Witness: MS Enjoys Network Effects Advantages Over Sun

Economist says advantages based on past anti-competitive acts could cause the market for distributed app platforms to tip in favor of .Net over Java.

An expert witness for Sun Microsystems Inc. testified that Microsoft Corp. enjoys network effects advantages over Sun based on past anti-competitive acts that could cause the market for distributed application platforms to tip in favor of .Net over Java.

However, when asked directly whether he expected the market to tip in favor of .Net, Dennis Carlton, a professor of economics at the University of Chicagos Graduate School of Business, said, "I cant say that." He said there are many factors involved.

Yet, Carlton, who at the outset of his testimony described himself as a conservative who does not tend to support government intervention in markets to protect competitors, said he does believe intervention is appropriate in this case.

"I believe it is," Carlton said. "The competition between .Net and Java has been distorted, and the distortion at early stages can have detrimental and long-lasting consequences." Therefore, the court should step in, he said.

"The remedy will allow competition to occur. It will not impose large costs on Microsoft and will make a calculation of damages simpler," Carlton said.

Carlton defined network effects as a situation where the value of a network depends on how many other people belong to the network or the presence of complementary products.

U.S. District Judge J. Frederick Motz, who is presiding over the case, asked a pointed question that went to the heart of the issue before the court—which is Suns request for a preliminary injunction forcing Microsoft to bundle a Sun Java runtime environment with Windows and Internet Explorer.

"Assume I grant Suns remedy—which would help solve this problem," Motz said. "Assume I grant the remedy. Why in the world would that lead to heterogeneity?" the judge asked. He also asked why a mechanism to make the two platforms interoperate would not be a resolution.

Carlton said "feedback effects" would still be at work, although interoperability could impact the feedback effects. Yet, "interoperability is not the same as being on the same platform," Carlton said, noting Microsofts "Better Together" program that encourages Microsoft products working together, such as .Net-based systems interoperating and talking to other .Net-based systems. Microsofts "Better Together" program emphasizes that Microsofts own products work better together than do a combination of Microsoft and third-party products.

Rusty Day, Suns lead attorney in the case, asked Carlton if the Sun remedy would solve all the issues related to Microsofts anti-competitive actions against Sun. Carlton said, "No, it is aimed at redressing the imbalance of the distribution. The issue of the number of developers attracted to the platform is not addressed by this remedy."

Indeed, Carlton said the remedy would not amount to "market engineering" in that "theres nothing in the remedy thats going to guarantee the markets going to tip."

Michael Lacovara, an attorney for Microsoft, began attacking Carlton on cross-examination, asking him why in more than 14 months since he has been retained on this case he could not give an adequate number for the amount of Sun-compatible Java Virtual Machines on desktops.

"I dont have a good estimate," Carlton said. "I have a rough one. The bulk of the Java runtimes out there are based on Microsofts incompatible JRE [Java runtime environment]."

Later, Lacovara displayed an e-mail dated May 2002 from James Gosling, the creator of Java and a Sun fellow, to Richard Green, Suns vice president of developer tools who testified yesterday, saying, "We have been [screwing] up on the client side." Lacovara asked if this indicated that Sun itself is partly responsible for the low acceptance of Java on the desktop. Carlton said it is true, but that Suns access to the distribution channel was affected by Microsofts "bad conduct."

Lacovara also noted that different versions of the JRE on user machines might be a factor in a network effects discussion. Carlton agreed.

In addition, Lacovara said he bought Carltons textbook in which the economist discusses antitrust remedies but does not address the issue of a "must-carry" remedy for a preliminary injunction.

Carlton said: "I dont believe I discussed in my textbook anything on preliminary injunctions. Its an interesting subject and something I might consider adding in the next version."

Lacovara battled Carlton on several rounds of hypotheticals over whether "but for" Microsofts unlawful acts the software giant would still maintain an advantage in distribution based on its own lawfully gained market power. Carlton said yes.