MS/DOJ: Microsoft pricing scrutinised

The US government will close its antitrust case against Microsoft by opening the software giant's pricing books. Attorneys from the US Department of Justice will use pricing data to attempt to show that Microsoft has the ability to charge whatever it likes for Windows. But whether the government can prove this in court is open to question. The Consumer Federation of America believes that the government will have no problem proving that Microsoft can charge what it wants, but some legal experts aren't so sure.

The US government will close its antitrust case against Microsoft Corp. today by opening the software giant's pricing books.

Attorneys from the US Department of Justice will use pricing data to attempt to show that Microsoft has the ability to charge whatever it likes for its Windows operating system.

But whether the government can prove this in court is open to question. The Consumer Federation of America, an advocacy association based in Washington, D.C., believes that the government will have no problem proving that Microsoft can charge what it wants, but some legal experts aren't so sure.

Consumers have been overcharged by some $US10 billion over the past several years for Windows, according to a report released Friday by the Consumer Federation, which represents some 260 consumer groups. Buyers pay a per-system cost that is $35 to $45 more than it should be because of Microsoft's monopoly, the report said. Microsoft operating system software is used on more than 90% of all personal computers.

But in the antitrust court case, proving that Microsoft prices are high may be difficult, according to Yee Wah Chin, an attorney at Squadron, Ellenoff, Plesent & Sheinfeld LLP. The government has to present benchmarks with other industries to establish its case, she said.

"Unless you have a benchmark, it's hard to say at what point it is a monopolistic profit margin," said Chin.

The best evidence of monopoly power may be revealed in any disparities Microsoft charges PC equipment manufactures to license its operating systems, according to legal experts.

"Disparities in prices help the Department of Justice prove that Microsoft has monopoly power," said Hillard Sterling, an attorney at Gordon & Glickson PC in Chicago. "A wide variety of pricing suggest that Microsoft has such power," he said.

Pricing disparities may show that Microsoft could "gorge profits to the extent that it is able" or offer lower prices to an OEM in exchange for something in return, said Sterling. "The DOJ will suggest that Microsoft can coerce OEMs to deal favorably with Microsoft for a reduction in price," he said.

David Boies, the lead government attorney, said last week that the pricing data -- obtained by government investigators from Microsoft databases in Redmond, Washington -- will show "evidence of the disparities" in what vendors pay.

But consumers as a whole are paying attention to the report released by The Consumer Federation of America.

Microsoft's profit margin has climbed from 25% in 1996 to 37% in 1998 due to inflated operating system pricing, the consumer group said. That profit margin is three times higher than what other software makers make and eight times higher than hardware industry profit margins, they said.

Mark Cooper, research director at the consumer group, said he hopes the pricing data presented in court today goes back to a time when there was competition in operating systems -- the 1980s.

"The interesting thing will be if prices are falling when there is competition," he said. "We know that they have been rising dramatically since."

Microsoft has disputed the analysis, arguing that its operating systems are competitively priced. For instance, the Windows 98 upgrade is $88 at retail; IBM's OS/2 Warp upgrade is $149; Red Hat's Linux is $50, and Sun Microsystems' Solaris 2.6 Intel operating system is $380, Microsoft said.

The Windows pricing data will be presented during the government's redirect questioning of its last witness, economist Franklin Fisher, an economics professor at the Massachusetts Institute of Technology (MIT).

Microsoft wants that Windows data to remain sealed, and any testimony on it held behind closed doors. However, a number of news organizations -- including The Washington Post, Associated Press, and The Seattle Times, among others -- have protested that move.

Once Fisher's testimony is complete, Microsoft will begin presenting its case. Its first witness, Richard Schmalensee, who is also an economics professor at MIT, is expected to take the stand Tuesday.

(Patrick Thibodeau is a senior writer at Computerworld.)

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