Does Microsoft owe us a $10 billion refund?

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Does Microsoft owe us a $10 billion refund?

By Richard Morochove

First published January 14, 1999

Have computer buyers been shafted by Microsoft? The Consumer Federation of America alleges that Microsoft has overcharged consumers around the world by a whopping $10 billion (U.S.) since 1996.

In a report issued last Friday, the federation of some 240 consumer groups said that historic price trends and comparisons with other programs indicate that Microsoft overcharged computer makers between $35 and $45 (U.S.) for each of approximately 250 million copies of Windows installed on new computers in the past three years.

The Federation used internal Microsoft documents unveiled in the anti-trust case brought by the U.S. Department of Justice to deliver its argument for a substantial penalty.

"We believe that $10 billion (U.S.) should be the minimum considered for a fine in the case," said the report. "The irony is that the monopoly has been so potent that even if Microsoft were forced to pay this sum as a fine, it could write a check from cash on hand and still have more cash, relative to its ongoing operations, than most companies keep. At the end of the third quarter of 1998, Microsoft had $17 billion in cash."

I believe the likelihood of Microsoft paying a $10 billion fine is slightly smaller than the chance of a bumper harvest of Canadian oranges next month. However, the report does highlight a potentially fatal flaw in Microsoft's operating system business.

Microsoft's big problem lies in the continuing drop in personal computer prices. In most PCs you buy today, the operating system is already installed by the manufacturer. The manufacturer pays Microsoft a licence fee for the privilege of installing Windows on each new computer.

While the costs of computer components such as hard drives, monitors, and memory have dropped dramatically in the past decade, the fee paid by computer makers for Microsoft's operating system has gone up, from an average $19 (U.S.) in 1990 to over $49 (U.S.) in 1996. While the price of Microsoft software has increased, surveys in the report show annual price decreases of 3 to 15 per cent each year for software sold in a competitive market.

With some home PCs priced as low as $1,000, the fee for loading Windows on the computer becomes a significant part of the machine's total cost, slowing the rate of decline in PC prices.

Most home PC users don't need or use most of the high-end capabilities of Windows 98. Yet Microsoft plans to migrate home PC buyers to an even more complex operating system, Windows 2000. Microsoft plans to hike its licensing charge, which could top 10 per cent of the cost of making a PC.

At some point the high costs of Windows will be too much for the market to bear. What are the possible consequences?

Manufacturers might simply eliminate Windows from new PCs. If you're buying a PC to replace your throw-away old clunker, you could salvage the operating system from your old machine, much as you might reclaim a modem or CD drive. However, this requires a degree of technical knowledge that's beyond the abilities of many low-cost PC buyers.

Selling PCs without an operating system might also increase the incidence of illegal copying of new versions of Windows. Some PC makers might install a free or low-cost operating system, such as Linux, on a new computer.

What about other Windows alternatives? According to a Microsoft memo, Compaq Computer was expected to pay about $750 million (U.S.) last year to license Microsoft's operating systems. In the future, Compaq might invest that hefty sum to forge a coalition with other PC makers to create a Windows clone using inexpensive programmers in India.

A Microsoft executive speculated that Intel might join hands with PC makers to develop an alternative operating system. Intel could then sell them a processor for $200 and the operating system for $1.

The Microsoft exec. sketched out a counter plan to Bill Gates. The software giant would move into the chipmaking business, acquiring National Semiconductor or AMD (Advanced Micro Devices). Then Microsoft could sell a microprocessor to PC manufacturers for its cost plus a dollar, along with $100 for the operating system.

Here's what I feel is the most likely scenario. Microsoft will move to a time-limited licence arrangement for a future version of Windows. Once you begin using Windows, the clock starts ticking. When your Windows licence expires, the system locks up your computer. You need to pay Microsoft a renewal fee to keep using your computer, even if you don't want to upgrade your operating system. CW

Richard Morochove, FCA, is a Toronto-based computer consultant.

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