Gates takes the stand at remedy hearing

Lawyers for Microsoft Corp. on Monday afternoon put chairman and chief software architect Bill Gates on the stand to detail the devastating effects that the remedies proposed by the states suing Microsoft for antitrust violations would have on the company.

Wearing a blue suit and closely cropped hair, Gates took the stand shortly after noon. Before lawyers for the District of Columbia and the nine states that are pursing litigation against Microsoft began cross-examining the high-profile witness, an attorney with Microsoft walked Gates through a number of exhibits included in his 163-page written testimony.

The exhibits, shown to the court as projected slides, were graphical representations of how the states’ proposed remedies would harm consumers, the PC industry, and Microsoft itself. During the remedy hearing, which began on March 18, both Microsoft and the litigating states are presenting proposed remedies to U.S. District Judge Colleen Kollar-Kotelly, who will make the final decision. The states are seeking remedies to Microsoft’s anticompetitive behavior that go beyond the restrictions agreed to by Microsoft, the U.S. Department of Justice, and nine other states in a proposed settlement agreed to last November.

The first exhibit shown to the court was intended to show the consequences of the states’ remedy that would force Microsoft to sell an “unbound” version of Windows, one free from additional programs such as a browser and media player that are referred to as middleware. The states’ proposal says Microsoft must make an unbound version of Windows that is the functional equivalent of the complete Windows available to the market through original equipment manufacturers (OEMs) and other means.

If Microsoft were forced to, for example, remove elements of its Internet Explorer (IE) Web browser from Windows, other functions within Windows that depend on that code as well as external applications from Microsoft and other software makers written to the code would not work properly, Gates said. “If (Microsoft) removed the code from IE, these things that call into (that code) would not function,” he said. Therefore, it would be difficult for Microsoft to create an “unbound” version of Windows that guarantees the same functionality of the OS as sold today.

He also said the states’ remedies would lead to fragmented Windows.

“Under the states’ remedy Windows would no longer be uniform,” said Gates. “Anyone who offers to license 10,000 copies would have the ability to essentially make arbitrary changes to Windows.”

If, for example, AOL Time Warner Inc. chose to create its own version of Windows, it would want to disable the operating system functions that AOL’s software competitors rely on, he said, and any software application written to those functions that were removed would break. There are currently tens of thousands of applications written to Windows, Gates said. Makers of new applications would be faced with deciding which variant of Windows their programs should run on, increasing development costs for those companies, he added.

In the third exhibit, Gates walked the court through the negative effects on Microsoft of the states’ remedy forcing the company to share the Windows source code. Today Microsoft makes available the application programming interfaces and communications protocols for Windows, so that developers can create software that integrates with or interoperates with Windows, he said. The states remedy would force Microsoft to “give away the recipe” to Windows by allowing its source code, which is Microsoft’s intellectual property, to be viewed by other companies including its operating system competitors, he said.

Companies could therefore easily clone Windows, leveraging Microsoft’s research and development efforts at a very low cost, Gates said. “There would be no reward, no positive economics, for the people doing the original work,” he said.

As soon as Gates was done presenting his evidence, Steven Kuney, one of the nonsettling states’ attorneys, asked Gates if he doesn’t want Microsoft to “continue doing the things” that the U.S. Court of Appeals found wrong.

Gates said, “That’s right.”

The appeals court cited 12 specific violations of Microsoft in illegally maintaining its monopoly.

Kuney asked Gates if any of those violations are continuing at Microsoft.

“I do not believe that they are,” said Gates, but added that if he found otherwise, “I would stop that.”

Kuney had less than 15 minutes to conduct his cross-examination before the court broke for lunch. But he appeared to start a line of questioning challenging Gates’ claims that the remedies would lead to the disintegration of his company.

In his 163-page written testimony, Gates lashed out at every remedy proposed by the nonsettling states, warning of damage to consumers, the industry, but especially to Microsoft.

The remedies would, in effect, transfer large chunks of Microsoft’s intellectual property to competitors, devalue its major revenue generator, Office, and remove any incentive for the company to upgrade Internet Explorer, said Gates.

In short, it would leave Microsoft “greatly devalued as a company,” warned Gates.

The U.S. Court of Appeals for the District of Columbia last June found Microsoft had violated antitrust law by illegally maintaining its Windows desktop monopoly.

The Bush administration reached a settlement with Microsoft last June. But nine of the 18 states in this case said the settlement didn’t go far enough to restore competition and protect other threats to desktop monopoly, such as handhelds, set-top boxes and server operating systems.

The nonsettling states are California, Connecticut, Florida, Iowa, Kansas, Massachusetts, Minnesota, West Virginia, Utah and the District of Columbia

Judge Colleen Kollar-Kotelly held a hearing on the settlement last month, and is deciding whether to accept it or not. The phase considering the remedy hearing has been going on for 6 weeks and is expected to continue for more than two months.

Gates said the remedies sought by the nine states would allow PC makers “to remove blocks of software code” from Windows, fragmenting the system, and leaving independent software developers without a “well-defined” set of interfaces for developments.

Customers, said Gates, could be faced with applications developed for specific Windows configurations, such as a Corel WordPerfect for Compaq Windows, Dell Windows, and Gateway Windows, among others.

Developing applications for idiosyncratic version of Windows would raise software development costs slow the pace of innovation, and give consumers less incentive to buy new PCs.

“In short, if the Windows platform were to fragment, the primary value it provides — the ability to provide compatibility across a wide range of software and hardware — would be lost,” Gates said.

By forcing Microsoft to remove features, the state settlement “would turn back the clock on Windows development by about ten years and effectively freeze it there,” according to Gates.

Another state remedy would require Microsoft to grant third-party developers access to its source code to ensure interoperability with the Windows operating system.

But Gates said these provisions would give competitors “free rein” to take Microsoft’s Windows technology and implement it any way they like. These remedies “would reduce the quality and utility of Windows.”

It would also “transfer Microsoft’s intellectual property to our competitors.”

The remedy sought by the nonsettling states would serve as “as a sword to extract business advantage from Microsoft or as a shield against vigorous competition from Microsoft.”

Making Internet Explorer open source, another provision in the state remedy, would give Microsoft “little reason” to continue to invest in its browser. “Any new innovation we developed would go straight to our competitors,” Gates said.

Why would America Online Inc., asked Gates, continue development of its own Web browsing software if Microsoft’s technology were available free of charge?

The state remedy that would require Microsoft to auction off Office licenses to three vendors, who could then develop versions for other operating systems such as Linux, is a “severe penalty” that would have a “grave impact” on the company’s Office business, said Gates.

Office generates as much as three times more than Windows in revenue, said Gates. Microsoft gets about US$70 per Windows unit, but anywhere from $150 to $275 for each Office user, he said.