MS/DoJ: Sides grapple with AOL-Netscape issue

Calling America Online's $US4.2 billion agreement to purchase Netscape Communications a "seismic change" in the competitive landscape, Microsoft has urged the US Government to drop its antitrust case.

The courthouse discussions about the relevance of the AOL-Netscape deal on the antitrust case follow the release by the US Department of Justice of Microsoft internal documents concerning its relations with Internet service providers and Walt Disney Online.

But the focus here was clearly on the Netscape-AOL deal. While downplaying the importance of the deal on its antitrust case, David Boies, the DoJ's lead trial counsel, said it may ultimately impact any remedies imposed by Judge Thomas Penfield Jackson, should the government win.

"At the remedy stage," said Boies, "you will have to look at all of the factors in the industry."

The government has not provided any specifics about what kind of corrective action it might seek against Netscape. But Boies acknowledged outside the courtroom that the news could influence Judge Jackson's perception of the industry.

"You can't say that it (the Netscape-AOL deal) will have no effect," said Boies, "I think it's unlikely to have a significant effect."

But Microsoft officials, from the legal standpoint, saw the Netscape-AOL agreement as proof of their long-standing argument about competition.

"This deal proves that the competitive landscape of the high-tech industry, of which Microsoft is a part of, can change dramatically overnight," said Bill Neukom, Microsoft's vice president for corporate legal affairs.

"These people aren't running scared, they're running hard against Microsoft," said Neukom.

John Warden, Microsoft's lead trial attorney, urged the government "to recognise commercial reality and drop this case."

Netscape Communications CEO and president James Barksdale was the first government witness in its antitrust case. The government has argued that Microsoft has used its monopoly power in the desktop operating system market to cut off Netscape's ability to distribute its browser.

The disappearance of Netscape, however, doesn't change the antitrust strategy, said Boies. "I don't think it makes any difference" whether the browser is made by any of the companies in the AOL-Netscape deal.

News of the agreement was raised in dramatic fashion in the courtroom this morning during Microsoft attorney Michael Lacovara's third day of cross-examination of government economic expert Frederick Warren-Boulton.

Warren-Boulton had been testifying on how the battle with Microsoft had been limiting the resources Netscape could devote to upgrading its browser when Lacovara raised the question.

Citing the Netscape-AOL deal and a related pact with Sun Microsystems, Lacovara asked "You don't think there is any resource limitations as a practical matter with Sun?"

The AOL-Netscape deal with Sun, includes an agreement that calls for the companies to jointly develop the next version of the Netscape Navigator browser.

Judge Jackson, unaware of the news of an agreement and showing surprise at the questions, asked Lacovara about the accuracy of his information. The attorney said he got it from a news source he believed was reliable.

But Warren-Boulton said he couldn't answer the question. "I'm extremely reluctant to provide you with an expert opinion of all the ramifications of the last day," he said.

The session ended with Lacovara saying he was "very substantially through" his cross-examination of Warren-Boulton. Warren-Boulton will return to the stand on Monday when the trial resumes.

The economist's direct, written testimony focused on monopoly issues. Regarding these issues, the government released more Microsoft documents in an effort to build its case that the company used its monopoly muscle to control markets.

A 1997 Microsoft internal memo concerning Internet service providers said in part: "We need a way of ensuring that the ISP is really loyal to IE or all we are doing is giving premium real estate to an ISP that might be 100% Netscape in their other distribution. Remember that ISPs have to swear allegiance to IE for typically 75% of all the browsers they distribute in order to get into the referral server."

The government also released Microsoft's desktop marketing and distribution agreement with Disney Online. In it, Disney agreed to market, distribute and promote Internet Explorer while agreeing not to promote any other browser on Disney Web sites.

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