Summary of Testimony by Frederick R. Warren-Boulton for Microsoft By Kimberley Isbell

*****This summary covers testimony by Dr. Warren-Boulton available on the web as of Tuesday evening, November 24, 1998. The rest of his testimony will be summarized as available once I get access to the web again.******

Background

Dr. Warren-Boulton is a Principal with MiCRA (Microeconomic Consulting and Research Associates, Inc.), and specializes in antitrust and regulatory matters. Dr. Warren-Boulton served as the chief economist for the Antitrust Division of the Department of Justice from 1983-1989. Dr. Warren-Boulton became involved in the current litigation when the Department of Justice asked him to perform an economic analysis of actions by Microsoft, and is testifying as an expert witness about his findings.

Direct Testimony

Dr. Warren-Boulton testified that he was of the opinion that 1) Microsoft has a monopoly in the relevant market (based on Microsoft's share of the Intel-based PC OS market), 2) that Microsoft engaged in practices which had the effect of impeding the commercial opportunities of producers of competitive Internet web browsers (specifically citing agreements and restrictions Microsoft negotiated with OEMs, ISPs, and OLSs), and 3) that, in his opinion, these measures cannot be justified on efficiency grounds (based on the supposed increased difficulty for a limited of consumers who might strongly prefer to seek their browsing capabilities from another source, or not at all, rather than having their system come prepackaged with a default set of browsing capabilities).

In defining the market applicable to his first proposition, Dr. Warren-Boulton considered only the Intel x86/Pentium-compatible market, leaving out other personal computer manufacturers like Apple. In reaching his conclusions about Microsoft's monopoly power and supposedly anticompetitive practices, Dr. Warren-Boulton rests his testimony on a number of assumptions, including:

1. Internet Explorer and Windows 95/98 represent separate products, rather than an integrated suite offering users maximum utility in one product, which can be provided separately without any functional impairment. Part of this assumption is the proposition that IE can be defined as simply the executable program without the corollary DLLs and other files which make up Internet Explorer and cannot be removed without impairing the functioning of Windows 98.

2. Browsers supplied by competitive producers represent a potential threat to Microsoft's ability to continue competing effectively in the OS market, by hypothetically serving as a potential platform for applications.

3. Agreements between Microsoft and OEMs, ISPs, ICPs, and OLSs were undertaken with the goal of harming Netscape's ability to compete, rather than for legitimate goals.

4. Distribution of Internet Explorer without cost (as Netscape has done with Communicator) occurred without regard for profitability, and thus were "predatory." This assumption requires the corollary assumption that Microsoft's primary source of income from Internet Explorer had to come from either a) revenues from sales, or b) maintenance of Microsoft's supposed monopoly in the OS market; this assumption leaves no room for the possibility that Microsoft sought to reap financial gains from Internet Explorer in other ways (such as paid advertisements on Microsoft's portal site).

5. Microsoft's maintenance of its position in the OS market will inevitably stifle competition and innovation. In a world where Java and Netscape have solved the problem of cross-platform compatibility, Dr. Warren-Boulton assumes the existence of a hypothetical market for specialized OSs which will be tailored to a user's individual needs, while the browser takes over the all-purpose role currently filled by the OS; however, the supposed benefits resulting from replacing an OS monopoly with a cross-platform browser monopoly aren't fully explained.

Cross Examination

A number of important points about Dr. Warren-Boulton's testimony were made during cross-examination, including:

1. For almost a year prior to the current litigation, Dr. Warren-Boulton has been employed as a consultant economist for the State of New York, among others, in litigation against the Microsoft Corporation. In addition, Dr. Warren-Boulton is on governmental (state and federal) retainer for at least seven other antitrust cases over the past three years, as well has having previously been retained to help the FTC build a case against Microsoft by the Novell Corporation. In his academic papers dealing with the software industry, Dr. Warren-Boulton on several occasions critically addressed practices in which he alleged Microsoft participated.

2. The guidelines used by Dr. Warren-Boulton in determining a) what the relevant market for analysis was and b) whether or nor Microsoft had a monopoly in that market were guidelines promulgated by the FTC and the DOJ to assess the impact of a proposed future merger; they were not designed to track the monopoly position of a single company in the current marketplace. Further, the guidelines were designed to account for generic industries, rather than the software industry which exhibits a number of unique features such as network effects, and the interaction of the market with federal copyright laws. In fact, the DOJ puts out specific guidelines for use in analyzing industries in which intellectual property rights play a significant role; guidelines that Dr. Warren-Boulton couldn't remember consulting in preparation for his testimony in the instant case.

3. Dr. Warren-Boulton's determination of Microsoft's market share, which he used in his analysis to determine whether Microsoft exercises monopoly power, is based upon an aggregation of all Microsoft OSs, including MS-DOS, Windows 3.x, Windows 95, and Windows 98. In each of these cases, Dr. Warren-Boulton agreed that Microsoft faced market pressures to come out with increasingly innovative products providing the customer with ever more value for their dollar, rather than being able to rest on it's "monopoly power" to continue extracting profits from sub-par products.

4. Dr. Warren-Boulton acceded to the proposition that, as the Internet became increasingly important to computer users, Microsoft was faced with market pressure to provide Internet capabilities in future versions of the OS in order to continue putting out a popular product which meet its customers' demands. Dr. Warren-Boulton agreed that in doing so, Microsoft included functionality within Windows which overlapped or duplicated the functionalities previously provided by independent software vendors, as with the inclusion of TCP/IP stacking capabilities in Windows 95, and that there wasn't anything wrong with such actions in principal.

5. Dr. Warren-Boulton also acknowledged that internal Microsoft documents identified several key competitive threats to Microsoft's position in the OS market, aside from the potential threat from a Netscape-Java cross-platform system, including the possibility of Intel getting into the OS business and offering OEMs a large discount on the cost of an OS when purchased with an Intel CPU, a threat made particularly acute given the fact that Intel has been developing a 64-bit chip which would require an entirely different OS design from the current Windows line, which relies on 32-bit technology. This latter development would necessarily affect what Dr. Warren-Boulton terms the "durability" of Microsoft's alleged monopoly power in the PC OS market.

6. In defining the relevant market for his analysis of Microsoft's supposed monopoly power, Dr. Warren-Boulton left out of his calculation the product he acknowledges posses one of the greatest threats to Microsoft's competitive position, one which already can serve as a substitute for the Microsoft OS in certain areas-Netscape with Java capabilities.

7. In his earlier testimony, Dr. Warren-Boulton discussed extensively the applications barrier to entry into the OS market. This barrier, which Dr. Warren-Boulton claimed would make it difficult for an entering firm to compete in that market, appears to have already been overcome by commercially available versions of Linux, such as Red Hat. The potential viability of Red Hat, which include not only a Windows-like operating system, but also copies of WordPerfect 7, Netscape, CAD, and various other popular computing programs as shown by plaintiff's exhibits 1901 A and B, as a competitor to Microsoft Windows had not been considered by Dr. Warren-Boulton when he performed his analysis of Microsoft's market position, as Dr. Warren-Boulton admitted to being unaware of the various features included as standard with Red Hat.

-- Anonymous, November 30, 1998