September 18, 1999

'Unbiased' Ads for Microsoft Came at a Price

By JOEL BRINKLEY

ASHINGTON -- Newspaper advertisements that a California institute presented as independent views supporting Microsoft Corp.'s position in its antitrust trial were actually paid for by Microsoft, the institute conceded Friday.

	http://www.independent.org
	David J. Theroux is founder and president of the Independent Institute.

The full-page newspaper ads, published in The New York Times and The Washington Post by the Independent Institute last June, were in the form of a letter signed by 240 academic experts. They prompted news stories and courtroom discussion during the trial.

The academics were not told that Microsoft was paying for the ads, and at least one now says he would not have signed if he had known the source of the financing.

Greg Shaw, a public relations manager for Microsoft, confirmed Friday night that the company had paid for the ads. "We thought this was an important, substantive letter, and we were interested in contributing to making it visible," he said. "In our view, the letter speaks for itself."

During the yearlong public relations war that has been fought in parallel with the antitrust trial, a dozen or more institutes and lobbying organizations have weighed in with advertisements, reports, news conferences or books that offer strong opinions on one side of the case or the other.

Many of the organizations have acknowledged that they were financed by Microsoft, or by its rivals. But the Independent Institute made an extraordinary effort to portray itself as beholden to no one. The institute, based in Oakland, Calif., has written papers and offered opinions on a broad range of political, social, business and foreign policy issues over the 14 years of its existence. Throughout the trial, it has often taken Microsoft's side.

According to its literature, the institute "adheres to the highest standards of independent scholarly inquiry." Its president, David Theroux, describes himself as a scrupulously disinterested academic and adds: "We are not doing contract work. We're independent. Our intention is to do work that holds up to any type of scrutiny."

But internal institute documents show that Microsoft has secretly served as the institute's largest outside financial benefactor in the last year. The documents were provided to The New York Times by a Microsoft adversary associated with the computer industry who refused to be further identified.

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Microsoft has mounted an elaborate public relations campaign as part of its trial strategy, to influence public opinion and, perhaps, the trial judge. Much of it is open and above board, but Friday's admission by the institute suggests that an important part is intended to be secret.

On June 2, the day the antitrust trial resumed for its final month of testimony after a three-month break, the institute ran full-page ads in The New York Times and The Washington Post signed by 240 academics who were said to support the view that antitrust prosecution was harmful to consumers -- a key argument Microsoft was making in court. Complemented by a heavily promoted news conference in Washington, the effort received enough attention that David Boies, the government's lead lawyer in the antitrust suit, referred to it in court on June 3.

Last month, the institute published a book titled "Winners, Losers and Microsoft: Competition and Antitrust in High Technology." The book argued that Microsoft had succeeded in dominating the software industry principally because it makes superior products -- another often-voiced theme of Microsoft's trial defense. The company's economic witness at the trial, Richard Schmalensee, an economist at the Massachusetts Institute of Technology, cited the book as a source for an important assertion in his direct testimony.

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Theroux has long acknowledged that Microsoft is a dues-paying member of his institute, a point that is usually made in news articles about the institute. But he has insisted all along that Microsoft is "just one of 2,000 members" and as such pays a membership fee of roughly $10,000 a year -- an inconsequential part of the organization's overall budget that gives the company no special standing. All Microsoft gets for that, he said, is "free copies of our publications, discounted tickets to our events."

He has also maintained that Microsoft had nothing to do with the newspaper advertisements. The ads, he said in the interview, "were paid for out of our general funds."

His letter to economists soliciting participation made no mention of Microsoft.

But, in fact, among the institute's internal documents is a bill Theroux sent to John Kelly, a policy counsel for Microsoft, for the full costs of the ads, plus his travel expenses from San Francisco to Washington for the news conference, totaling $153,868.67. Included was a $5,966 bill for airline tickets for himself and a colleague. Unfortunately, he wrote Kelly, "the airlines were heavily booked" and "we had to fly first class to D.C. and business class on the return."

Asked Friday evening about that bill, Theroux acknowledged that Microsoft had paid for the ads but said it made no difference. "The academic process we use is independent of sources of revenue."

At least one academic who signed the ad disagreed.

"He should have told us," Simon Hakim, an economist at Temple University, said Friday when told of the financing. "I would not have participated if I had known. It's not right to use people as a vehicle for special interests."

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On the other hand, Stan Liebowitz, a professor of economics at the University of Texas at Dallas who was one of the authors of the "Winners, Losers and Microsoft" book, said that he, too, had been unaware of the Microsoft payments, but added, "it doesn't matter to me."

Also among the institute's internal documents was an accounting of 337 contributions the institute received for the fiscal year that ended June 30. Theroux said those donations accounted for 60 percent or 70 percent of the institute's overall budget.

The accounting sheets show that Microsoft contributed significantly more than $10,000 last year -- $203,217, in all, the most from any outside individual or organization and about 20 percent of the total outside contributions for the period. (Not counted in that tally was $304,725 that Theroux contributed to his own foundation.)