System alleged to rule market Antitrust economist says Windows has power of monopoly; Price tops worth, he says; Upgrades are geared to profit, not to battle rivals, he tells court; Microsoft


WASHINGTON -- The chief economist in the Reagan administration's antitrust division testified yesterday that Microsoft's monopoly power has allowed it to charge consumers more for the company's computer operating systems than they should be paying, because the company effectively has no competitors.

"I believe Microsoft has raised prices over the competitive level," said Frederick R. Warren-Boulton, now a principal with Microeconomic Consulting Research & Associates Inc.

Appearing as a government witness in the Microsoft antitrust trial, Warren-Boulton said under cross-examination that Microsoft is able to set prices significantly above what it could charge if there was valid competition in the operating systems market.

Microsoft's operating systems, such as Windows 98, are on more than 90 percent of desktop computers.

Much of Warren-Boulton's testimony echoed what he told the court in his written testimony Wednesday.

But that sort of analysis is critical if the government is to prove its case, even though much of the evidence the Justice #i Department is depending on comes from the company's internal memos and e-mail.

Warren-Boulton's statements were prompted by a question from Microsoft lawyer Michael Lacovara, who asked him to explain the method used for his analysis for the software industry.

Lacovara appeared to be laying the groundwork for a claim that the witness improperly used standard economic and analytical tools to examine the software industry, which Lacovara argued is unique.

Warren-Boulton responded that all industries have their

peculiarities and that any analysis must take that into account, as he says he did.

He explained that although Microsoft does not have a monopoly -- which would mean it has no competitors -- it does have monopoly power, so it can set the prices for its products without regard to the prices charged for other companies' products.

"The prices they have chosen are, in some cases, significantly higher than the prices they could have chosen," he said.

Lacovara walked the economist through Microsoft's history of frequently improving its software, moving consumers from Windows 3.1 to Windows 95, and this year to Windows 98.

He asked whether Microsoft's feeling the need to constantly improve its products means that it fears competition.

Warren-Boulton said no, explaining that the company innovates in part to induce people who already own the product to buy an upgrade.

"A monopolist has the same incentive to innovate as a competitive firm," he said.

The network effect, which makes an item more valuable to consumers as more consumers use it, makes Microsoft dominance of the operating system market virtually unassailable, told the court.

Software developers write applications, such as Internet software or games, for the operating system that dominates the industry because they'll get more sales that way.

"It doesn't take an economist to decide that that's your market," he said.

Warren-Boulton also referred to an internal Microsoft document that listed the most significant threats to the company's control of the operating system.

One concern focused on the possibility that computer manufacturers might grow tired of paying Microsoft hundreds of millions of dollars each year for the Microsoft operating system.

The companies could have paid software developers to write an alternative operating system, but that threat was dismissed by Microsoft as remote because of the network effect.

A more significant threat lurked among the engineers at Intel Corp. Intel makes the chips used in the computers that run Microsoft's operating systems.

Microsoft remains concerned about Intel's ability to develop and distribute its own operating system software.

The government has presented evidence that Microsoft illegally pressured Intel to stay away from software development.

But the greatest threat Microsoft feared, Warren-Boulton said, was the combination of Web-browsing software and the Java programming language.

The government has alleged that Microsoft illegally used its monopoly power in the operating system market to attack the companies behind both those technologies.

Pub Date: 11/20/98

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