoft's denials of wrongdoing are not to be believed, contrasting the evidence--which he claims proves Microsoft knowingly violated antitrust laws--with videotaped testimony in which Microsoft chairman and chief executive Bill Gates insists he was unaware of any illegal behavior.

"Mr. Gates is again trying to distance himself" from behavior that for more than a year was under the microscope of antitrust investigators, Boies told U.S. District Judge Thomas Penfield Jackson, who is overseeing the case. "What [the evidence] demonstrates is that, even down to the details, the top management was directly involved."

One of the most explosive allegations Boies introduced is that Gates asked America Online executives to knock Microsoft rival Netscape Communication out of the browser market.

"How much do we need to pay you to screw Netscape?" Gates reportedly asked AOL, according to an internal AOL document detailing a 1996 meeting. The document, which was blown up on large monitors placed in the packed courtroom, went on to claim that Gates told AOL executives: "This is your lucky day."

The AOL allegations, along with a host of others contained in numerous exhibits, are designed to show that Microsoft engaged in a broad pattern of predatory conduct designed to reinforce its dominance in the market for personal computer operating systems and to take control of the emerging market for Internet software.

Other allegations included:

  • That in 1995 Microsoft proposed to Netscape that the two companies carve up the market for browser products. In return for Netscape not building a version of its Navigator browser to run on Microsoft platforms, Microsoft allegedly promised a "special relationship," in which Netscape would receive advance notice of Windows interfaces, among other things.

  • That after Netscape refused, Microsoft executives attempted to force Netscape out of business in order to protect their Windows monopoly. Among other actions, Boies alleged, Microsoft made public statements designed to persuade financial analysts that Netscape had no viable financial future; created exclusive relationships with computer sellers, Internet service providers, and content providers in order to deprive Netscape of channels it needed to distribute its browser; and studied Netscape's revenue sources and attempted to eliminate them in an attempt to force Netscape out of business.

  • That Microsoft pressured partners Intel, Apple, and Intuit not to use Netscape's Navigator or versions of Sun Microsystems' Java that conflicted with Microsoft's Internet goals.

    Early on in his argument, Boies urged Jackson to be wary of Microsoft's defense, and used Gates's videotaped testimony as proof that Microsoft executives are not to be believed. In one clip, Gates claimed he had known nothing about a proposal to carve up the browser market until he had read an article in a business newspaper. Market allocations, Gates said in his deposition, "would be against company policy."

    In another clip, Gates claimed he "had no sense what Netscape was doing" in June of 1995 when the meeting between Microsoft and Netscape took place.

    Boies then cited several internal Microsoft messages from 1995 in which Gates and other top executives list in detail their worries that Netscape's Navigator might threaten the dominance of Windows. As a May 1995 memorandum made clear, "Microsoft and Mr. Gates personally were directly concerned about the threat that Netscape posed," Boies said.

    Regarded as an antitrust wizard who successfully defended IBM against a 13-year antitrust suit in the 1970s, Boies also cited Microsoft messages in which Gates allegedly discusses Microsoft's pitch to Netscape to divide the market. "We could even pay them money as a piece of the deal," Gates is alleged to have written in one note.

    "This is not something that [low-level Microsoft managers] did on their own or, in Mr. Gates's words, 'against company policy,'" Boies argued. "This is something they are being directed by the top management to do."

    Boies also detailed email that reflected Microsoft's sometimes rocky relationship with chip giant Intel, which was interested in several Internet technologies that Microsoft viewed as a threat. According to one internal Intel memorandum recording a meeting between Gates and Intel's then-chief executive Andy Grove, Gates allegedly made "vague threats" to Intel if it did not back away from the technologies--which included chip instructions called NSP or native signal processing and software that optimized Java multimedia software for Intel's microprocessors.

    Under federal antitrust laws, it is not illegal simply to possess a monopoly. But companies run afoul of the law when they intentionally try to maintain that monopoly or use it to leverage new monopolies. It also is illegal under the laws for any company, large or small, to collude with competitors to fix prices or divide up markets.

    Although the government has yet to prove that Microsoft holds a monopoly for Windows, Boies said he will prove in trial that Microsoft's Windows market share has been more than 90 percent for the past decade.

    Microsoft is expected to begin its rebuttal argument today. The court will convene Mondays through Thursdays throughout the case, with no proceedings slated for Fridays.

    Microsoft, for its part, has expressed confidence that it will prevail. Microsoft general counsel William Neukom yesterday said Boies's arguments were inaccurate and failed to raise anything new.

    Bill Neukom
    Bill Neukom meets with reporters. AP
    The evidence was "a lot of snippets taken dangerously and unreliably out of context," Neukom said on the courthouse steps immediately following yesterday's proceedings. He added they were the "same old tired allegations. There is nothing new."

    In recent weeks, Microsoft has accused the government of entirely rewriting its case.

    "The relevant evidence, the admissible evidence, will show that Microsoft is a vigorous but a very fair competitor," Neukom told reporters outside the court.

    Steve Houck, an assistant attorney general from New York, also made opening remarks today, arguing that the Microsoft antitrust case has important implications for the information age. "Microsoft is now poised to extend its monopoly to the Internet," Boies said, adding that, unlike the government's suit against IBM, this case would be short.

    Meanwhile, government attorneys further Microsoft's day in court accused Microsoft of stonewalling their attempts to obtain information contained in databases that have been hotly contested for more than two months. Despite an order Jackson issued last week requiring Microsoft to hand over the data, the government said it still has not received it.

    "Microsoft's intransigence thus far has forced plaintiffs to file two separate motions to compel production of the information," the government's brief claims. It asks that Microsoft be ordered to provide the information exactly as it is presented in Microsoft's database.

    The Justice Department (DOJ) will try to prove that Microsoft illegally has maintained a monopoly in the desktop operating system market and used deliberate, predatory tactics to develop new monopolies in other markets. Microsoft contends that it rose to prominence by offering the best software products on the market and that it has done nothing illegal to gain market dominance.

    The trial is expected to last four to eight weeks, but many observers say the case--no matter what the outcome--ultimately will wind up in the Supreme Court.

    Ever since the government filed suit in May, the Microsoft antitrust case has attracted massive attention. Some observers have likened it to previous antitrust lawsuits against AT&T, IBM, and even Standard Oil. The implications are significant for the future of the high-tech industry and the development of electronic commerce.

    The government originally sought rulings that would require Microsoft to separate its Internet Explorer

    browser from its Windows operating system, or to make other concessions. In a ruling filed last week, antitrust prosecutors said they plan to push for additional steps that would keep Microsoft from abusing monopoly power should the government emerge from the lawsuit victorious.

    Despite its arcane nature, the case is packed with drama.

    For starters, the trial is taking place in the same federal courthouse where former White House intern Monica Lewinsky testified about her relationship with President Clinton.

    Microsoft trial witness table
    Government witnesses

    James Barksdale
    chief executive, Netscape Communications

    David Colburn
    senior vice president of business affairs, America Online

    David Farber
    professor of telecommunications, Univ. of Pennsylvania

    Franklin Fisher
    professor of economics, MIT

    Edward Felten
    assistant professor of computer science, Princeton Univ.

    James Gosling
    vice president and fellow, Sun Microsystems

    William Harris
    president and CEO, Intuit

    Steven McGeady
    vice president of content group and health technology initiative, Intel

    John Soyring
    director of network computing services, IBM

    Avadis Tevanian
    senior vice president of software engineering, Apple Computer

    Glenn Weadock
    president, Independent Software

    Frederick Warren-Boulton
    principal, Microeconomic Consulting Research & Assoc. (MiCRA)

    Microsoft witnesses

    Bob Muglia
    senior vice president for applications and tools, Microsoft

    Eric Engstrom
    general manager for multimedia, Microsoft

    Richard Schmalensee
    professor of economics and management, MIT

    Paul Maritz
    group vice president, platforms and applications, Microsoft

    James Allchin
    senior vice president, personal and business systems, Microsoft

    Joachim Kempin
    senior vice president, OEM sales, Microsoft

    Brad Chase
    vice president, developer relations and Windows marketing, Microsoft

    Cameron Myhrvold
    vice president, Internet customer unit, strategic relations, Microsoft

    William Poole
    senior director, business development, Microsoft

    Daniel Rosen
    general manager, new technology, Microsoft

    John Rose
    senior vice president and group general manager for enterprise computing, Compaq Computer

    Michael Devlin
    Rational Software

    The case also features personalities such as Microsoft cofounder and chief executive Bill Gates. The world's wealthiest person, valued at more than $50 billion, Gates has become a baron for a new era in which high-technology reigns supreme as a leading economic driver.

    James Barksdale, chief executive at Netscape Communications, yesterday featured prominently as leader of the Web browser upstart that claims to have beaten Microsoft to the punch with software designed to surf the Internet.

    Microsoft is expected to offer evidence that the company already had planned to introduce Web browsing software and to incorporate it into its Windows operating system before Netscape burst onto the scene. Microsoft also is likely to characterize Netscape's own missteps as the reason for the success of Microsoft's Internet Explorer Web browser, rather than any predatory practices by the company.

    Overall, the government is expected to introduce more than 1,200 exhibits as evidence.

    Judge Jackson has allowed each side 12 witnesses and two surprise rebuttal witnesses that will testify later in the trial. Microsoft and government "trustbusters" already have submitted initial written testimony for their witnesses to Judge Jackson. To expedite the proceedings, the written testimony will serve as "direct examination" in the case, sparing the time-consuming task of oral testimony.

    The government's witnesses will be the first called to the stand. They will be cross-examined by Microsoft's attorneys, then government prosecutors will have a chance to redirect questioning. At that point, Microsoft's legal team will be allowed to "re-cross," or cross-examine the witnesses one final time. Once the government rests its case, the reverse will be true for Microsoft's witnesses.

    Sources said they expect each witness's testimony to last between two and four days, depending on the intensity of the questioning and the importance of each witness's testimony to the case.

    Both parties finalized their witness lists last week, but only after some last-minute jockeying. When the government added new witnesses from Apple Computer and Sun Microsystems, Microsoft argued that government lawyers were attempting to broaden the scope of the case beyond the allegations detailed in the original filing in May.

    The software giant asked Judge Jackson for an additional two-week delay to prepare for what it called new allegations, but the judge declined the request. Sources said that, at the final pre-trail conference last week, Jackson told the company, "We'll see you Monday."

    Jackson's apparent eagerness to get the trial under way is just one factor that has been fueling wild speculation about what fate could come to Microsoft if the government is awarded a victory in the case.

    The severity of the charges Microsoft faces raises the prospect that, if the government wins, it could seek the ultimate remedy of breaking up the software giant--a remote but nevertheless feasible possibility.

    "I think that the chances of a court ultimately imposing a structural breakup are less than one in five, but the consequences would be so severe the company has to take it very seriously," said William Kovacic, an antitrust specialist at George Washington University Law School.

    Microsoft has said it has internal communications that show it initiated plans to become a major browser player and integrate its Internet Explorer program with its Windows operating software before it had even heard of Netscape.

    But the Wall Street Journal reported today that America Online had provided evidence to the government that supports Netscape's version of what happened at a June 21, 1995, meeting between Netscape and Microsoft that is expected to be a major feature of the case.

    CNET News.com confirmed independently that a Netscape engineer told an AOL executive that Microsoft "would crush them" if Netscape did not cooperate with Microsoft in providing a board seat and make available its plans.

    Microsoft repeatedly has denied Netscape's version of events.

    Separately, the Wall Street Journal reported that a Italy's International Alliance for Compatible Technology (IACT) filed an antitrust complaint last week in Rome, making allegations similar to the the DOJ's case.

    A lawyer with the Italian firm that filed the complaint said the case falls under the country's jursidiction because of the "Italian characteristics" of software in question, namely Windows and Internet Explorer. A Microsoft spokewoman said the case appears like one being considered by the European Commission, and that the company will defend itself, the Journal said.

    News.com's Dan Goodin reported from Washington and Corey Grice from San Francisco. Reuters contributed to this report.

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