From...

January 11, 1999
Web posted at: 12:35 p.m. EDT (1235 GMT)

by Jeffrey Rothfeder

(IDG) -- No matter how the "antitrust trial of the century" turns out, one verdict is already in: Consumers have lost.

According to system vendors, industry analysts, internal Microsoft documents, and a report by an independent consumer group, Microsoft's overwhelming domination of the markets for operating systems (over 80 percent) and for productivity software (nearly 80 percent) has translated into higher prices and limited choices for consumers.

Doubling the price

PC vendors won't say how much they pay for copies of Windows, and they're understandably nervous about criticizing Microsoft. But ask them off the record, and they'll tell you that Microsoft has more than doubled what it charges computer makers for its OSes -- from $15 to $25 in 1991 to between $40 and $70 in 1998, depending on the size of the vendor.

Microsoft won't comment on its pricing policies. But the company's own internal memo entitled "PC Value Analysis," written in 1996, found that the operating system accounted for 0.5 percent of a PC's total cost to consumers in 1990, then jumped to 2.5 percent in 1996. According to Frederick Warren-Boulton, a former Reagan administration economist and a key government witness in the Microsoft case, the percentage has doubled again since then.

Microsoft's price increases have been equally tough on consumers who buy OSes off the shelf. According to the Software Publishers Association, in 1992 the stand-alone version of Windows 3.1 retailed for about $100; such a version of Windows 98 now sells for about $160.

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Kill the competition

Companies that make disk drives, monitors, and memory -- those that have real competition -- have cut prices, while Microsoft, which has killed off its competition, has raised prices," says Mark Cooper, consumer advocate and author of "The Consumer Case Against Microsoft." Cooper's report, written for the Consumer Federation of America (a Washington, D.C.­based consortium of state and local public interest organizations), sharply criticizes the software giant's pricing and marketing tactics. "If Microsoft was like any other technology company," Cooper says, "the price for its operating system should have come down 3 percent or in the worst case stayed flat."

Compare prices in markets where Microsoft faces strong competition with those in markets it dominates. For example, Intuit's popular Quicken Deluxe personal finance program costs about $60, a bit less than it did a couple of years ago; Microsoft's Money 99, which lags behind Quicken in market share, costs roughly the same. It's a different story in the office suite arena, where Microsoft has a 78 percent market share. According to a survey of online software stores conducted by PC World, Microsoft's Office 97 costs an average of 33 percent more than its rivals. At one Comp-USA store, Office 97 sells for $450, while Lotus' SmartSuite and Corel's WordPerfect Suite can be had for $400 and $300, respectively.

Higher share, higher prices?

Microsoft's critics say the connection between pricing and market share is proof of Microsoft's monopolistic power. According to International Data Corporation, Windows accounted for 75 percent of desktop operating systems installed worldwide in 1991; by 1998, that share had grown to 82 percent.

Microsoft acknowledges that it has pushed the boundaries on OS pricing. In a memo to CEO Bill Gates on December 16, 1997, Joachim Kempin, senior vice president of Microsoft's OEM division, warns that the company's prices for OSes could alienate such stalwart customers as Compaq. (Compaq alone pays Microsoft upwards of $750 million a year for operating system licenses.) "Our high prices could get a single [hardware vendor] or a coalition to fund a competing effort," Kempin wrote. In other words, those vendors might develop their own operating systems.

Got Corel?

But Kempin's concerns that incensed vendors might form a coalition and develop a competing OS never materialized. Today, no major computer vendor, with the exception of Apple, preinstalls any OS but Windows on its systems. A couple of them may give you the option of special-ordering another operating system, but they won't make it easy. Likewise, most hardware companies will preinstall only Microsoft versions of popular applications, especially office suites. Consumers buying from Micron or Gateway can't substitute Lotus SmartSuite or Corel's WordPerfect Suite for Microsoft Office; Compaq will install those other packages on your new computer, but it won't remove -- and it will still charge you for -- Microsoft Office.

In fact, the only times you'll find non-Microsoft products preinstalled on a PC are when you're buying from a smaller vendor. Microsoft charges one second-tier PC vendor we spoke to (on the condition of anonymity) over $150 for Office 97, while (according to PC vendors and analysts speaking confidentially) larger customers like CompUSA, Dell, and Gateway pay $100 or less. To be able to offer consumers a $1500 computer on a par with those of its larger hardware rivals, the second-tier vendor we spoke to preinstalls Lotus's SmartSuite on its systems instead of Office. (It obtains the suite from Lotus for a mere $24 a copy.)

Don't be surprised

Some industry observers say nothing is surprising about Microsoft's pricing strategies. "Where there's competition, Microsoft prices aggressively and competitively; where there isn't, Microsoft doesn't," says Chris LeTocq, a software analyst at Dataquest, a market research firm in San Jose, California.

Microsoft argues that customers pay more for OSes now because they get more: Win 9x is more feature-rich than Win 3.x. "Windows 95 was a quantum leap in terms of features," says Microsoft spokesman Mark Murray. But critics counter that Microsoft's reasoning contradicts industry trends: You can get a 2.1GB hard drive these days for $100 or less; you couldn't buy a 20MB drive for that much in 1990. Murray says that such trends don't apply to OSes. "The cost of the plastic and the keyboard has dropped, but the cost of hiring programmers has gone up."

Furthermore, Microsoft is not the only company that has raised prices for key PC components. According to Microsoft's memo, Intel's revenue per CPU sold jumped from $108 in 1990 to $236 in 1996. Likewise, the microprocessor's percentage of the PC's cost ballooned from 3.1 percent to 11.8 percent during the same period. Which is one reason the Federal Trade Commission is investigating Intel's alleged anticompetitive behavior.

Plummeting prices

Large PC vendors defend their decision to preinstall Microsoft products, arguing that standardizing on one OS allows them to trim costs elsewhere and then pass the savings on to consumers. However, according to one analyst, if computer makers let consumers choose an office suite for their PC, the prices of suites would plunge. "For the chance to build market share, Lotus and Corel would just about give their software away," says the analyst, who wished to remain anonymous.

Microsoft has contended throughout its trial that high technology is a tough business and that rivals like Apple, America Online, Intel, Netscape Communications, and Sun Microsystems behave in the same way when given the chance. Unfortunately, the business can be tough on consumers as well. Should PC buyers be paying less for Microsoft products? Should they have more choice? Lawyers on both sides of the Microsoft case can and will continue to argue about the "shoulds." However those arguments are resolved, one thing is clear: Consumers are paying higher prices for, and have less choice in, software products than they would if Microsoft didn't dominate that market.