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As the Federal Trade Commission’s antitrust challenge to two MSC.Software Corp. acquisitions heads to court today, the combatants are presenting decidedly different takes on how to properly define a high-technology market. The government advocates a narrow definition that includes only engineering software based on Nastran computer code. MSC counters that the market is much broader, including software that uses other computer languages to provide analyses similar to Nastran-based programs. Which market definition Administrative Law Judge D. Michael Chappell accepts is likely to have broader ramifications than whether Santa Ana, Calif.-based MSC broke the law in 1999 when it acquired Universal Analytics Inc. and Computerized Structural Analysis and Research Corp. Failure for the government in the MSC case could force antitrust regulators to reconsider their approach to defining markets in high-technology deals. Conversely, it could make it easier for tech firms to secure antitrust clearance. A loss for the government would mark the second time in a year that it lost a challenge to a high-technology deal. The Department of Justice last fall charged SunGard Data Systems Inc.’s acquisition of a unit of Comdisco Inc. would harm competition for computer disaster-recovery services. A judge cleared the deal after concluding that a much broader array of products compete with those offered by Wayne, Pa.-based SunGard and Rosemont, Ill.’s Comdisco. In both the SunGard and MSC cases, the government rooted its antitrust allegations in a narrow, product-focused definition of the markets in question. In other words, a loss of competition revolving around specific technologies resulted in a violation of antitrust law. By contrast, the companies said the markets should be broadly interpreted to include alternative products or approaches that fulfilled the same customer needs. The FTC staff is striving to ensure it does not suffer a fate similar to the Justice Department. It has pushed hard during the discovery phase of the trial to gather evidence that MSC’s two purchases violated Section 7 of the Clayton Act by substantially lessening competition. Though much of the evidence has been redacted from the public record, the government and MSC have recently filed pre-trial briefs that outline their case and suggest the type of evidence each will introduce at trial. The market definition dispute centers on whether advanced versions of Nastran are a distinct market or part of the broader sector for so-called finite element analysis solvers, which are used to model how products react to heat, vibrations and other conditions. The FTC contends that advanced Nastran constitutes its own market because users of the solver would turn first to other makers of advanced Nastran in response to a price increase. The agency also said the solver market must be narrowly construed because not enough companies would switch from advanced Nastran to other types of solvers to make a price hike unprofitable. A company would incur significant costs to switch from an advanced Nastran solver to another type of solver, the agency said. Relying on its market definition, the FTC said the MSC acquisitions fostered monopoly because MSC, UAI and Computerized Structural were the only three producers of advanced versions of Nastran. “No elaborate market analysis is needed to show that these acquisitions were anticompetitive,” the FTC said. “The acquisitions wiped out the competitive force that had driven MSC to lower its prices.” Though UAI and Computerized Structural were tiny compared to MSC — each had about 5 percent of the market — they were competitively significant because they targeted MSC’s largest clients, the FTC said. This forced MSC to discount prices and spend more on improving its advanced Nastran product, the agency said. MSC counters in its pre-trial briefs with an all-out attack on the market definition the FTC uses as foundation for its case. First, the company argues that the FTC failed to prove the existence of an advanced Nastran market. Rather than provide economic evidence, the FTC relied on speculation and anecdotal evidence to support its case, MSC said. MSC also said there is no basis for the FTC’s contention that the deals allow the company to profitably raise prices 5 percent to 10 percent. The FTC, it charged, ignored the ability of many users to switch at least some of their Nastran usage to other types of solvers after a price hike. “Such partial switching alone is sufficient to discipline MSC’s pricing,” it said. In addition, the agency failed to prove users of advanced Nastran are unable to switch to other types of solvers, MSC said. The company said the argument fails because there is no evidence that it would be easier for MSC customers to switch to the products offered by UAI and Computerized Structural than it would be to switch to a non-advanced Nastran solver “Complaint counsel’s case, therefore, consists of ill-formed theories and a failure of proof,” the company concluded. MSC said the mergers benefited consumers because the company acquired the engineering design talent to introduce superior products. It also said the solver market is dynamic, which means competitors may enter it with relative ease. Finally, MSC said it will show that UAI and Computerized Structural were “troubled firms” unable to sustain their niches in the market, which justifies the deals. Anticipating some of these arguments, the FTC said in its brief that users of advanced Nastran saw UAI and Computerized Structural as “clone competitors” of MSC that produce a lower-cost product. The regulators also argued that switching to other solvers is not always practical because Nastran is designed for aerospace and automobiles. The FTC is asking the judge to require MSC to license its advanced Nastran to two new competitors, which would restore marketplace competition. MSC called this proposed remedy “punitive” because it would create three equal versions of advanced Nastran, which was not the case in 1999 when MSC was the dominant player with the most advanced software. “None of complaint counsel’s cases support the unheard of remedy of breaking up a company’s core business as the price for making two trivial acquisitions,” it said. Testimony is expected to last through August with a decision likely in early fall. Officials for the FTC and MSC declined to comment. Copyright �2002 TDD, LLC. All rights reserved.

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