Of Public Interest

Volume 4, Number 8
April, 2002

Richard E. Wagner

Iowa is one of nine states whose Attorneys General are sponsoring still more litigation against Microsoft (www.naag.org/issues/microsoft). This litigation would impose a heavy though hidden tax on the consumers of Windows, and would also transform Microsoft into a form of public utility.

Developing software is a complex and costly process, both for the developer and for Microsoft. Iowa’s Attorney General and his comrades want to make this process even more complex and costly, thereby forcing consumers to bear higher costs.

At present, Microsoft produces Windows, and computer manufacturers then license Windows from Microsoft. Microsoft first writes the computer coding, then individual computer manufacturers may choose to install additional or alternative middleware on their computers before selling their computers to consumers. One of the major features of the antitrust settlement that Iowa’s Attorney General rejected was that Microsoft would make it easier to add or remove middleware from Windows.

Iowa’s Attorney General proposes instead to destroy Microsoft’s ability to determine the computer coding for Windows. Microsoft could no longer produce its own product. This is what the Attorney General calls "unbinding" in his proposals. The Attorney General would allow computer manufacturers to demand customized versions of Windows from Microsoft, to fit the particular middleware configurations those manufacturers chose to install. The simple algebra of this situation is that Microsoft would have to test 4,096 different configurations of middleware to ensure that Windows works across computer platforms, whereas now Windows already comes off the shelf ready to work across all platforms.

The increased costs the Attorney General seeks to create would affect both independent software developers and Microsoft, and would act as a strong tax on Windows. Stan J. Liebowitz, Professor of Economics at the University of Texas at Dallas, has estimated conservatively that the increased cost to software developers would run around $81 billion over a three year period (www.actonline.org).

If the cost burden placed on Microsoft is roughly similar to that placed on non-Microsoft software developers, the Windows tax could amount to some $160 billion over a three-year period. One simple way to appraise this cost figure is to note that it would amount to about $600 per person when distributed across all Americans. To be sure, not all Americans use Windows, so the cost to users of Windows would be even higher.

To be sure, the Attorney General’s proposal would require Microsoft to give price reductions to computer manufacturers who purchased stripped down versions of Windows. This price reduction, however, is a charade. To be able to offset an overall cost increase of $600 by a price reduction of $20 or $30 might soften the tax blow a little, but no sensible person would ever confuse this for a price reduction. Even more, this does not mean that prices will actually be lower for consumers of these stripped down versions of Windows. Someone who wants a computer that can play music will have to pay for alternative middleware if he buys a computer from a manufacturer who has removed Microsoft’s media player.

Iowa’s Attorney General would also transform Microsoft into a public utility. Microsoft would be overseen by a Special Master, whose office and activities would be financed by a tax on Microsoft. The Special Master would have open access to all Microsoft records, including those pertaining to future business plans. Microsoft would be forced to give at least 60 days advance notice of future plans to such competitors as AOL Time Warner, Sun Microsystems, Oracle, Apple, and IBM. Public utility companies have never been innovators in the commercial marketplace, and it would surely be the same with Microsoft should the Iowa Attorney General and his comrades have their way.

The task and challenge of judicious antitrust enforcement is to distinguish between those cases where antitrust protects consumers by maintaining open and vigorous competition and those cases where it protects competitors from their competitive inadequacies, thereby placing burdens on consumers in the process. The provision in the original settlement that strengthened and simplified the add/remove feature in Windows seems reasonably to be a means of strengthening competition. There can be no doubt, however, that Iowa’s Attorney General proposes to harm consumers by removing Microsoft as a vigorous competitor from the commercial marketplace.

The simple geography of where Microsoft’s competitors are located might tell us why Attorneys General for such states as California and Utah are seeking to shatter Windows and convert Microsoft into a public utility. It is, however, a deep puzzle why Iowa’s Attorney General might choose to wreak such commercial destruction.

A Publication of:
Public Interest Institute at Iowa Wesleyan College
600 North Jackson Street
Mt. Pleasant, Iowa 52641-1328
Phone: 319-385-3462 Fax: 319-385-3799
E-Mail: public.interest.institute@limitedgovernment.org Web Site: www.limitedgovernment.org