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Microsoft against the wall
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February 13, 1999: 7:43 a.m. ET
Experts say it's not a matter of if the company will lose, but by how much
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NEW YORK (CNNfn) - With each witness Microsoft Corp. puts on the stand at its federal antitrust trial in Washington, the bigger the hole the software giant seems to dig for itself, antitrust experts say, leading some legal scholars to believe the company's best bet is to narrow the margin of its almost-certain defeat.
Just before Microsoft (MSFT) began its defense last month, trial watchers said the Redmond, Wash.-based company had its work cut out for itself, as the Justice Department and 19 states had done a good job of offering strong evidence of antitrust violations.
One step forward, two steps back
As it has proceeded with its defense, however, Microsoft seems to be falling further behind instead of gaining lost ground.
Perhaps most damning to the defense has been lead Justice Department attorney David Boies' ability to lure company executives to contradict previous testimony.
Earlier this week, Cameron Myhrvold, a Microsoft vice president, acknowledged that the company pressured Internet service providers to use its Internet Explorer Web browser instead of Netscape Communications Corp. 's (NSCP) Navigator because it feared head-to-head competition - an admission that played right into the heart of the government's allegations of anti-competitive behavior.
"The most recent testimony seems to be an admission that Microsoft set up the browser to knock off Netscape rather than an attempt to improve the browser," said Burton Caine, a professor at Temple University Law School.
"They're saying they can't out-compete Netscape, so they're using their power [in Windows market share] to exclude them. If that's what the case is about, they'll lose."
Few trial watchers doubt that U.S. District Judge Thomas Penfield Jackson will rule for the government. In part because federal prosecutors have made a strong case, but also because Microsoft has been losing an opportunity to gain ground with its own witnesses.
"I can't comprehend how bumpy the whole trail of witnesses have been for Microsoft," said William Kovacic, a professor at George Mason University Law School. "I'm absolutely dumbfounded."
Focus on Appeals Court
With the government apparently holding a commanding lead at this point, most trial watchers are focusing on the next phase of this never-ending legal battle: the appeals process.
"It's premature to claim victory at the trial level," said Tom Miller, attorney general of Iowa, one of the 19 states that joined the Justice Department's suit. "We believe the case has gone well for us, and everybody is conscious of an appeal in any case - both parties as well as the judge."
But some antitrust experts say that even with a trial victory, the government's work will be far from over.
"The old story in antitrust cases is that the government wins the battle and loses the war," said Harry First, a professor at New York University Law School. "The question is: What do you get in relief?"
Appeals court weighs heavily
A U.S. Court of Appeals decision made an impact on the case before it even began. In June, the court ruled that Microsoft's bundling of the Internet Explorer Web browser with the Windows operating system is a genuine integration.
One of the key issues of the government's case is that Microsoft bundled the two programs solely to cut off a competitive threat from Netscape.
"Boies made real progress in showing there is no greater consumer benefit through integration than if consumers were choosing the products individually," said Tom Miller, Iowa attorney general.
Despite the reams of internal Microsoft documents the government has presented in court, First said that issue will continue to be a slippery one for federal prosecutors.
"One overall problem for the government is that after all the e-mail smoke clears, the government has to show where the consumer injury is," First said. "It can't just look like the competition has been hurt."
That's an argument Microsoft has made all along. Company officials and Microsoft's legal team have often asserted that many of the actions the government deems anti-competitive actually benefits consumers.
Caine, however, said that argument may not hold up in appeal in light of Myhrvold's testimony.
"If Microsoft is putting out a technologically advanced product and its competitors suffer, fine. That's progress," Caine said. "But if they're doing what they do for anti-competitive purposes, they would lose" on appeal.
The bundling issue aside, trial watchers believe the government has done a good job of presenting a case that could hold up on appeal.
"One strong point for the government is the test on pricing from [Massachusetts Institute of Technology economics professor] Franklin Fisher, who indicated Microsoft charges prices that are higher than they would be in a competitive market," First said. "That's the kind of thing the government wants on appeal."
Credibility counts
In the past two weeks, Microsoft has dug itself into a deeper hole with a series of gaffs involving videotaped demonstrations.
Microsoft officials dismissed the flubs as minor events that the government has pounced upon to distract from the real issues. But Kovacic said Microsoft's credibility problems could have effects beyond the current trial.
Most of Microsoft's witnesses to date have submitted direct testimony that run more than 50 pages. Kovacic said although Boies has focused on relatively small parts of the testimonies, he has done an impressive job of making defense witnesses appear unreliable.
The risk is that Jackson may find Microsoft's witnesses so unreliable that he may dismiss their entire testimonies, not just the issues disputed in the courtroom.
"Microsoft's greatest danger is that Jackson will not only find the government has borne the burden of proof, but that he refuses to accept factual evidence in the testimonies that refutes it," Kovacic said. "Boies has been very good at picking points of testimony that undermine the whole document. It narrows the legal openings through which Microsoft may escape on appeal."
Microsoft spokesman Jim Cullinan, however, said the company is confident that Jackson will remain focused on the facts dealt with in defense witness testimony.
"The government is making good points from a public-relations perspective… but a number of points haven't been touched," Cullinan said.
Microsoft's best bet
Despite popular opinion, Cullinan said Microsoft is happy with the way the trial is proceeding.
"We feel very good about the direction this case is going," he said. "The fact that Windows and Internet Explorer is one product is even agreed upon by the government. That's a huge, huge point in this case."
It may not be enough, however. The best Microsoft can do now, Kovacic said, is to narrow the government's margin of victory heading into the appeal's process - the legal equivalent of losing the game but beating the spread.
"What Microsoft has to hope for is to limit the damage to discrete areas of [their witnesses'] testimony and persuade Jackson to look at the rest of the testimony," he said.
But Microsoft isn't making matters easy on itself, according to NYU's First. Not just in its courtroom performance, but by its refusal to consider a settlement that would result in less-sweeping remedies.
"I think Microsoft has been a very difficult client," First said. "They've made it harder for their lawyers to exercise professional judgment where the case might go because they've been very dogged about standing firm."
Microsoft shares fell 5 to close at 157-3/4 in Friday trading. 
-- by staff writer John Frederick Moore
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