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Commentary: Microsoft: There's More Than One Way To Play Monopoly

News: Analysis & Commentary: COMMENTARY


For years, Microsoft Chairman William H. Gates III has had a simple answer for trustbusters who accused his company of acting like an old-fashioned monopoly: Unlike the railroads and oil companies that inspired the Sherman Act a century ago, Microsoft Corp. doesn't jack up prices on captive customers. On the contrary, says Gates: "The price of software has come down in every category we are in, while the power of the software has improved."

On closer inspection, however, Gates may be protesting a bit too much. Sure, Microsoft gives away Web browser and server programs, where it needs to build share. But in markets where it has a commanding position, it seems to be using classic monopoly pricing.

CAPTIVE MARKET. Consumers won't notice: Retail prices for Windows and Microsoft's popular Office package have dropped sharply over the years, even as Microsoft has added features.

But behind the scenes in the computer industry and in corporations, there's a different story. Take Windows. Without it, most PC makers would be out of business. So they pay more for every new version of Windows--around $35 for Windows 3.1, vs. an estimated $40 to $60 for Windows 95. Windows NT for workstations, Win95's eventual successor, costs PC makers double that. (Microsoft is not alone. PC makers now pay, on average, $216 for a microprocessor, up from $103 in 1990, mainly enriching Intel Corp., the other half of the "Wintel" duopoly.) And, to be fair, succeeding versions of Windows add lots of new features. "Windows costs far less than the constituent parts," argues Gates.

A more dramatic example of Microsoft's pricing power is in corporate sales of Office, a "suite" that combines several programs including the Excel spreadsheet and Word in one deeply discounted bundle. Now that Office has 87% of the suite market and thousands of businesses rely on it, the cost of a corporate license in most cases is headed up.

Through various changes in pricing plans, Microsoft has been quietly boosting the annual revenue per PC that it gets from Office. For example, last year Microsoft stopped corporate customers from using the software at home at no extra charge. In December, it quietly phased out "concurrent" licensing. Under that policy, a company with 10,000 employees could buy a license for just 2,000 suites if no more than 2,000 employees would use the software simultaneously.

Now, customers negotiating new licenses will have to pay for a copy of Office for each employee. The price per copy might be lower, but the overall cost is expected to soar. Says Patrick J. Zilvitis, vice-president of corporate information technology at Gillette Co.: "Twenty-thousand times anything is expensive."

Zilvitis spends 10% of his software budget on Microsoft products, and with the change, that will go up, although he's not sure how much. But he has little choice. Once a business commits to Office and builds applications with it, the software "becomes the fabric of your whole company," says Howard Anderson, president of The Yankee Group. So Zilvitis is unhappy, but resigned. "I wish we had an alternative, but we really are in a captive position."

Gartner Group Inc. calculates that the combination of per-processor licensing, no home use, plus changes Microsoft has made to its maintenance plan will boost costs significantly. It estimates a company with 10,000 workers that today has a concurrent license priced for 2,000 could see its bill for Office rise more than fivefold over 5 years.

For its part, Microsoft says it's just phasing out a license option that few customers use, while simplifying its contracts. Mary Welch, a Gartner research director, however, says 30% of Gartner's clients have concurrent Office licenses.

As Microsoft moves into core computing jobs with programs such as Windows NT and Back Office, a suite of server programs, Welsh figures it will repeat the Office pattern. In a recent memo, she warns clients: "Microsoft will eliminate concurrency rights for these products when its market position strengthens."

Microsoft can't be accused of price gouging, and its high-volume, low-cost model has indeed been a boon to the entire PC industry. Still, it's worth noting the laws of falling technology prices can be selective.By Amy Cortese

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