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Microsoft witness: Innovation hurt by fix

By Reuters
May 8, 2002, 1:25 PM PT

update An economist testifying on behalf of Microsoft on Wednesday said the strict antitrust sanctions sought by nine states against the company would be harmful to consumers.

University of Virginia economics professor Kenneth Elzinga said the states' proposed sanctions would cripple the Windows operating system, raise costs, and reduce Microsoft's incentive to improve its products.

"To me, it is plain that the non-settling states' proposal would harm consumers," Elzinga said in written testimony to U.S. District Judge Colleen Kollar-Kotelly.

Elzinga also told the judge that the states' sanctions are legally flawed because they "seek to impose a regulatory regime" on Microsoft software that has nothing to do with the antitrust violations the company committed.

Elzinga endorsed the settlement that Microsoft reached in November with the Justice Department and nine other states, which is designed to allow computer makers to feature more non-Microsoft software on the machines they sell.

The settlement "corrects the conduct by Microsoft found anti-competitive," Elzinga said. It "will reduce uncertainty for the thousands of firms that comprise the software business--it will allow them, and Microsoft, to plan investments and continue to innovate."

The dissenting states have refused to sign on to the settlement, saying it is filled with loopholes and would not prevent future antitrust violations.

The sanctions proposed by the states would force the company to disclose more technical information to competitors and offer a modular version of Windows, with add-on features that can be removed from the operating system.

But Elzinga said the states' proposal "will cause prices to rise, output to fall, innovation to slow, (and) quality to erode."

Elzinga said it would be better to allow computer makers to hide software features in Windows than to make them removable. That would prevent any anti-competitive tactics "without...having consumers use a degraded operating system."

An attorney for the dissenting states, Steve Kuney, tried to convince the judge that Elzinga's testimony was biased and his views on antitrust extreme.

Kuney cited a Microsoft-funded, 1998 article on the software industry that Elzinga co-authored in which the economist said the software business was wide open to competition.

Under questioning, Elzinga acknowledged that he thinks even some provisions in the Justice Department settlement go too far in restraining Microsoft.

Kuney also showed the judge that when Elzinga was interviewed in a pretrial deposition, he conceded he had not done any tests to determine whether removing icons from the desktop would be enough to restore competition.

Last June, a federal appeals court agreed with trial court findings that Microsoft had used illegal tactics to preserve its Windows monopoly in personal computer operating systems but rejected breaking up the company.

The case was sent back to a new judge, Kollar-Kotelly, to consider the most appropriate remedy.

Now in their eighth week, the hearings on the states' proposals could end next week. Kollar-Kotelly is also considering whether to endorse the proposed settlement.

Elzinga is the second economist Microsoft has called to the witness stand to argue against the holdout states.

University of Chicago economics professor Kevin Murphy testified last month that the states' sanctions are unwarranted since there is no proof that Microsoft's illegal acts actually stopped competitors from succeeding.

But Murphy also conceded that all the research he's published on the software industry since 1998 has been at least partly funded by Microsoft.