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12/4/2001
11:35 AM
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Industry Comment: Microsoft's Latest Shell Game

Microsoft hopes to settle a slew of lawsuits for much less than the amount publicized, and take over yet another market.

Microsoft's legal staff and lawyers representing the class-action plaintiffs have crafted a mutually satisfactory resolution to the charge that, due to monopolistic practices, consumers were significantly overcharged for Windows. Microsoft agreed to a $1 billion donation to the nation's schools, and said it would pay the fees of the opposing legal wizards. These fees should be very handsome--perhaps upwards of $300 million.

The terms of the arrangement, which still has to be approved by U.S. District Judge J. Frederick Motz, are intriguing. Microsoft acquiesces to pay what it says is $1 billion, not to the consumers who bought Windows, but to poverty level schools--approximately 14% of the nation's total. The money would primarily be in goods and services, the bulk consisting of 1 million reconditioned computers equipped with Windows. The rationale is that if cash were returned to the software buyers, each would get only about $10 after lawyer fees.

The proposed settlement has at least three troubling components:

  1. Is the money going to the right people?
  2. Is the amount offered sufficient?
  3. Does the settlement encourage the very actions that led to the class-action suits?

Most people agree that our schools are very important. Yet, I think it's more appropriate for Microsoft to reimburse the actual aggrieved parties, the millions of customers who bought Windows. Those who overpaid should get the money since, for the most part, it is possible to identify these individuals and companies. (On the other hand, class-action suits have been settled before by payments to a third party, such as in the tobacco lawsuits.)

Pocket Change
Regardless of who gets the money, is it enough? Microsoft makes about $1 billion each month in profits and has around $32 billion in cash in the bank. A settlement of a billion dollars is not a very big hit to the company.

But is it even a billion? It turns out that 50% of the $1 billion would be in Microsoft software, calculated at list price; the rest would be in reconditioned computers, training, and technical support. Anyone who knows anything about the computer industry is aware that the incremental cost to Microsoft of $500 million in software is minimal. If Microsoft has used similar mathematics to derive the cost of the donated computers, training, and tech support, you can bet that the hit on Microsoft's pocketbook is probably not more than a week or two of profit--a modest sum, to settle so many pesky lawsuits.

It's not a heavy price to pay, especially when you consider that the punishment further enhances Microsoft's power. The proposal endorses the very tactics that led to the original antitrust suit against the company. The charge, at that time, was that by bundling and giving away Internet Explorer, it was extending its operating system monopoly to the browser marketplace.

What will be the impact on competition of dumping so many copies of Windows in the K-12 educational community? Apple still has the largest installed base (47%) in elementary and secondary schools in the United States, but for how long, if this settlement is approved? If Microsoft had decided to give away software in the educational market as a marketing strategy, we would have all concluded that we were seeing Netscape II, this time with Apple in the supporting role.

The really cute part is that the settlement proposal has a five-year time limit, after which the schools would have to pay Microsoft to renew their licenses and to upgrade. Of course, by that point it would be very difficult to switch off the Windows platform to a less expensive alternative.

A more interesting settlement would have Microsoft supply $500 million in Linux or Apple software and support. Not only would the money go a lot further, but Microsoft's market position wouldn't be enhanced. Besides, maybe the kids could then learn to build a good seamless interface to Windows programs that works with open systems. Now that would be a fitting punishment for our friends in Redmond.

Robert M. Rubin is CEO of Valley Management Consultants, a firm specializing in E-business and information technology strategy, organizational design, and evaluation. Prior to joining VMC, he was senior vice president and CIO for Elf Atochem North America, a $2 billion diversified chemical company. Recipient of multiple industry awards, he is a contributing editor to InformationWeek and a member of its advisory board. He can be reached at valleymc@home.com.

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