Study: Microsoft overcharged users $US10 billion

Over the past three years, Microsoft has overcharged consumers $US10 billion for its operating system, and, if undeterred, it could overcharge another $15 billion over the next two years, according to a study released by several consumer research groups. The groups say Microsoft has bucked the industry trend of providing more functionality at lower prices, that its profit margins are between three and eight times those of other companies - and that the $10 billion would be a reasonable, even minimum, fine to impose on Microsoft should it be found at fault in its antitrust trial.

Over the past three years, Microsoft has overcharged consumers $US10 billion for its operating system, and, if undeterred, it could overcharge another $15 billion over the next two years, according to a study released by several consumer research groups.

Microsoft has used anticompetitive business practices to drive other companies out of the market or prevent their entry, protecting its monopoly and thus enabling it to charge higher prices than rivals, said Mark Cooper, research director at The Consumer Federation of America (CFA), which released the report along with the Media Access Project and the US Public Interest Research Group.

"Everybody else in the (computer) industry has been providing more functionality at lower prices," he said. "If you look at the hardware, the speed of the computer has increased ten-fold while the price has been cut in half or two-thirds.The same is true of software."

Meanwhile, Microsoft's profit margin is five times the rest of the industry, he added. Microsoft's profit margin has risen from about 25% in 1996, where it was more than five times higher than the software and services sector and the hardware sector, to 37% in the first three quarters of 1998, where it was three times that of other software firms and eight times what the hardware sector earns, the report found.

"Their argument is 'I'm giving you more value so stop complaining,' but they're only supposed to be able to charge what their competitors (the market) will let them," Cooper said. But "Microsoft hasn't lowered the price to the floor because they have no (viable) competitor."

The study was undertaken after the US Department of Justice filed its antitrust lawsuit against Microsoft last year to answer the question of how consumers are being affected by Microsoft business practices, Cooper said.

While it is up to the Justice Department to decide whether to use information from the report as evidence in the ongoing trial, the report suggests that $10 billion would be a reasonable, even minimum, fine to impose on Microsoft.

The study, which looked at internal Microsoft documents, among other information, points out that:

-- Microsoft has doubled the price of its operating system over the past decade and is committed to doubling it again.

-- About 250 million computers preloaded with Windows were sold with Microsoft charging between $35 and $45 too much per system, amounting to $10 billion in overcharges worldwide and about $4 billion in the US.

-- Microsoft has launched a campaign to prevent the adoption of low-cost personal computers and strives to shift demand to higher cost systems where it can more easily collect profits.

-- Microsoft has publicly defended its pricing and bundling strategy as being technologically necessary and consumer-oriented, while internally devising a strategy to reduce operating system content which computer manufacturers install and sell add on retail packs.

A Microsoft spokesman said that while he was not prepared to refute all the specifics in the report, he rejected its entire premise and conclusion.

"Overall, the success of Microsoft's products, including the Windows operating system, is due to many important factors including low and stable prices ....," said Tom Pilla in Microsoft corporate public relations. "In terms of pricing, the undisputable fact is that the cost of Windows 98, even in light of its increased functionality and enhanced performance, costs exactly the same as Windows 95, which is about $89 for a retail upgrade."

Pilla also said the operating system in the average PC comprises less than 5% of the entire cost of the system.

"A hallmark of this entire industry is that consumers routinely enjoy low prices for increased value," he added.

The report is on the Web at http://www.stateandlocal.org/report.html/. The CFA can be reached at +1-202-387-6121. Microsoft, based in Redmond, Washington, can be reached at +1-425-882-8080 or http://www.microsoft.com/.

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