1 United States District Court s1
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1 UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
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3 UNITED STATES OF AMERICA, :
PLAINTIFF, :
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VS. : C. A. NO. 98-1232
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MICROSOFT CORPORATION, ET AL. :
6 DEFENDANTS :
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7 STATE OF NEW YORK, ET AL. :
PLAINTIFFS :
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VS. : C. A. NO. 98-1233
9 :
MICROSOFT CORPORATION, ET AL. :
10 DEFENDANTS :
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11 WASHINGTON, D. C.
JUNE 4, 1999
12 (A. M. SESSION)
13 TRANSCRIPT OF PROCEEDINGS
BEFORE THE HONORABLE THOMAS P. JACKSON
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COURT REPORTER: PHYLLIS MERANA
20 6816 U. S. COURTHOUSE
3RD & CONSTITUTION AVE., N.W.
21 WASHINGTON, D. C.
202-273-0889
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1 FOR THE UNITED STATES: PHILLIP MALONE, ESQ.
DAVID BOIES, ESQ.
2 U. S. DEPT. OF JUSTICE
ANTITRUST DIVISION
3 SAN FRANCISCO, CA.
4 FOR THE DEFENDANT: JOHN WARDEN, ESQ.
RICHARD J. UROWSKY, ESQ.
5 STEVEN L. HOLLEY, ESQ.
RICHARD PEPPERMAN, ESQ.
6 SULLIVAN & CROMWELL
125 BROAD STREET
7 NEW YORK, NEW YORK
8 FOR THE STATE OF NEW YORK: STEPHEN HOUCK, ESQ.
N. Y. STATE DEPT. OF LAW
9 120 BROADWAY, SUITE 2601
NEW YORK, NEW YORK
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1 I-N-D-E-X
2 WITNESS REDIRECT
3 PROFESSOR FRANKLIN FISHER
4 BY MR. BOIES 4
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7 E X H I B I T S
8 PLAINTIFFS' IN EVIDENCE
9 2085 6
10 2084 17
11 1062 18
12 2117 32
13 2116 39
14 2112 47
15 1951 49
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1 P-R-O-C-E-E-D-I-N-G-S
2 THE DEPUTY CLERK: CIVIL ACTION 98-1232, UNITED
3 STATES VERSUS MICROSOFT CORPORATION, AND 98-1233, STATE OF
4 NEW YORK, ET AL. VERSUS MICROSOFT CORPORATION.
5 PHILLIP MALONE, STEPHEN HOUCK AND DAVID BOIES FOR
6 THE PLAINTIFFS.
7 JOHN WARDEN, STEVEN HOLLEY, RICHARD UROWSKY AND
8 WILLIAM NEUKOM FOR THE DEFENDANTS.
9 THE COURT: THE CALENDAR WAS SHORTER THIS MORNING
10 THAN I ANTICIPATED. NOBODY SHOWED UP.
11 MR. BOIES: GIVEN THE CALENDAR THAT YOU HAD
12 YESTERDAY, YOUR HONOR, I THINK YOU'VE PROBABLY AVERAGED OUT
13 TO NORMAL.
14 THE COURT: ALL RIGHT.
15 (PROFESSOR FRANKLIN M. FISHER, PLAINTIFFS'
16 WITNESS, PREVIOUSLY SWORN.)
17 REDIRECT EXAMINATION (CONTINUED.)
18 BY MR. BOIES:
19 Q. GOOD MORNING, DR. FISHER.
20 I'D LIKE TO BEGIN BY COVERING TWO TOPICS BEFORE WE
21 GO TO THE AOL-NETSCAPE QUESTIONS THAT WE TALKED ABOUT RIGHT
22 AT THE END OF THE SESSION YESTERDAY.
23 THE FIRST OF THOSE TOPICS RELATES TO A WINDOWS
24 PRICING AND, IN PARTICULAR, TO DEAN SCHMALENSEE'S FORMULA
25 THAT WE TALKED ABOUT, AND THAT YOU TALKED ABOUT WITH
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1 MR. LACOVARA.
2 FIRST, MR. LACOVARA RAISED A QUESTION WITH YOU AS
3 TO WHETHER THE AVERAGE P.C. PRICE OF $950 DID OR DID NOT
4 INCLUDE A MONITOR. DO YOU RECALL THAT?
5 A. YES.
6 Q. AND FROM AN ECONOMIC ANALYSIS STANDPOINT, WHAT IS THE
7 SIGNIFICANCE AS TO WHETHER OR NOT THAT PRICE DOES OR DOES
8 NOT INCLUDE A MONITOR?
9 A. WELL, I THINK IT WAS CLEARLY A MISTAKE NOT TO INCLUDE A
10 MONITOR, AND I SHOULD HAVE NOTICED IT. MONITORS SELL FOR
11 ROUGHLY 2 TO $300. IF ONE HAD INCLUDED THE MONITOR, IT
12 WOULD NOT HAVE CHANGED THE SUBSTANCE OF WHAT I HAD TO SAY.
13 Q. LET ME ASK YOU TO LOOK AT GOVERNMENT EXHIBIT 2085, WHICH
14 I WOULD OFFER, WHICH IS AN ADVERTISEMENT THAT APPEARED IN
15 THE WASHINGTON POST ON THE DAY THAT YOU WERE BEING EXAMINED
16 BY MR. LACOVARA.
17 MR. LACOVARA: MAY I ASK FOR WHAT PURPOSE THIS IS
18 BEING OFFERED?
19 MR. BOIES: TO SHOW THE PRICES AT WHICH COMPUTERS,
20 INCLUDING MONITORS, ARE REGULARLY ADVERTISED AND OFFERED IN
21 THE COMMUNITY.
22 MR. LACOVARA: IF IT'S BEING OFFERED TO SHOW THAT
23 YOU CAN BUY A COMPUTER AND MONITOR FOR $800, I HAVE NO
24 OBJECTION, YOUR HONOR.
25 THE COURT: GOVERNMENT'S 2085 IS ADMITTED.
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1 (WHEREUPON, PLAINTIFFS'
2 EXHIBIT NUMBER 2085 WAS
3 RECEIVED IN EVIDENCE.)
4 BY MR. BOIES:
5 Q. NOW, PROFESSOR FISHER, DO YOU HAVE ANY BASIS FOR
6 UNDERSTANDING AS TO WHETHER RETAIL OUTLETS REGULARLY OFFER
7 COMPUTERS, INCLUDING A MONITOR, FOR LESS THAN $950?
8 A. YES, AS THIS AD SUGGESTS THAT THEY DO. IN ADDITION,
9 ALTHOUGH I DON'T THINK IT'S ON THIS AD, RETAIL OUTLETS VERY
10 OFTEN OFFER COMPUTERS WITH A REBATE, WHICH IS NOT INCLUDED
11 IN THE AVERAGE PURCHASE PRICE AS QUOTED YESTERDAY OR SEVERAL
12 DAYS AGO.
13 Q. LET ME JUST FOLLOW UP ON THAT FOR A SECOND. THE $950
14 AVERAGE FIGURE DID NOT INCLUDE THE PRICE OF A MONITOR, WHICH
15 WOULD HAVE INCREASED THE PRICE SOMEWHAT; IS THAT CORRECT?
16 A. YES.
17 Q. NOW, YOU'RE ALSO SAYING THE $950 PRICE DID NOT INCLUDE
18 REBATES. IS THAT WHAT YOU'RE SAYING?
19 A. THAT IS MY UNDERSTANDING.
20 Q. AND THAT WOULD HAVE REDUCED THE PRICE?
21 A. YES.
22 Q. NOW, MR. LACOVARA ALSO ASKED YOU SOME QUESTIONS ABOUT
23 WHETHER THE AVERAGE PRICE OF P.C.'S HAD BEEN HIGHER AT THE
24 TIME THAT WINDOWS 98 WAS BEING PRICED. DO YOU RECALL THAT?
25 A. I DO.
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1 Q. IN THAT CONNECTION, LET ME ASK YOU TO LOOK AT A DOCUMENT
2 THAT HAS BEEN PREVIOUSLY ADMITTED AS GOVERNMENT EXHIBIT 365,
3 WHICH IS A DECEMBER 16, 1997 PRICING ANALYSIS BY MR. KEMPIN,
4 SENT TO MR. GATES.
5 AND LET ME TO ASK YOU TO LOOK AT THE FIRST PAGE OF
6 THE ANALYSIS ITSELF, AND IN PARTICULAR, THE SECOND SENTENCE
7 AFTER THE HEADING "CURRENT SITUATION" --
8 A. YES.
9 Q. -- WHERE MR. KEMPIN WRITES TO MR. GATES, "WE EXPECT THAT
10 P.C.'S SELLING FOR LESS THAN A THOUSAND DOLLARS WILL BE
11 BOUGHT BY CONSUMERS AND BUSINESSES AND COULD CONSTITUTE MORE
12 THAN 50 PERCENT OF ALL P.C.'S BY CHRISTMAS OF 1998."
13 DO YOU SEE THAT?
14 A. I DO.
15 Q. NOW, WHAT IS THE SIGNIFICANCE, IF ANY, OF THAT ANALYSIS
16 TO THE RELEVANCE OF WHAT PRICE SHOULD BE USED IN DEAN
17 SCHMALENSEE'S FORMULA?
18 A. WELL, ASSUMING, AS I BELIEVE TO BE TRUE, THAT MICROSOFT,
19 AS MANY OTHER FIRMS, DOESN'T LIKE TO CHANGE ITS PRICE ALL
20 THE TIME, THEN MICROSOFT, IN SETTING ITS PRICE, HAS TO LOOK
21 FORWARD TO WHAT THE SITUATION WILL BE FOR A WHILE.
22 THIS SAYS THAT AT LEAST HALF THE BUSINESS COULD BE
23 AT BELOW A THOUSAND DOLLARS. AND, BY THE WAY, HE SAYS
24 SOMEWHAT LOWER DOWN IN THE DOCUMENT -- THIS IS A "BY THE
25 WAY" -- HE SAYS "WHEN COMPARING SYSTEM" -- I'M ABOUT A THIRD
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1 OF THE WAY DOWN OR THREE-QUARTERS OF THE WAY DOWN THE
2 PARAGRAPH -- "WHEN COMPARING SYSTEM PRICES OVER THE LAST
3 COUPLE OF YEARS WITH TODAY'S PRICES, WE SHOULD NOTE THAT IN
4 THE LOW END SEGMENT, P.C. MANUFACTURERS PRICES HAVE STARTED
5 PULLING OUT MONITORS AND OTHER ITEMS FROM THEIR SYSTEMS. AS
6 A RESULT, MY COMPARISON IS NOT A HUNDRED PERCENT CORRECT,
7 BUT THIS DOES NOT CHANGE THE TREND," AND SO ON.
8 NOW, THERE ARE, IN FACT, AT LEAST TWO OTHER
9 REASONS TO BELIEVE THAT ONE OUGHT TO BE INTERESTED -- THAT
10 MICROSOFT OUGHT TO HAVE BEEN INTERESTED IN SETTING A
11 PROFIT-MAXIMIZING PRICE IN TERMS OF THE LOW-PRICED MACHINES.
12 Q. WHAT IS THAT OR WHAT ARE THOSE REASONS?
13 A. WELL, ONE REASON IS THE FOLLOWING: THE HIGH-PRICED
14 MACHINES -- THE RELATIVELY HIGH-PRICED MACHINES SOLD THROUGH
15 OTHER CHANNELS ARE TYPICALLY MORE POWERFUL MACHINES WITH
16 MORE STUFF ON THEM. AMONG THE STUFF ON THEM IS -- ARE
17 SOFTWARE PACKAGES AND MATERIAL THAT BRING COMPLEMENTARY
18 REVENUES TO MICROSOFT, AND, THEREFORE, ONE OUGHT NOT TO
19 COUNT THAT PART OF IT IN THIS CALCULATION SINCE THE
20 COMPLIMENTARY REVENUES ARE TAKEN ELSEWHERE.
21 A MORE INTERESTING -- WELL, WE ALL HAVE DIFFERENT
22 TASTES. TO ME, A MUCH MORE INTERESTING REASON IS THE
23 FOLLOWING. IT'S NOT -- LET ME BACK UP.
24 IT'S A RATHER REASONABLE VIEW THAT THE PEOPLE WHO
25 ARE PRICE SENSITIVE ARE THE PEOPLE WHO ARE BUYING THE
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1 LOW-PRICED MACHINES, AND THAT THE PEOPLE WHO ARE LESS PRICE
2 SENSITIVE WILL BE THE PEOPLE BUYING THE LARGER MACHINES.
3 AND THEY'LL BE THE PEOPLE WHO ARE INTENDING TO USE THE
4 COMPUTERS MORE.
5 IN THAT CASE, THE PROFIT-MAXIMIZING STRATEGY,
6 ASSUMING MONOPOLY POWER, IS NOT, AS DEAN SCHMALENSEE
7 SUGGESTS, TAKEN AS THE PRICE THEY SHOULD CHARGE RELATIVE TO
8 THE AVERAGE PRICE OF P.C.'S, BUT, IN FACT, WHAT THEY OUGHT
9 TO BE DOING TO MAXIMIZE PROFITS IS TO CHARGE A PRICE THAT
10 FITS DEAN SCHMALENSEE'S FORMULA -- THIS IS MAXIMIZING
11 SHORT-RUN PROFITS -- THEY SHOULD CHARGE A PRICE THAT FITS
12 DEAN SCHMALENSEE'S FORMULA AT -- FOR THE PRICE SENSITIVE
13 CUSTOMERS -- THAT IS, THE LOW-PRICE CUSTOMERS -- AND
14 RECOVERING FROM THE HIGHER-PRICE CUSTOMERS IN TERMS OF
15 COMPLEMENTARY REVENUE RATHER THAN IN THE PRICE OF THE
16 OPERATING SYSTEM ITSELF.
17 THIS IS A PHENOMENON KNOWN IN MY TRADE AS METERING
18 AS A REASON FOR -- SOMETIMES GIVEN AS A REASON FOR TIE-IN
19 SALES, WHICH IS NOT WHAT'S INVOLVED HERE.
20 Q. LET ME ASK YOU TO LOOK AT DEFENDANT'S EXHIBIT 2493 THAT
21 MR. LACOVARA USED WITH YOU. AND I WANT TO DIRECT YOUR
22 ATTENTION TO THE SECOND PARAGRAPH OF THAT EXHIBIT. AND THIS
23 IS A REPORT DATED IN MARCH OF 1999 -- THAT IS, MARCH OF THIS
24 YEAR.
25 AND IT BEGINS BY SAYING, "SUB-$1000 P.C.'S
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1 CONTINUED TO DOMINATE THE MARKET IN FEBRUARY, ACCOUNTING FOR
2 62 PERCENT OF UNIT SALES."
3 DO YOU SEE THAT?
4 A. I DO.
5 Q. AND IT SAYS THAT JANUARY'S UNIT SALES WERE 65.7 PERCENT
6 SUB-$1000 P.C.'S.
7 DO YOU SEE THAT?
8 A. YES.
9 Q. AND THEN THE NEXT SENTENCE SAYS, "WITHIN THIS GROUP, THE
10 LARGEST UNIT GROWTH WAS CONCENTRATED IN THE SUB-$600 MARKET,
11 WHICH GREW 657 PERCENT OVER FEBRUARY 1998, AND NOW
12 REPRESENTS 19.9 PERCENT OF P.C.'S SOLD AT RETAIL."
13 WHAT SIGNIFICANCE, IF ANY, DO THOSE FACTS HAVE TO
14 YOUR ANALYSIS OF WHAT THE APPROPRIATE WINDOWS PRICE OR P.C.
15 PRICE NUMBER IS TO USE IN DEAN SCHMALENSEE'S FORMULA?
16 A. WELL, I SAID EARLIER THAT -- TWO THINGS. I SAID, IN THE
17 FIRST PLACE, THERE IS A REASON TO BELIEVE THAT THE
18 APPROPRIATE PRICE IS THE PRICE FOR THE LOWER-PRICED
19 MACHINES, THE RETAIL PRICE. SECOND, THAT THE -- MICROSOFT
20 OUGHT REASONABLY TO BE INTERESTED, NOT MERELY IN WHAT THE
21 PRICE OF MACHINES IS NOW, BUT WHAT IT'S GOING TO BE IN THE
22 FUTURE WHILE THEY ARE STILL SELLING WINDOWS, PRESUMABLY AT
23 THE SAME PRICE. THIS SUGGESTS THAT THERE IS A CONTINUED
24 TREND, AND THE TREND IS SHARP AT THE LOW END, OF PRICES
25 FALLING.
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1 AND, THEREFORE, ONE OUGHT TO BE INTERESTED IN
2 LOOKING AT RELATIVELY LOW PRICES.
3 Q. LET ME ASK YOU TO LOOK NEXT AT DEFENDANT'S EXHIBIT 2388.
4 THIS WAS THE DOCUMENT THAT MR. LACOVARA INTRODUCED THAT
5 PURPORTED TO BE BASED ON IDC DATA.
6 AND AS I UNDERSTAND IT, WE STILL DON'T HAVE THAT
7 UNDERLYING DATA; IS THAT CORRECT?
8 MR. LACOVARA: CORRECT.
9 BY MR. BOIES:
10 Q. HOWEVER, JUST FOR PURPOSES OF TRYING -- AND WE'LL DEAL
11 WITH THAT WHEN WE DO GET THE DATA -- BUT JUST FOR PURPOSES
12 OF DEALING WITH THIS WHILE YOU'RE HERE, PROFESSOR FISHER, I
13 WOULD ALSO LIKE YOU TO HAVE IN FRONT OF YOU DEFENDANT'S
14 EXHIBIT 2498, WHICH WAS AN IDC DOCUMENT THAT WAS ALSO USED
15 WITH YOU BY MR. LACOVARA.
16 AND, IN THAT CONNECTION, LET ME ASK YOU TO LOOK AT
17 THE TABLE NUMBER 9 THAT'S HERE. NOW, THIS TABLE ONLY HAS
18 SOME OF THE YEARS THAT ARE REFLECTED IN DEFENDANT'S
19 EXHIBIT 2388. BUT IF YOU LOOK AT THE VARIOUS CATEGORIES AND
20 THEN LOOK DOWN TO THE BOTTOM WHERE IT SAYS "TOTAL ASP" OR
21 "AVERAGE SELLING PRICE" -- DO YOU SEE THAT?
22 A. YES.
23 Q. DO YOU SEE A TREND, BOTH FOR THE ACTUAL YEARS THAT ARE
24 THERE, AS WELL AS THE PROJECTED YEARS GOING FORWARD?
25 A. YES. IT'S GOING DOWN.
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1 Q. AND IS THAT CONSISTENT WITH YOUR UNDERSTANDING OF WHAT
2 WAS HAPPENING IN THE MARKETPLACE?
3 A. OH, ABSOLUTELY. P.C.'S WERE GETTING CHEAPER.
4 Q. NOW, WE'VE SPENT SOME TIME, BOTH ON YOUR DIRECT AND
5 CROSS AND I'M NOW IN YOUR REDIRECT, ON THE RIGHT NUMBERS TO
6 PLUG INTO DEAN SCHMALENSEE'S FORMULA.
7 I'D LIKE TO RETURN JUST BRIEFLY TO WHETHER OR NOT,
8 IN YOUR VIEW, DEAN SCHMALENSEE'S FORMULA, EVEN IF YOU HAD
9 THE RIGHT NUMBERS, IS SOMETHING THAT RESULTS IN SOMETHING
10 THAT IS RELEVANT TO YOUR ECONOMIC ANALYSIS?
11 A. WELL, BASICALLY NOT. AS I HAVE NOW SAID SEVERAL TIMES,
12 EVEN WITHOUT WORRYING ABOUT WHAT ELSE IS GOING ON, DEAN
13 SCHMALENSEE'S RESULT ONLY IMPLIES THAT MICROSOFT IS DOING
14 SOMETHING OTHER THAN MAXIMIZING SHORT-RUN PROFITS IN THE
15 PRICE THEY CHARGE FOR WINDOWS.
16 AND THAT IS TRUE WHETHER OR NOT THEY HAVE MONOPOLY