Microsoft report

Thu, 08 Oct 1998 10:54:32 +1000

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Contact: SEN.           HOWARD METZENBAUM (202) 387- 6121
OCTOBER 7, 1998         ANDREW SCHWARTZMAN (202) 232-4300

MICROSOFT MONOPOLY COSTS CONSUMERS HUNDREDS OF MILLIONS OF DOLLARS, DENIES
CHOICE, 
                        AND THREATENS INTERNET COMMERCE

      Washington, D.C., October 7, 1998: Microsoft's anticompetitive business
practices and abusive pricing of computer software have already cost the
public hundreds of millions of dollars in excess charges and are
threatening to inhibit development of the Internet, a report released
today by the Consumer Federation of America (CFA) and the Media Access
Project (MAP) charged.    

      Pointing to the disturbing findings of the report, entitled The
Consumer Case AgainstMicrosoft, CFA and MAP were joined by Consumers
Union (CU) and The Consumer Project on Technology (CPT) in a letter that
urged Congress to  engage in vigorous oversight and, if necessary, consider 
legislation that would promote greater competition in the computer software 
industry.   

       These business practices must be driven out of the software industry
and prevented from spreading to the Internet,  Senator Howard
Metzenbaum, CFA s Chairman said.  A competitive market in software would
meet consumer needs at lower cost by directly forcing prices down, and
indirectly by giving consumers a wider range of choices. 

      Consumers are also citizens,  Andrew Jay Schwartzman, MAP's President
said.  Those of us who see the Internet not just as an engine for
economic growth, but also as a new means of self expression, worry that
no government - and no corporation - should be able to control how the
Internet grows or to decide whose content or icon gets favored
placement.  Left unchecked, Microsoft's dominance of operating systems
and software applications may well increase the cost of Internet access
and preempt competitive offerings which might provide new ways to
enhance democracy, civic discourse and creativity.   

       The Internet's success is based upon open standards and competition
free from monopoly abuses,  Jamie Love, CPT s Director said.  Microsoft
wants to use its monopoly in desktop operating system software to
control Internet standards and influence Internet navigation. No one
should gain excessive power over the Internet. 

      Key findings of the 115-page report include the following.

BUSINESS PRACTICES:

        Three different types of evidence (quantitative, journalistic and
legal) covering four different product areas (operating systems, desktop
applications, web browsers, and the Internet) demonstrate repeated use
of over a dozen anticompetitive practices.    

         Microsoft hides its prices from the public by bundling software in
computers, which forces consumers to buy too much software that requires
too much computer capacity. 

        Claims that only a monopoly like Microsoft's can provide consumer
convenience and economic efficiency in the software industry are
analyzed and rejected.

PRICING AND PROFITS

        Microsoft doubled its prices after it secured its operating system
monopoly and it has kept those prices up in the face of dramatically
declining prices for the other parts of a PC. 

        As a result, the cost of the operating system incurred by typical
consumers has already risen from about 3 percent of the total package to
as much as 13 percent and is likely to increase yet again as the cost of
other components declines further.  

        Without competition to force prices down, Microsoft ends up with 
huge profit margins that are five times as high as the national average. 
These margins have been rising as Microsoft has monopolized more and
more software markets.

# # #
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• Consumer Federation of America is the nation's largest consumer advocacy
group, composed of over 250 state andlocal affiliates.

• Media Access Project (http://www.mediaaccess.org) is a twenty-five year
old, non-profit public interest lawfirm representing civil rights, civil
liberties and consumer organizations dedicated to advancing the public s
First Amendment right to speak and to be heard.

• The Consumer Project on Technology (http://www.cptech.org) was created
by Ralph Nader in 1995 to addressemerging issues in software,
telecommunications, intellectual property rights, privacy and access to
health care technologies.

• Consumers Union, publisher of Consumer Reports magazine, is an
independent, non-profit testing, educational andinformation organization
serving only the consumer. 
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                                                        October 7, 1998
Senator Orrin G. Hatch
Senate Judiciary Committee

Dear Chairman Hatch,

    As the enclosed study, entitled The Consumer Case Against Microsoft,
shows, the public may pay a heavy price for the Microsoft monopoly. The
terms and conditions that Microsoft has imposed on suppliers in
neighboring markets are part of a business model that results in
overcharging for software, denial of consumer choice, and stifled
innovation.

    We believe this is inconsistent with competitive market forces and
therefore urge you to engage in vigorous oversight and, if necessary,
consider legislation that would promote greater competition in the
computer software industry.  

    Only by conclusively and permanently banning Microsoft s practices can
impediments to competition be driven out of the software industry and
prevented from spreading into the much broader and more important realm
of electronic commerce on the Internet.  Regardless of who wins the
antitrust case (U.S. v. Microsoft), competitive balance in the software
industry and effective consumer protection will only be attained through
a new public policy mechanism that prohibits Microsoft s past
practices.  

    The importance of Congressional scrutiny was demonstrated just this
year, when, on the eve of a Congressional hearing, Microsoft declared it
would abandon certain practices that it had said either did not exist or
were strictly legal.  Subsequently, Microsoft has declared that the
contracts have expired and it will not renew about two dozen
objectionable clauses in its contracts with computer manufacturers,
Internet Service Providers, and Internet Content Producers.  

    Unfortunately, the need for more vigorous Congressional action is also
demonstrated by this eleventh-hour promise.  The CFA/MAP report demonstrates 
that Microsoft's promise to abandon these practices in the browser market 
will be too little, too late.  Having apparently captured the market with 
threats, tying and foreclosure, there is no chance that it could be dislodged 
by normal competitive processes.   It has passed the tipping point of market
share, built incompatibilities into its browser, and created a base of
preinstalled Microsoft browsers that may function as an insurmountable
obstacle to competition. 

    As the report documents in detail, there are dozens of examples of this
type of abuse.  In  voluntarily  abandoning these specific contracts,
Microsoft insists that these are acceptable business practices.  It is
likely to resort to them again, if it is not forcefully prevented from
doing so. Indeed, it has already begun applying its business model to
retail services on the Internet. 

    With an aggressive monopoly controlling a key point of access to the
information superhighway, there is great danger that Microsoft would have 
gone a long way toward extending its anticompetitive practices into huge 
new markets on the Internet.  Control of this important gateway by any
company raises fundamental problems not only about economic activity but
also about the free flow of information.  The concern is particularly
acute in the face of the longstanding complaints about Microsoft's abuse
of market power.  

    Congress enacted the antitrust laws to keep our economy open just as
the flowering of the industrial age was about to produce what has been
called the American century.  We believe that keeping the American economy 
competitive and its marketplace of ideas open is just as crucial to ensuring 
national strength in the information age as it was in the industrial age. 

    The course of the antitrust case and the remedy it imposes will
determine the scope of the action that Congress should take in the next
session. Your interest and action will play a key role in defining
whether the information age is economically open, consumer friendly and
promotes the free flow of ideas.  We look forward to working closely
with you in the next Congress to define a vigorously pro-consumer,
pro-competitive policy for what is certain to be the most important
industry in the twenty-first century.  

        Sincerely,

Sen. Howard Metzenbaum          Andrew Jay Schwartzman
Chairman                        President
Consumer Federation of America  Media Access Project                    

Gene Kimmelman                  James P. Love
Washington Co-Director          Director
Consumers Union                 Consumer Project on Technology

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Stewart Fist - writer and columnist
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