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Mixed Signals on Microsoft

Trial: Economist called by U.S. says software industry remains highly competitive--after asserting the firm has a monopoly.


WASHINGTON — After asserting in written testimony that Microsoft Corp. meets the definition of a monopoly, a key government witness acknowledged in court Thursday that software remains a "highly competitive" business and that "consumers have been well-served."

Frederick R. Warren-Boulton is one of two economists the government is counting on to establish its claim that Microsoft--whose Windows software runs more than 90% of personal computers--is a monopoly and is likely to monopolize other emerging technology markets.

On Thursday he squabbled with Microsoft lawyer Michael Lacovara over what "monopoly power" means and whether Microsoft illegally wielded its clout to keep potential rivals at bay.

In his 91 pages of written testimony, Warren-Boulton, a principal with Microeconomic Consulting Research & Associates Inc., maintained that Microsoft did have such power. He said consumers will be "significantly harmed" if Microsoft is not constrained in its fight with rivals such as Sun Microsystems Inc. and Netscape Communications Corp.

Under cross-examination Thursday, Warren-Boulton acknowledged that even Microsoft had concerns about exercising one power often wielded by a monopolist: aggressively raising prices. He cited a December 1997 company memo in which a Microsoft executive expressed misgivings about the amount Microsoft was charging Compaq Computer Corp., the world's largest maker of personal computers.

"Our high prices could get a single OEM (Compaq might pay us $750 million next year) or a coalition to fund a competing effort (say in India)" to develop computer operating software to compete with Windows, wrote Joachim Kempin, Microsoft's senior vice president for sales to PC makers, who are often referred to as OEMs, or original equipment manufacturers.

Pricing could develop into the Achilles' heel of the government's antitrust case, some experts say.

While the retail price of Microsoft's Windows upgrade has remained unchanged since 1995, there has been fierce debate about whether Microsoft has raised prices for the Windows software it supplies to computer makers, where the company makes the lion's share of its Windows sales.

Some computer manufacturers have claimed that the wholesale price Microsoft charges for Windows has doubled in the last seven years to as much as $60 per copy of the software installed in new PCs. But documents introduced in the antitrust trial suggest there is enormous flexibility in Microsoft's asking price for Windows with big PC makers.

And the company has acknowledged that it has cut pricing deals with manufacturers to win their support for Microsoft's Internet Explorer browser and other technologies it has pushed.

"I think you'll see evidence from us that we in fact have not raised prices," Microsoft spokesman Mark Murray said.

An internal memo released at the trial Thursday showed the software giant is considering changing its pricing policy for Windows by charging personal computer users an annual fee to use its operating system starting in 2001.

Kempin suggested that an "annuity" be paid by PC owners and called it "the best thing long term" in the December 1997 memo sent to Microsoft Chairman Bill Gates. Purchasers of new computers now pay a single fee for Windows, which is included in the cost of the computer.

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