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WASHINGTON--Lawyers for Microsoft put Chairman Bill Gates on the stand Monday to detail the devastating effects that antitrust remedies would have on the company.

Gates, also chief software architect of the company he cofounded, testified in a hearing over stricter remedies sought by nine states and the District of Columbia in the ongoing antitrust case. The holdout 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.

During his cross-examination of the witness, Steve Kuney, lawyer for the litigating states, attempted to show that in his 163-page written direct testimony Gates overreacts to the states' proposed remedies and exaggerates the impact they would have.

Objections Illustrated

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 for 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 first exhibit shown to the court was intended to illustrate the consequences of a proposed remedy that would force Microsoft to sell an "unbound" version of Windows--one free from additional programs such as a browser and a media player, which are referred to as "middleware." The states' proposal would require Microsoft to create an unbound version of Windows that is the functional equivalent of the complete Windows, and make it available to the market through original equipment manufacturers and by other means.

Gates said that if Microsoft were forced to remove, for example, elements of Internet Explorer from Windows, other functions within Windows that depend on that code, as well as external applications from Microsoft and other software vendors, would not work properly. "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 OS would have the same functionality as the OS sold today.

Windows Clones Feared

Gates also said the states' proposed remedies would lead to fragmented Windows versions.

"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 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. Then, any software application written to use the functions that were removed would break. Tens of thousands of applications are written to work with Windows, Gates said. Makers of new applications would have to decide which variant of Windows their programs should run on, increasing development costs for those companies, he added.

During cross-examination, Kuney asked if the market for Windows isn't already fragmented, since similar but not identical code bases exist for Windows 9x and Windows NT. Through his questioning, Kuney noted that Microsoft helps developers who build applications for the different versions of Windows, and showed the court a Microsoft instructional document designed to help developers modify their applications to work with various OS upgrades.

Gates answered that the document related to a very specific instance dealing with the changes in the installer program from the Windows 9x-based OS to Windows NT. Gates said Microsoft provides "some limited assistance" to developers, but won't help them, for example, target an out-of-date version of the OS such as Windows 3.1.

Gates also described the possible negative effects of the states' proposal to force Microsoft to share the Windows source code. Today, Microsoft releases 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 releasing its source code to be viewed by other companies, including its competitors, he said.

Then companies could 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.

Practices Questioned

Kuney, representing the states, asked Gates if he wants 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 he added that if he found otherwise, "I would stop that."

Later in the afternoon, Kuney asked Gates to explain criticism in his written direct testimony that the states' proposals are "vague and ambiguous, providing Microsoft with no clear statement of its obligations." For example, the DOJ's proposed settlement contains a strict definition of which APIs would be detached from Windows, but the nonsettling states leave the determination up to Microsoft.

Kuney asked Gates about his response to the states' proposal that Microsoft disclose in a timely manner any new Windows APIs. Gates reportedly commented during his pretrial deposition that this would mean as soon as a Microsoft developer got a good idea, "he's in criminal contempt."

The remedy would require Microsoft engineers to disclose a new Windows API as soon as they began preliminary design work, Gates explained. Kuney showed the court a copy of the states' remedies, which uses the term "in a timely manner," and asked if that means a bright idea that was not used didn't require disclosure. Gates answered that design work would constitute deployment. "You may think of it as an extreme example, but I think it's covered here," Gates said.

His testimony is scheduled to continue Tuesday.

Earlier Comments Give Hint

In his 163-page written testimony, Gates lashed out at every remedy proposed by the nonsettling states, warning of damage to consumers, the PC industry, and 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. He warned that it would leave Microsoft "greatly devalued as a company."

Also in his written testimony, Gates said the remedies sought by the nine states could fragment the operating system, leaving independent software developers without a "well-defined" set of interfaces for creating new programs. He maintains that developing applications for idiosyncratic versions 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 states' proposed settlement "would turn back the clock on Windows development by about ten years and effectively freeze it there," according to Gates.

The nonsettling states' 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 the revenue that Windows does, said Gates. Microsoft gets about $70 per Windows unit, but anywhere from $150 to $275 for each Office user, he said.

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