Article 183 of 200
Microsoft Breakup Could Spark Higher Software Prices
By Peter Loftus
Dow Jones News Service
(Copyright (c) 2000, Dow Jones & Company, Inc.)


NEW YORK -(Dow Jones)- Consumers and businesses can expect to pay higher prices for computer operating systems and related software and services if a judge's order to break up Microsoft Corp. (MSFT) is ultimately upheld, according to some analysts.

The severed components of Microsoft would face increased costs and have less incentive to keep product prices down, said Christopher Selland, analyst with the Yankee Group, a Boston research firm.

In the past, for example, Microsoft has given away its Internet Explorer Web browser with its Windows operating system. But Wednesday's ruling against Microsoft would bar the company from tying the browser to Windows. Under that condition, Microsoft would presumably begin charging for Internet Explorer, Selland said.

"Assuming there is a breakup, I think what the average consumer can expect is higher prices, which is sort of ironic because the government has argued that the antitrust case was meant to protect consumers," Selland said.

In addition to higher prices for Microsoft products, businesses will have to pay more up-front costs to integrate the products, said Joe Clabby, vice president of platforms and services as Aberdeen Group, an information technology consulting firm in Boston. A split-up Microsoft would be barred from coordinating its operating system with software application products, leaving it up to customers to pay for systems integration.

"I think there would be regulatory restrictions that would retard integration efforts," Clabby said.

Aberdeen, the Boston IT consulting firm, estimated a Microsoft breakup would cause $43 billion in financial damages throughout the economy over 10 years. Clabby, the Aberdeen executive, said the firm arrived at that estimate by concluding that systems integration costs would rise, Microsoft shareholder value would fall, U.S. taxpayers would pay more for government regulation and innovation would be stifled.

A breakup would produce duplicative operations at each new company, resulting in higher costs than at a single Microsoft, Clabby said. The post-breakup companies would have to choose to absorb the higher costs or pass them along to consumers in the form of higher prices.

Consumers would encounter higher software prices because a separate operating system company would likely charge more for Windows, said Nicholas Economides , an economics professor at New York University.

"The DOJ lawyers argued Microsoft had the power to raise prices but was not exercising this power to kill Netscape," he explained. "If it's split, and (all one company) has is Windows and it could charge higher prices, why wouldn't it?"

Despite expectations of higher prices, analysts don't think consumers will immediately feel any effects from the breakup ruling. Consumers and businesses will continue to use Microsoft products because it would be expensive to make any deep-rooted changes in their computer systems, said Dan Kusnetzky, vice president of systems software research at International Data Corp., the Framingham, Mass., research firm. And the appeals process is widely seen lasting at least a year.

What's more, if price increases do take effect, Kusnetzky thinks they'll be minimal. He said hardware vendors who buy Microsoft products to install in PCs will feel the biggest brunt of price increases. PC makers who have received preferential treatment from Microsoft in the past probably face higher costs for software purchases from Microsoft. But from the perspective of a consumer buying a $1,500 PC, the price increase could be as small as $5, he said.

"The differences are minor enough that, on a per-user basis, the typical consumer won't see any changes at all," he said.

Economides said firms that compete with Microsoft in the desktop software business, such as Apple Computer Inc. (AAPL) and the Linux promoters, are too weak and small to get much of a boost from the proposed changes. But Microsoft's server software rivals, such as International Business Machines Corp. (IBM) and Sun Microsystems Inc. (SUNW), "are going to be considerably helped because Microsoft is going to be so absorbed in trying to deal with the suit," he said.

-By Peter Loftus; Dow Jones Newswires; 201-938-5267

(Marcelo Prince, Dow Jones Newswires, contributed to this report.)

While some industry analysts and consultants assert that a Microsoft breakup will result in higher software prices, a consumer advocacy organization believes otherwise. The Consumer Federation of America, Washington, D.C., supports the government's antitrust case against Microsoft and says a breakup will drive software prices down by introducing competition to the marketplace.

"If we get competition in operating systems and applications, prices will go down," said Mark Cooper, director of research at the umbrella organization for consumer groups nationwide. "There's no doubt Microsoft has raised prices dramatically over the past decade."

Cooper also concurs with the court ruling that Microsoft's monopoly prevented certain products from reaching the marketplace. He cited IBM's allegation that in the mid-1990s, Microsoft threatened to raise prices for sales of Windows to IBM, or to stop selling it to IBM altogether, if IBM continued to promote Lotus Notes and other rival software products.

With a Microsoft breakup and behavior restrictions in place, companies like IBM and others would be freer to introduce new products, Cooper said.

"These cases are really about competition," he said. "It's fascinating to listen to people who say we need one standard system because consumers want simplicity. We believe consumers make sophisticated decisions every day. It's in the interest of producers of products to put them all together so they work."

   -By Peter Loftus, Dow Jones Newswires; 201-938-5267;

Copyright © 2000 Dow Jones & Company, Inc. All Rights Reserved.