MS/DOJ: Windows not overpriced, witness says

By Elizabeth Wasserman, Computer World |  Business

WASHINGTON -- Microsoft Corp.'s chief economics witness today attacked the U.S.
government's conclusion that the software giant charges monopoly prices for its Windows
operating system software, during what may be the last week of the antitrust trial.

Richard Schmalensee, dean of the Sloan School of Management at MIT, said the
government's economist underestimated the average price of PCs and other figures in
making his calculations about the cost of Windows to consumers. Schmalensee, testifying
as Microsoft's final rebuttal witness, testified that the true monopoly price of
Windows would be around $265 per copy. Microsoft charges around $65 per copy to
computer manufacturers.

"Either the plaintiffs are wrong or Microsoft has been for a long time leaving a lot
of money on the table," Schmalensee testified. "I find the latter conclusion
implausible."

Not likely to leave money on the table

A more plausible explanation, he said, is that Microsoft is charging less than it
could because "it has to be concerned with its long-term competitive position" in a
market that is rapidly changing.

After the end of his direct examination this morning, Schmalensee came under
questioning from the U.S. Department of Justice's outside counsel, David Boies, about
how much money he has earned by working with Microsoft during the past seven years.
Schmalensee maintained that he couldn't put a dollar figure on the amount. But under
continued questioning he said he earns $800 per hour, received a $200,000 bonus from an
economics firm he works with last year and has earned more than $250,000 for his work
with Microsoft during the past two years alone.

The line of questioning was payback, in essence, for the line of questioning
Microsoft's attorneys opened with the government's economist, Franklin Fisher, also at
MIT, when he testified several weeks ago. Microsoft attorney John Warden asked Fisher
whether he had any conflict of interest because he serves as chairman of an economics
consulting firm, Charles River Associates Inc., which may represent competitors of
Microsoft in civil suits that could result if the company is found to have a monopoly.

MIT vs. MIT

Fisher, when he testified, hit every element of Schmalensee's earlier testimony --
his economic analysis, judgment and data -- characterizing it in parts
as "muddled," "mixed up," "confused" and even "ridiculous." Schmalensee today
questioned Fisher's estimate that the average PC costs around $950, noting that price
excludes a monitor and is based on retail sales.

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