Microsoft's Defense: A Tough Sell, But Not Impossible

The software giant will argue that it fails a key test for a monopoly

As the Justice Dept.'s last witness takes the stand in its antitrust suit against Microsoft Corp., the company is revving up its defense. The thrust: Microsoft doesn't have monopoly power.

It would seem to be a tough sell, given that its Windows operating system comes installed on 90% of all PCs. Yet it's not perfectly clear that Microsoft fits the classic legal portrait of a monopolist: the ability to raise prices or the power to limit supply without attracting new competitors. And if it's not a monopoly, then how can it abuse monopoly power, as the government charges? That, at least, will be the argument that Microsoft's first witness, Massachusetts Institute of Technology economist Richard Schmalensee, will make when he takes the stand during the week of Jan. 11.

HELPFUL PRECEDENTS. Microsoft can marshal Supreme Court and lower court decisions to help out. In these cases, the courts found that even 100% market share doesn't prove monopoly power if rivals can easily gain entry.

In 1990, for instance, an appeals court in California rejected the Justice Dept.'s claim that movie-house operator Raymond J. Syufy had monopoly power, even though he had bought all first-run theaters in Las Vegas. The court held that the movie-house business is a "rough-and-tumble industry, marked by easy market access." The court noted that Syufy's market share started to decline after Justice filed the case.

The question for Jackson: Is the PC operating-systems market as easy to enter as the Las Vegas movie-theater market? Justice says no. Some antitrust attorneys and many industry insiders agree. On Jan. 5, government witness Franklin M. Fisher testified that there is a major obstacle to entry into the OS market: Because Windows is dominant, most software applications are written for it. That, in turn, said the Massachusetts Institute of Technology professor, creates more demand for Windows--making it tough for rivals to break in.

Fisher pointed to the depositions of a number of PC makers who testified that potential rivals would have a tough time persuading software writers to incur the expense of writing to both Windows and other operating systems. And without applications, they said, consumers won't switch. "The threshold for entering the market is very high," says Chicago attorney Terry F. Moritz.

Microsoft's lead-off witness, Schmalensee, is likely to argue that Microsoft operates in one of the most free-wheeling of all markets, replete with meteoric rises and stunning failures. Just take Apple Computer Inc.--once stumbling and now thriving. Sales of new iMac computers boosted its market share from 2.1% last spring to 6.6% in August, according to ZD Market Intelligence. "The concern of antitrust law is the durability of market power, not its transience," says William E. Kovacic, a visiting antitrust professor at George Washington University School of Law. True enough. After the deluge of PC sales in the fourth quarter--most of which included Windows--Apple's share had dropped to 5.3% by November.

Microsoft likes to point to America Online's acquisition of Netscape Communications to show how quickly fortunes can change. It asserts that as long as there are browsers like Netscape's--which can operate on operating systems other than Windows--then the potential for OS rivals to emerge exists. But Fisher testified that the Netscape browser, Java programming language, and other "alternative" technologies "won't seriously threaten" Windows' dominance.

IN THE WINGS. But if Microsoft is so dominant, can it set prices as it wants? William F. Shughart II, an economics professor at the University of Mississippi's School of Business Administration, argues that fear of competition stops Microsoft from acting like a real monopolist and charging more for Windows. He says that Microsoft's wholesale prices for operating systems have remained relatively stable, while Windows now includes more functions. "If Microsoft attempted to raise prices above competitive levels, there are substitutes out there ready to expand their market shares," Shughart says.

Schmalensee is expected to make similar points. But the pricing debate is just heating up. Fisher has concluded that Microsoft pricing for PC makers is anticompetitive, and he's expected to testify about his analysis, based on confidential Microsoft information, in a closed-court session. His testimony could hurt the software giant's argument. But if Microsoft can somehow avoid the monopoly tag, the entire case crumbles. So you'll be hearing a lot from Microsoft on why, despite that 90% market share, it's not a monopoly.

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