Microsoft Economist Surprised By Gates Survey


By David Lawsky

WASHINGTON (Reuters) (January 15, 1999) - Microsoft's top
economist was surprised to learn on the witness stand Thursday that a survey on which he relied
for his testimony had been ordered up by company chief Bill Gates, complete with the results he wanted.

But Massachusetts Institute of Technology economics professor Richard
Schmalensee said he would not have changed his testimony anyway.

"It's not misleading, it's a random survey done by a third party research firm," he
said. "The purpose is not relevant."

Schmalensee gave his answer after government lawyer David Boies showed him
several e-mails, including one in which Gates set out what he wanted in the survey.

The Justice Department and 19 states have charged that Microsoft Corp. holds
monopoly power in the operating system for personal computers and has illegally
sought to preserve and extend that power. Schmalensee is the company's first
witness.

In particular, the government charges that the company used unfair practices to
compete against Netscape Communications Corp. and its Web browser.

Web browsers were the subject of the survey. Gates wanted to show there was
support for the company's decision to integrate its Internet Explorer Web browser
into its Windows operating system. He said he wanted the survey to use in his
appearance before the Senate Judiciary Committee.

"It would HELP ME IMMENSELY to have a survey showing that 90 percent of
developers believe that putting the browser into the (operating system) makes
sense," wrote Gates on Feb. 14, 1998.

The results of the survey of software developers came close to what Gates asked for.
As reported by Schmalensee, the survey showed that "85 percent predicted that
Microsoft's integration of Internet functions into Windows would help their
company and 83 percent predicted it would help consumers."

The 350-word question that elicited that positive response detailed the benefits of
integration and no disadvantages.

The market research department had doubts about the survey. Boies pointed to a
memo by Ann Redmond, a researcher for Microsoft, written on Feb. 23, 1998, that
said the survey was "not entirely unbiased," and she "wouldn't refer to it as an
opinion poll" and "would avoid releasing the question to the press."

Boies asked Schmalensee: "If you had been aware of this would you have used the
survey as you did?"

Replied Schmalensee: "The short answer is yes," although he acknowledged:
"There's clearly a debate about the question."

The survey was conducted by the polling firm of Hart and Teeter. Microsoft
coincidentally released a poll by the same firm on Thursday.

The new Microsoft poll shows that 76 percent of American consumers believe that
Microsoft has benefited both U.S. consumers and the computer software industry.

Earlier, Schmalensee testified that the main reason Microsoft kept its prices down
was the possibility of competition in the long-run.

"Current competitors are not the primary constraint on Microsoft pricing," said
Schmalensee.

One important antitrust test of monopoly power is whether other companies have the
ability to constrain prices.

Schmalensee said that Microsoft faces "some short-run impact from existing
competitors," but even under intense questioning did not identify them.

Schmalensee said the price was also constrained by those who already have
Microsoft Windows and would be reluctant to buy a new system if it cost too much.
He also said illegal copying of software also helped depress prices.

"What company is most likely to be a potential entrant for operating system
competition?" asked government lawyer David Boies.

After taking a few stabs at the question, Schmalensee finally said: "The characteristic
is that software competitors come out of nowhere."