Originally created 01/20/99

Government highlights Microsoft contract restrictions



WASHINGTON -- The government sought in court Wednesday to portray Microsoft Corp. as a jealous master who enforced fidelity with corporate contracts so restrictive they violated federal antitrust laws.

Turning to what legal experts consider some of the strongest evidence against Microsoft, the government asked an economist testifying for the company about alleged exclusionary agreements with the nation's computer makers and Internet providers.

Microsoft limits, for example, how PC makers can alter the basic appearance of its dominant Windows operating system, such as by preventing them from hiding or removing easy access to some preinstalled software including Microsoft's Internet browser.

In an important concession, Richard Schmalensee of the Massachusetts Institute of Technology admitted that computer makers have no choice but to agree demands because there is effectively no alternative to Windows.

"In the short run, the answer is no," Schmalensee said.

Justice Department lawyer David Boies showed Schmalensee an angry e-mail to Microsoft from an executive at Hewlett-Packard Co., the world's second-largest computer company, complaining about such restrictions.

"If we had a choice of another supplier, based on your actions in this area, I assure you would not be our supplier of choice," wrote John Romano, a manager at Hewlett-Packard. He added that Microsoft's restrictions caused "significant and costly problems" for his company.

Schmalensee called Romano "clearly an angry person." But he said there were many examples of what he called "channel conflict," where a manufacturer's legal actions make its distributors irate.

"It would be surprising ... if Microsoft reducing the freedom of action in some respects didn't cause them upset," Schmalensee testified.

As part of its antitrust case, the government alleges that Microsoft imposed restrictions as early as 1996 to discourage distribution of competing Internet software from rival Netscape Communications Corp.

Sworn statements from executives at several PC companies indicated they were reluctant to sell Netscape's browser if already forced to distribute Microsoft's. Both products let people view information on the Internet.

In some agreements with Internet providers, Microsoft offered its browser free -- despite spending millions of dollars on its design -- if they agreed to limit distribution of Netscape's software below thresholds, often to fewer than 15 percent of their customers.

Boies suggested Wednesday that Microsoft has spent $500 million to develop its Internet browser since 1994. Schmalensee said the estimate "would not strike me as unreasonable."

Microsoft maintains that its agreements with computer makers and Internet companies are legal. It calls its distribution deals similar to those in other industries and says limits on PC makers ensure a "common Windows experience" even for customers using computers from different manufacturers.

Schmalensee called Microsoft's attempt to protect its design of Windows a "plausible rationale" for its restrictions on PC makers.

But Boies confronted Schmalensee with e-mail from a Microsoft employee, Bill Koszewski, about limited waivers the company had granted to some PC makers to offer specialized Internet accounts.

"We're headed down the slippery slope," he wrote to Microsoft executive Brad Chase in May 1998, just days before the Justice Department and a group of states filed their antitrust lawsuits.

Koszewski added that Microsoft's lawyers didn't approve of those waivers because "changes like this undermine our whole case in defense of Windows experience."