MS/DOJ: MS market dominance was key, America Online says

Under intense cross-examination today, an executive of America Online (AOL) insisted that the key reason his company chose to incorporate Microsoft's Internet browser technology instead of Netscape Communications' product was because Microsoft offered to place AOL on its market-dominant Windows operating system desktop screen.

The testimony of David Colburn, AOL's senior vice president of business affairs, came during the second week of the US government's antitrust trial against Microsoft, and helped substantiate the charge that Microsoft used its dominant position to gain advantage in other markets and knock out competitors.

If US District Court Judge Thomas Penfield Jackson finds that Microsoft holds a monopoly in the personal computer operating system market, the governent is arguing that such activity would be illegal.

"Microsoft used its monopoly control over who could get access to the desktop in order to require America Online to give exclusivity to its browser," David Boies, attorney for the US Department of Justice, said outside the courthouse. "The critical item, as the witness said, was the fact that Microsoft and only Microsoft could control access to a monopoly desktop."

Mark Murray, Microsoft's spokesman, contended that AOL was already present with a more beneficial position for its desktop icon on over 90 per cent of home computers that were being sold in America as a result of contracts with computer makers. "Nothing in Microsoft's agreement with America Online stopped America Online from working with Netscape."

Colburn was AOL's chief negotiator during the company's talks with both Microsoft and the software giant's rival, Netscape, about licensing browser technology to distribute to subscribers starting in October 1995. The talks culminated in pacts with both companies in March 1996. He testified that a backdrop to those negotiations was AOL's concern about competition from the Microsoft Network online service, which was bundled with each copy of Windows 95 and promoted with an icon on the desktop.

Under cross-examination today, Microsoft's hired counsel, John Warden, asked Colburn, "The most important factor in choosing between Microsoft and Netscape was getting software that worked with the client, wasn't it?"

Colburn remained firm. "No. We looked at five factors, the most important of which was securing relative parity with MSN as far as the desktop was concerned," he said. The other factors, he added, were how much AOL would have to pay, the browser's interoperability with Windows, flexibility to offer other browsers and whether the technology would work.

AOL agreed to license Netscape's browser on March 11, 1996. But, on the very next day, AOL also agreed to license Microsoft's Internet Explorer and make that the default browser in the AOL software distributed to that company's 13 million subscribers worldwide. The Microsoft pact also provided that AOL software would be distributed with Windows 95 and any subsequent Windows release and also ensured that AOL was promoted in a category on the desktop first screen called the Online Services folder.

Netscape's president and chief executive, James Barksdale, was the government's first witness in the case. He testified that AOL's decision and lack of notice to Netscape outraged him, given that he had a personal relationship with Steve Case, AOL's chief executive. In fact, during an electronic mail exchange in 1995, Barksdale addressed Case as "Franklin D." and signed his correspondence "Josef Stalin" - implying that they were allies in a world war against Microsoft.

In the browser war, in Barksdale's view it was Case who sold out his ally, as the AOL decision was regarded as a victory for Microsoft -- which at that point was a laggard in the browser market. The contract seemed to provide a turning point for Microsoft in the browser war.

Despite Colburn's contention about achieving the Windows desktop positioning, Warden pointed out that AOL already had negotiated a desktop icon with most of the leading computer manufacturers, accounting for about 90 per cent of personal computers sold. That icon, Colburn admitted, was far more important than the placement in the Online Services folder that the company won from Microsoft in the browser agreement. Warden also entered into evidence several internal AOL memos that questioned the benefits of the Microsoft desktop, as opposed to AOL's practice of "carpet bombing" potential subscribers. In 1995, AOL distributed 175 million copies of its software, according to the memos.

While Netscape's Navigator browser is available to AOL subscribers, they have to go looking for it. AOL is not allowed to promote Netscape's browser in any prominent locations. Colburn said the agreement amounts to "virtual exclusivity".

Under questioning, he explained the phrase: "Because of the fact that Internet Explorer has to be the default browser, because there is relatively little place to promote Netscape, the vast, vast majority of our subscribers use IE," he said. "Customers use what we give them. They have virtual exclusivity."

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