Consumer Harm in the Microsoft Case

 

Every time the Microsoft antitrust case moves forward, one observes a new wave of “where is the harm?” opinion articles in daily newspapers, presenting Microsoft’s anticompetitive practices as harmful to competitors but not consumers.

Judge Jackson’s 206 page findings of fact addressed the issue of

consumer harm in ways that resonated with many computer experts.

While Judge Jackson mentioned that Microsoft had considerable leeway

in terms of pricing Microsoft Windows, citing an internal Microsoft

memorandum comparing the benefits of a $49 or $89 price for an upgrade

price for Windows 98, the findings of fact devoted considerable

attention to the non-price issues, such as those relating to

innovation, choice and software quality, that are key to the Microsoft

case.

However, Judge Jackson’s findings of fact are limited by the

scope of the government lawsuit against Microsoft, both in terms of

the types of anticompetitive conduct and the harm to consumers, and

therefore understates the harm of Microsoft’s monopoly to consumers.

The US Department of Justice and State Attorney Generals have decided

to prosecute a relatively narrow case against Microsoft, largely

ignoring a plethora of issues relating to Microsoft’s huge power in

the desktop applications area, including the components of Microsoft

Office, or the impact of its anticompetitive enterprise licensing

strategies.

We often hear from consumers who say they are harmed by Microsoft’s

monopoly abuses. Here are some of the complaints. Because this is a

meeting about Linux, a free operating system, I will begin with the

pricing issues.

Pricing Issues

Windows is too expensive. The price for Microsoft Windows

depends upon how you buy it. A license for Windows is often bundled

with a new PC. That doesn’t mean it is free — only that the OEM has

paid for the license.

When people talk about software prices, they sometimes forget

that typically new technologies begin with high prices. Television

sets, compact disk recorders and personal computers are only a few

examples of this. Automobiles were very expensive when they were

first introduced, costing around $10,000, or nearly $200,000 in

today’s dollars. More efficient mass production was followed by much

lower prices. The Ford Model T, which was produced from 1908 to 1927,

at one point sold for less than $260.

As prices for personal computers, scanners, printers and other

computing devices have fallen, Microsoft has been able to charge high

prices for many of its products. For example, the OEM prices for

Windows licenses have increased, making this license an ever larger

share of the cost of a new computer.

Microsoft charges consumers a list price of $109 for an upgrade

of Windows 98, which is discounted by retailers to $89 — but to get

this price you must already own Windows 95, so it is like a

maintenance fee. The list price for a new version of Windows 98 is

$209. Yahoo.com sells Windows 98 at a discount for $181.92, nearly

half the price of buying a new low end PC, and more than three times

the $49.99 price for the well reviewed BeOS. BeOS is a

technologically superior operating system that suffers from a paucity

of third party applications, illustrating the significance of the

consumer lock-in with Windows.

In addition, Microsoft is steadily tightening the conditions on

licenses. Many OEM licenses for Windows are tied to a single machine,

and cannot be sold or transferred to another machine, even by the

original owner. Business users are facing restrictions on the use of

concurrent licenses, requiring them to purchase more copies than

before. And for most models of PCs that consumers buy, the OEM has to

purchase the license, even if the end user doesn’t want the software.

The “required to buy” Windows problem is a particular galling

issue for Linux users who are often actively trying to avoid using

Microsoft products. After our own efforts in 1998 to push the major

OEMs to give consumers the chance to buy PCs without a Windows

license, we have seem some modest improvement, as Dell and other PC

manufacturers offer a limited number of PC models with Linux pre-

installed. But it is still the case that nearly all of the PC models

sold by major OEMs, including Dell, require purchase of a Windows

license.

A consumer who has been using computers since 1995 may have

already purchased a half dozen or more Windows licenses. You might

have begun with Windows 95a, but bought Windows 95b so you could

better use the large hard drives. And then purchased one or more

upgrade computers, with new Windows licenses. Then one has to

consider the number of computers that need licenses. Often a person

may have separate PCs for work and home, plus a laptop for travel. So

it isn’t simply the price of Windows, it’s the number of licenses for

Windows that you end up buying, and how often you have to pay upgrade

fees.

Microsoft forces upgrades of the operating system by introducing,

even between official revisions, significant changes in the OS,

including the important support for third party device drivers.

Indeed, Windows 98 is already on its “second edition.” To get what

are essentially bug fixes, Microsoft charges Windows 98 users $19.95,

plus shipping and handling, for the second edition of the same

product. (Creating yet another opportunity to charge consumers more

money so its products will function properly).

Any given version of Windows becomes obsolete within a few years,

because it will no longer support the latest innovations in hardware.

This is intentional, because Microsoft’s biggest “competitor” in the

OS market is its installed base of users who have already purchased

Windows. Microsoft forces consumers to buy what is essentially the

same product again and again.

In 1997, analysts said that Microsoft had a ninety-five percent

share of global revenues for sales of office suites. Microsoft Office

has become the global standard for word processing, spreadsheets and

other desktop productivity applications. The pricing for MS Office is

high. Microsoft’s Office 2000 “standard” edition lists for $499, with

a “street” price of $399. Even an upgrade to Office 2000 Standard has

a list price of $249, and a discounted price of $195 – and this

assumes you have already purchased the Microsoft Office before.

The “premium” version of MS Office is now priced at $799, or $449 for

an upgrade version.

These prices are much higher than the prices for Corel’s Office

200 suite, which features WordPerfect. For example, the list price

for an upgrade of Corel’s Standard Office 2000 suite lists for $99,

about 40 percent of the Microsoft list price. (And discounts for

about $79, about 40 percent of the Microsoft discounted price).

Microsoft can command hefty prices for its Office Suite because

consumers are often forced to upgrade – simply to read documents they

receive from others. Microsoft is constantly changing document

formats so that owners of older versions of Microsoft Office cannot

read the newer documents. Again, Microsoft’s main competitor is its

own base of installed users. And, here too Microsoft is a tough

adversary, using interoperability and compatibility as weapons, to

force upgrades and generate more earnings for Microsoft.

Millions of computer users who have perfectly functional copies

of Microsoft Office 95 found it impossible to read documents prepared

in Office 97, and one anticipates a new round of compatibility issues

with Office 2000.

Microsoft knows that most consumers have little use for the

endless expansion of word processor features, particularly as the

world has come to rely upon the much simpler formats for information

used in electronic mail. Moreover, the newer versions nearly always

contain new bugs, and necessitate more learning, and spark new

predatory attacks on non-Microsoft products.

Plus, as MS Office and Windows become ever larger, they require

huge increases in computing resources. For consumers this often means

a costly and time consuming hardware upgrade — an event highly

correlated with losses of user data. But for Microsoft, a hardware

upgrade is usually just another source of revenue — as nearly every

new PC ships with a new license for Windows and other Microsoft

software.

One feature of Microsoft’s pricing is the huge difference between

its list prices and the prices paid by large buyers, including OEMs,

big corporations, governments or universities. Microsoft knows that

these large buyers need licenses to Microsoft products, and that they

don’t want to pay the high list prices. All of these large buyers get

Microsoft products at significant discounts. However, for many big

users, Microsoft insists on “enterprise” type licenses, which

effectively force big organizations to buy licenses for many products

for all employees (or students). When Microsoft gives an organization

a blanket license for Windows and Office, they make it next to

impossible for rivals to compete, since the organization has already

paid Microsoft a license fee for all the computer users. Microsoft’s

pricing strategies are designed to give organizations no realistic

options, if they want to avoid sky high list prices for Microsoft

Office and Windows.

This is also an issue for the OEMs, since the price of software

is a significant component of cost in the highly competitive PC

market. Microsoft can use the threat of higher prices for OEM

licenses — for Windows or Office — to discipline OEMs, and reduce

opportunities for Microsoft competitors.

 

Non-Pricing Issues

While the pricing issues are an important measure of the cost of

the Microsoft monopoly, we hear more often from consumers about non-

price issues, including many of the non-price issues raised by Judge

Jackson.

The most common complaint is that Microsoft crashes. “At least

once a day,” according to many Microsoft Windows users. We also hear

countless complaints that Microsoft attacks non-Microsoft products, so

they don’t work. For example, when Microsoft released its Windows

Media player, as a competitor against the RealAudio player, consumers

wrote to say it disabled dozens of third party multimedia software

programs. Little wonder that people call Microsoft’s Internet

Explorer, the “Internet Exploder,” because it attacks and disables an

unpredictable number of non-Microsoft applications.

The documents in the Microsoft trial shed new light on the

seemingly endless compatibility and interoperability problems with

Windows and Microsoft Office. When Microsoft executives proposed

making “running any other browser . . . a jolting experience,” they

were simply adding yet another example of the “DOS isn’t done until

Lotus won’t run,” corporate legacy.

Microsoft could never have succeeded as a software company if its

intentions to sabotage third party products were known earlier, before

consumers and third party developers invested billions of dollars and

countless hours around the Windows platform.

Even before you consider issues surrounding deliberate hostility

to users, you have the typical problem of a monopoly that can get away

with poor products. Because it is so costly and difficult to migrate

to a new platform, Microsoft can succeed even when its core products

suffer hugely from poor stability, limited interoperabilty, and

endless security problems. The fact that millions of users tolerate

daily crashes of Windows says volumes about the costs of migration

away from Windows.

But, as Judge Jackson points out, and as most computer experts

know, not all of the quality problems are innocent. In its internal

emails and by countless examples, Microsoft has demonstrated that it

believes it benefits when consumers cannot make competitor’s products

work correctly. Microsoft has a range of methods to undermine its

competitor’s products. When it does not use deliberate sabotage, it

can withhold important technical information or refuse to license

technology to its competitors, such as when it refused to permit

Netscape to distribute a utility to log-on to Internet Service

Providers, or when it withholds or unexpectedly changes applications

programming interfaces and data file formats.

Microsoft can also destroy the quality of rival software by using

predatory business practices, such as the enterprise licensing of

Windows and MS Office, exclusionary OEM and ISP licensing, or bundling

of products with “must have” Windows and Office products.

When Netscape cannot effectively distribute its browser through

ISP or OEM channels, and when Microsoft’s Internet Explorer product is

bundled in with Windows and MS Office, Netscape can no longer justify

continued R&D in the product. This harms consumers who prefer

Netscape. When Microsoft bundles Outlook Express, its personal

information manager and email client, into Windows, millions of users

who relied upon rival products, like ECCO Pro, were stranded when

their products were abandoned by publishers who could not compete with

a bundled product having a zero marginal cost to consumers. And there

are countless other examples of this in the software market.

Despite the colossal sums of money being invested in ecommerce

ventures, there is very little investment for desktop productivity

software. And while the stock market seems crazy about some Linux

stocks, and with all due respect to this gathering, and in light on

the fact that we are using Linux extensively in our offices, Linux is

still primarily a server technology, without significant penetration

in the PC “client” space. For this to change, there will have to be

considerable improvements in Linux documentation and in Linux desktop

applications.

For most PC users, there is a steadily shrinking number of

choices for a growing number of important applications. Microsoft is

squeezing the life out of markets for word processors, spreadsheets,

desktop database software, presentation graphics, personal information

managers, email clients and Internet browsers — the applications that

most computer users need.

Some observers, such as Robert J. Samuelson, seem to think that

Microsoft has provided a public service. By eliminating competitors,

Microsoft gives everyone a common standard, and making life simpler

has benefits, Samuelson says.

I think most people here see the poverty of this analysis. There

are, of course, alternative methods of setting standards than relying

upon a private monopoly. The Internet is a powerful and relevant

example of how a non-monopolistic standard can facilitate enormous

innovation. And, as pointed out in Judge Jackson’s findings of fact,

Microsoft has sought to crush third party technologies, such as Java,

that create cross platform standards that Microsoft does not control.

The free software movement actively embraces a more open approach

to software development. A distribution of Linux isn’t the creation

of a single firm. It is a collection of hundreds of programs

developed by different individuals and groups, that work together.

The disclosure of the source code is designed to make it easier to

design software programs that work together, to solve user problems.

There is competition among distributions of Linux, and users can

choose alternative graphical user interfaces, programming tools,

utilities and applications. As described in the so called Halloween

memorandums, Microsoft’s response to the popularity of Linux is to

seek ways to cripple interoperability, by deploying proprietary and

patented software interfaces. And so far, Microsoft has resisted

efforts by OEMs to ship computers ready to dual boot Windows and Linux

or Windows and BeOS.

There are, of course, huge costs associated with forcing everyone

into a software monoculture. Some of the issues concern security.

Microsoft’s security breach of the week wouldn’t be such a huge

problem if its software wasn’t so ubiquitous. But this is only one of

many issues.

There are also large costs associated with the disappearance of

the products that Microsoft crushes. In the beginning, Microsoft had

a tiny presence in desktop applications, and businesses and

individuals invested money and time around non-Microsoft products.

The forced migration to Microsoft’s Johnny-come-lately imitations is

costly.

Consumers value choice, about a wide range of software

characteristics. WordPerfect and Microsoft Word have different

approaches to document management. Netscape Navigator, Microsoft

Explorer and Opera appeal to differ users. Every software product has

its own fans and its own critics. Robert Samuelson seems to think of

this as an inefficiency, but the contrary is true. A “one size fits

all” world harms consumers, and lowers productivity.

Competition among software products leads to innovation and

improvements in software quality. This competition moves the industry

to solve the problems consumers face, and leads to more productive and

reliable products. Indeed, perhaps the most important consideration

is that Microsoft is not a leader in product development — it is an

imitator, and this is the most significant harm to consumers — the

stifling of innovations that we never see. As pointed out by Judge

Jackson, even Intel, the other half of Wintel, was forced by Microsoft

to stop development of a promising new multimedia technology.

We recognize that in software markets, there may be cases where

the market coalesces around a single product with a large market

share. But it is one thing for that decision to be made on the basis

of competition for consumer satisfaction, based upon product quality

and price, and something else when consumers are forced to pick

Microsoft, by an endless array of underhanded, coercive and non-

meritorious tactics. Consumers are harmed when there is no real

choice, except to succumb to the Microsoft Borg.

Thank you.

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