Summary of Franklin F. Fisher

The testimony of Prof. Fisher is an attempt to tie together all of the strands of the Department of Justice's complaint against Microsoft for alleged antitrust violations under the Sherman Act, and to serve as an effective, somewhat longish road map for the DOJ's closing arguments. Prof. Fisher draws upon a good deal of testimony in the case to date, a number of internal documents from Microsoft and other computer-industry sources, as well as some economic analyses familiar from the testimony of Dr. Warren-Boulton. While Microsoft's attorneys are able to cast some doubt upon the value of Prof. Fisher's "expert" opinion, there is very little in the testimony that is new, so that it moves the DOJ case forward through its sheer synthesis of the case, with or without the addition of independent, "expert" economic analysis beyond that provided by Warren-Boulton. Prof. Fisher is a professor of economics at MIT, where he has taught for 38 years, and a director of the National Bureau of Economic Research . Fisher's area of specialization include industrial organization, microeconomics, and econometrics, and he has written previously in the field of antitrust economics. Prof. Fisher's testimony begins with some key definitions, and then moves on to four key economic questions. Prof. Fisher frames the discussion by defining anti-competitive conduct as conduct which restricts competition more than necessary, or which are only profitable to the extent that they interfere with competition (DT 17, 46). Fisher clearly circumscribes his analysis to exclude activities which occur in the absence of monopoly power, but which would otherwise be anti-competitive (DT p. 3, 6 9), and emphasizes that activities which might otherwise be benign are anti-competitive if undertaken to maintain or create a monopoly (DT 4, 10). He then gives a definition of predatory anti-competitive acts as those which meet two criteria: they are not expected to be profitable in the long run without supra-normal profits to be derived from an adverse effect on competition, and it is expected to be profitable in the long run only when taking into account those profits (DT 17, 47-48). Fisher further adds that these acts involve a deliberate sacrifice of profit to secure or protect monopoly power, when taking into consideration the opportunity costs of the actions (DT 15, 50-51). Fisher then discusses the four key questions before him:

1) Does Microsoft have monopoly power in the PC OS market? Fisher answers this in the affirmative (DT 7, 17), providing the necessary prerequisite to any DOJ claim under the Sherman Antitrust Act. This determination draws upon testimony by OEMs, and upon MS's large, stable share of OS sales. Fisher doesn't base this conclusion on these factors, alone however, making the point that 100% market share, in the face of high supply substitutability, doesn't indicate monopoly power (DT 13, 35). Instead, Fisher says you must look to the durability of a corporation's ability to charge monopoly rents (DT 14, 38). According to Fisher, MS has the ability to charge monopoly rents because of a confluence of several factors: economies of scale in the software industry, network effects, and applications barriers to entry (DT 15, 40). MS tries to rebut this assertion by expanding the definition of the market to include hand-held devices in addition to PCs (6 AM 13), asserting a potential threat from Linux (6 AM 59) and network-based computing (6 AM 19), and asserting that MS took the prices of other OSs into consideration in pricing Windows 95, and thus, by extension, when pricing Windows 98 (6 AM 78), yet none of these arguments seem to fully answer Fisher and Warren-Boulton's analysis. Fisher makes the case that monopolists can act anti-competitively in two ways: using monopoly power to enter a subsidiary market (the Internet browser market), or entering a subsidiary market to maintain the original monopoly. Fisher makes the case that MS engaged in both practices when considering the next two questions.

2) Has Microsoft maintained its OS monopoly by anti-competitive conduct? Fisher answers this affirmatively, making the latter of the two claims above. To do this, Fisher attempts to construct a four-part pattern which he claims explains MS's conduct in response to perceived threats to their OS monopoly from Netscape, Java, QuickTime, and platform-level software briefly pursued by Intel: first, a piece of platform-level software to which applications could be written appears; then MS perceives a threat that the software's API's could lower the barrier for entry into the OS market because of cross-platform capabilities; MS next tries to get the competitor to withdraw from the Windows market while offering something in return; finally, MS threatens to pour resources into preventing the software's success, regardless of whether or not it would be justified from a business standpoint (DT 53, 118). Fisher goes on to elaborate on the tactics employed by MS in step four against Netscape. Fisher notes that MS threw large sums of money into developing and marketing IE, to turn around and offer it at a negative price by making it free and inducing companies (such as the makers of Quicken, ISPs, ICPs, and OLSs) to use IE and to disfavor other Internet browsers through payments and important concessions (DT 54, 123). In addition to the predatory pricing of IE and the exclusionary agreements with the OLSs, ISPs, and ICPs, Fisher also emphasizes the anti-competative agreements with OEMs which restricted their ability to delete or de-emphasize IE; even going to the extent of convincing Apple to make IE the default browser in exchange for not halting production on Office 97 (DT 76, 153). Fisher also brings Java back into the picture, claiming MS sought to minimize the threat from Sun by hurting Netscape and killing the cross-platform nature of Java (DT 207-08, 96). Finally, Fisher alluded to one other possible strategy for MS to protect its monopoly using IE. By creating versions of IE for other OSs and seeking to decrease Netscape's competitiveness, MS might eventually become able to dominate the Internet browser market for alternative OSs. This would leave those OSs vulnerable to MS halting production of IE, least they not have any browser software available for their platform, which would make their OS even less competitive with Windows (DT 44, 94-95).

3) Has Microsoft used its monopoly power in anti-competitive ways to distort competition or achieve monopoly power in other markets? Fisher again answers in the affirmative, although emphasizing MS's desire to use this new monopoly in the Internet browser market to maintain the OS monopoly, rather than to extract a second set of monopoly profits. The primary methods by which Fisher claims MS did so is through tying IE and Windows, and enforcing this tying through agreements with OEMS; and by restrictive ISP agreements. Fisher emphasizes the fact that most users stick with the first browser they obtain because few will take the time to download and install a new browser, making MS's ability to prevent Netscape from being able to distribute at the OEM or ISP level especially significant (DT 95-100, 211-217).

4) Has Microsoft placed unreasonable restraints on trade? Fisher, drawing upon his analysis from the previous two questions, again answers affirmatively. Fisher outlines 5 such restraints: tying IE to the OS, thus making it necessary to enter the OS market to enter the Internet browser market; excluding competitors from distribution channels; placing restrictions on OEMs which prevent them from offering the choice of an IE-free Windows; concluding agreements with various companies to boycott or disfavor other browsers; and giving IE away for free or negative cost (DT 8-9, 22). In addition, Fisher notes several attempts by MS to allocate markets in violation of the Sherman Act (DT 44-52, 97-115).

Finally, Fisher makes the case that these actions by Microsoft matter even without obvious effects on innovation (or at least on Microsoft-innovation) or prices. Because of the unique importance of the PC and the browser as the access point to the Internet, MS's ability to gain and maintain monopoly power over the OS and the browser pose significant opportunities for the extraction of high monopoly rents in the future (DT 6, 13). Fisher also provides an answer for the Chicago school which asserts that a firm has only a finite amount of monopoly power which can be asserted: MS presents a different case, since if it can protect its current monopoly, Windows and IE can be leveraged to increase the total amount of monopoly power in the OS and browser markets, rather than just modifying the use of an existing quantity (DT 5, 11).

MS's cross-examination manages to varying degrees to accomplish several aims: to question AdKnowledge's data which serves as part of the basis for Fisher and Warren-Boulton's conclusion that MS is headed towards monopolizing the browser market; to draw into question the quality of Fisher's preparation of his testimony; to question Fisher's basis for asserting MS's OS monopoly (discussed above); to undermine Fisher's predatory pricing claims; and to question Fisher's assertion that IE and Windows can be conveniently separated (thus undermining the tying claim). MS brings up a number of problems with AdKnowledge's data (although, the supposed "problem" of NCompass being counted as IE doesn't appear to be as much of a problem if MS's main objective is to stop the spread of Netscape, rather than to increase the spread of a given variety of IE) (5 PM 9-50). The effect of this appears blunted by the fact that the data roughly corresponds to data from another firm used by MS to gauge market share (5 PM 12). The questions about Fisher's preparation (and his billing only 49 hours) appear more troublesome. Although it is difficult to reach any conclusions without seeing how much Fisher billed for staff time (because of the frequency with which professors have graduate students do preliminary research, reporting their findings in a condensed version to allow the professor access to relevant data without wading through all of it himself), Fisher does come across as having possibly cut some corners (5 PM 80-90). MS also tries to get around Fisher's predatory pricing claims by likening its free distribution of IE to similar actions by Adobe and Netscape (7 AM 42-66). Fisher reiterated some of his previous counterpoints, given in his direct testimony (DT 58-61, 129-30), making a convincing case that MS did not expect ancillary revenues from free distribution of IE. MS's final attack against Fisher's testimony, arguing his ability to assert that IE can be separated from Windows without negative consequences (6 AM 6-71), while on the mark is somewhat irrelevant for the Sherman Act claims, although not necessarily for the Clayton Act ones. Final determination on whether IE can be separated relies more upon your view of Felton's testimony than Fisher's, although Fisher did warn against allowing software makers off the hook so easily (DT 78, 158), and pointed to inconsistencies with that and Dell's ability to remove IE from Windows 95 for large clients (DT 79, 162) and the presence of add/remove in Windows 95 (DT 78, 159).

-- Anonymous, January 28, 1999