For Microsoft, Market Dominance Isn't Enough

chemstar writes "Last summer Orlando Ayala, then the top sales executive at Microsoft Corp., sent an e-mail titled 'Microsoft Confidential' to senior managers laying out a strategy to dissuade governments across the globe from choosing cheaper alternatives to the ubiquitous Windows operating system. Ayala's e-mail told executives that if a deal involving governments or large institutions looked doomed, they were authorized to draw from a special internal fund to offer software at a steep discount, or free, if necessary. Steve Ballmer, the Microsoft chief executive, was sent a copy of the e-mail. The memo, which focused on system software for desktop computers, specifically targeted Linux, a still small but emerging competitor. "Under NO circumstances lose against Linux," Ayala said." Perhaps that's because, as roomisigloomis writes, "Seems that MS' licensing practices are working against the company," pointing out this article which "suggests that open source, Linux and other software is actively being sought."

Comments

It's Captain Stupendous, Master of the Obvious!

[Violet Null]

It's not the price, really. Corporations and governments are willing to pay the price of Windows to ensure that they have support and stability. But the licensing of Windows -- product activation and the like -- are what's really kicking Microsoft's teeth in. Consumers are willing to overlook a lot, but not things that actively make their life harder, for no personal gain for them.

Re:It's Captain Stupendous, Master of the Obvious!

[gcalvin]

I've had opportunities to call Red Hat tech support and Microsoft tech support. On the whole, I've felt much more insulted by Microsoft tech support. I find the tedious exercise of going through some phone jockey's troubleshooting script highly insulting -- to my intelligence, and to the value of my time. Red Hat was much quicker to connect me with a human who had some real technical knowledge, and wasn't just following a script. If such a tech had said something along the lines of "...if you were an idiot and did 'x'..." I would have taken it in the spirit it was offered. I'd rather have quick, clear, correct answers than sympathetic but incompetent hand-holding.

Re:It's Captain Stupendous, Master of the Obvious!

[IamTheRealMike]

And did you report this rep? What did Redhat say? Did they apologise?

I'm sure you're being honest, but given your track record as somebody rabidly pro-MS and often anti-Linux, allegations against random redhat employees carry less weight than they otherwise would.

Not an uncommon business practice..

[Gortbusters.org]

To want to beat out the competition.

Many large corporations drive prices down to crush the little guy.

Re:Not an uncommon business practice..

[Jason Earl]

Sun is willing to give OpenOffice away for free, and they even will happily give you the source code. What exactly is the difference between giving away OpenOffice and giving away Microsoft Office?

Answer: there isn't any difference other than the fact that you probably like Sun, and you don't like Microsoft.

The fact of the matter is that, despite what Microsoft says publicly, the cost of MS Office and Windows is definitely a factor. Competing with Free Software in the long run is going to require that Microsoft lower their prices substantially. This is especially true when you are talking about key accounts like governments and large institutions. Microsoft will do what it takes to maintain these accounts.

The good news is that Microsoft can't really afford to lower the prices on their core products of Windows and MS Office. Sure, they have billions in the bank, but that doesn't mean that they want to become a charity. Microsoft currently has a price/earnings ratio of about 30. That means that Wall Street expects a very healthy amount of growth from Microsoft. As these discounts cut into Microsoft's profit margins and revenues then this trend will negatively effect MSFT's stock price. $43 billion is a lot of money for a business to have in the bank, but it is peanuts compared to the amount of wealth that Microsoft executives have tied up in their stock.

When push comes to shove Microsoft execs will defend their stock price at all costs, and that means coercing more money out of their current customers, not less.

Re:Not an uncommon business practice..

[DogIsMyCoprocessor]

Sorry, but Microsoft has been found to be a monopoly in a court of law. They don't have the same rights as non-monopolies. Legal fact. Get over it.

Re:Not an uncommon business practice..

[swillden]

Yes, I don't agree with the law. Apparently Mr. Ashcroft doesn't either.

I guess both of you wish that gasoline cost $10 per gallon and was only sold at subsidiaries of Standard Oil.

There are very good reasons why the Sherman Anti-Trust Act and follow-on legislation were passed, and your lack of understanding of both history and economics don't devalue them one bit.

I personally can't wait for Linux to achieve Total World Domination

What's interesting here is why open source appears to be the only viable competitor to Microsoft's dominance (and it actually *isn't* a competitor yet, and we don't really know for sure that it ever will be). Why does it require such a bizarre, apparently socialist structure to compete with MS? Because any ordinary product from would be pinned to the wall by Microsoft's monopoly power, which is being allowed to run virtually unconstrained. Only the ghost-like, hydra-headed and essentially non-commercial nature of open source makes Linux a viable competitor. That should tell you something about just how nasty monopolies can be.

Even if a Democrat gains the whitehouse in the next election there isn't much of a chance that the DOJ will go after Microsoft again.

Of course not. MS gives plenty of cash to both sides.

Microsoft won't be a monopoly by the time that the government looks at this case again.

I'm far less certain of that than you are, unless you're just trying to imply that the government will never look at it again. Don't get me wrong, I think it is likely. I run nothing but Linux on any of my systems (well, I'm considering moving my firewall to OpenBSD), and I don't think it's that far from being a viable competitor on the desktop. It's clearly a powerful competitor in the server market and it's currently making heavy inroads into the embedded market and preparing to really attack the PDA and cellphone markets. However, MS is a determined, wealthy, smart, ruthless and insanely powerful competitor.

What do we really expect?

[hesiod]

I hate Microsoft as much as the next geek, but really, what do we expect from a company? Companies aim to make as much money as possible -- excluding not-for-profit & charitables -- so why should anyone be surprised that they do anything within their power to make their software as widespread as possible?

It seems to me that every time there is a posting about something else MS does, it's the same old stuff: they want more market share, just like everyone else. That's it, it should be expected by now.

Keep in mind that I am not excusing them for any unethical practices, just something that nags at me.

Re:What do we really expect?

[Jason1729]

Selling a product below cost or giving it away for free to make it difficult for competitors to get a foothold is called dumping, and it violates anti-trust laws.

This is exactly why Standard Oil and AT&T were split up.

When you say a company should do anything within their power to make their software as widespread as possible, do you include illegal things? Maybe a campaign of assassinating prominant open source developers until nobody is willing to work on Linux.

Jason
ProfQuotes

Dumping?

[Amazing Quantum Man]

Maybe the EU should look into dumping charges against MS, if they offer to give it away for "free"...

Antitrust?

[10Ghz]

Isn't this illegal? Here we have a convicted monopoly selling it's products at a loss to shut out a smaller competitor. Isn't that illegal?

Re: Antitrust?

[Black Parrot]

> Isn't this illegal? Here we have a convicted monopoly selling it's products at a loss to shut out a smaller competitor. Isn't that illegal?

Not under Republican administrations.

Re:Antitrust?

[hipster_doofus]

That's no different than a cell phone company giving a phone away for free to get you to sign a two-year service contract. They're taking an initial loss in order to realize a long-term gain.

My own experience

[Hugonz]

Well, it seems to be working. i worked hard here in Mexico for a company that I will not disclose. They were to offer a set-top box to an ISP, using the Geode procesor. They wanted the box with linux and they were actively encouraged by the ISP to do so.

After a while, we discovered that we were only being used as a tool of negotiation to get lower prices for WinCE licensing... it seems that using Linux as a disuasve weapon was effective. It seemed that they would do anything not to lose to Linux

Those heartless bastards

[TopShelf]

Courtois also said Microsoft sometimes gave away software to "very low income countries." He cited a program where Microsoft donated software in South Africa and helped train teachers to use it.

Of course, if MS had charged them full price, they'd be pilloried for contributing to the "digital divide."

Market Neccessity

[DarkBlackFox]

Seems to me the business/government market has clung to MS for the sole purposes of familiarity and ease of support. Hire any MCSE off the street and you have qualified support personell. Have a problem, call up Redmund and tell them about it.

Windows has kept essentially the same for the past few years, minus a few "enhancements" (a.k.a. extra features not many people need). This facilitates people turning their heads towards more customizeable software, where a kernel can be compiled for any given specific purpose, and only the required software runs.

Aside from the incredibly cheap software itself, the unmatched compatibility-for-purpose, and customizability make Open Source a very viable solution for previously proprietary, overpriced, "as is out of box" software. And as potential support people and developers materialize out of the mould, it's getting more and more serious consideration.

It's just plain sick of Microsoft that they would consider just giving their multi-thousand dollar software away simply to keep market share. Wonder how that would make me feel, if I were a business owner. Knowing I paid $2,500 for an enterprise server, when a friend of mine's business gets it free just so they remain a Microsoft customer. Really would make me consider the alternatives all the more, for fear of getting played like a fiddle by the monster of dominance.

So Obvious

[Jason Earl]

The reason that Microsoft is concerned about governments is that they know that governments have the power to set de-facto standards. If a business partner sends me an unreadable document I can probably work something out with him or her. If the government demands that any electronic communication be in a particular format, that's the format that you use. What's more, nearly everyone has at least some business contact with the government. If a government switches to StarOffice/OpenOffice then you can bet that within a few years StarOffice formats will be the standard in that particular country for almost everything. It won't matter that it some ways OpenOffice isn't as good as MS Word, because it is definitely "good enough," the price is right, and it is the format that you need to use to communicate with the government.

Large institutions are a similar deal. If your University demands that you turn in your assignments in Microsoft Office formats, then you don't use WordPerfect or OpenWriter (or if you do you make sure to double check the formatting with MS Office before actually turning the assignment in. Likewise, if you supply parts to Ford Motor Company and they require that documents you submit be in MS Word format, then you don't use something else.

Microsoft can't afford to lose these big accounts. If they do their entire monopoly will start to unravel around them. It is far better business for Microsoft to give away software to these key accounts than to lose them to the competition.

Re:So Obvious

[Jason Earl]

Microsoft has been beating their competitors over the head for years by being "good enough" at a lower price. Microsoft executives were part of the wave that put commodity PC hardware everywhere, do you think that they don't know what commodity software is likely to do to their business plan?

Microsoft knows that in the long run the OS and the office suite (and a whole pile of other software) are going to become commodity products. That is why they are willing to lose so much money starting up some of their other businesses. Microsoft's current business plan has serious problems.

However, in the short term Microsoft has huge profit margins on Windows and MS Office. As long as they can keep up the appearance that they have a workable business model they get to rake in billions of dollars in cash, and, more importantly, they get to sell their stock options at an astronomically high price/earnings ratio. In other words, Microsoft's current business plan is part shell game and part extortion racket.

Microsoft could make Linux and OpenOffice disappear tomorrow simply by drastically reducing prices. Only the hardest core of the Free Software movement would be interested in Linux and OpenOffice if Windows and MS Office cost 30% of their current price, and Microsoft has that much profit margin to give. The reason that Microsoft doesn't respond this way is that the Microsoft executives are more concerned about their own personal fortunes (tied up primarily in MSFT stock) than in the longterm health of the company. If Microsoft lowered prices to compete with Linux then MSFT stock would drop like a rock.

Eventually Microsoft will lower prices to compete with Linux, but they won't do so until they have no other choice.

Re:Legal?

[stratjakt]

What's below cost?

It costs maybe 25 cents to produce a copy of Windows 2003.

Dev costs are already written off/recouped.

Software isn't a tangible product. It only "costs" what people are willing to pay.

Re:that's great

[tuffy]

So, if you want to have Microsoft software for free, you know what to do!

Ah, but Microsoft software is free only if your time is worthless.

;)

Somebody get that company a CISSP!

[Spyder]

As a goon in the network brute squad for an enormous and paranoid company, I'm gonna say: How come all of these high level memos get out? Ok granted they've been able to keep their source code contained, but executive memos like this should be at approximitly the same sensitivity level. I could, if I were petty, ask why we should trust security and operation processes from a company that seems either not know what they are, or at least how to follow them. The information in the memo is not a great suprise to any market observer, but it could be, as experessed in other comments, legally damning.

MS products "free" like cocaine is "free"

[dh003i]

These products are "free" like cocaine is "free". Free for the first buy. Free for the second buy. Free as long as it takes for you to be completely addicted and dependent -- then it's a leg and an arm.

MS will not continue giving it's products away for zero cost to anyone. They will do so long enough to ensure dependency, then charge full price. If they kept on giving it away at zero cost, they'd go out of business, despite everyone using their products. That's obviously not what they want. Their plan is obviously to make governments and citizens dependent on MS software using mechanisms like the Word incompatability fiasco.

At the very least, all government agencies should require that the formats in which they store information are completely OPEN and FREELY AVAILABLE for anyone to implement.

That figures

[matsmats]

The Norwegian government resigned last year from their deal with Microsoft for delivering software to the whole administration to look at alternatives. Linux was mentioned as one of the possible ways to go.

Last week Steve Ballmer visited to have a meeting with the Minister of Administration. The most published result from the talk was that the government get disclosure of the source code. And probably, according to this, got an opportunity to renegotiate for a better deal.

Just an example. But what it means is that Linux and Open Source gives (large) organizations a hand in negotiating price and conditions with Microsoft. I'm not sure if that means anything to the Open Source Movement at all.

I'm not even sure if that's good for Open Source. Expensive and closed Microsoft is good for OSS, because that means Linux et al is where to go for open systems. If large corporations (in Norway, the government, military and one large corporation now has access to Microsofts source code) can get to the insides, that means a lot of resources that could go to the public good is kept locked up by MS anyway.

Re:that's great

[eXtro]

The same is true for any other software though, there's really nothing significant about the comment. Linux is free, but if I want to use it as the infrastructure for my company then I need to invest manhours into it, whether my own or somebody elses. Depending on which flavour of zealot you ask you'll get a different answer as to which is more expensive in terms of man hours required to implement that infrastructure.

I don't know how to feel about this...

[chrysrobyn]

Some say this is dumping -- selling their product below cost just to push out a smaller competitor. Sure, it fits that definition, but Microsoft is lowering its price to that of a competitor who is also selling below cost. Alan Cox's labor alone probably ads up to more than a penny on the two debian machines I have right now which would be two more pennies than I spent on their software. (Aside, if each of us sent Alan a penny for each of our servers, how much money would he have?)

Some are calling this just another unfair tactic, losing money to maintain marketshare. Well, maybe it is, but isn't that what M$ is doing with the XBox? Rumor has it that Sony did it with the PS2 at least when it came out. Numerous other business models do this as well. Maybe Microsoft is turning to a business model where the software is free (under certain circumstances) and they earn their money on the support calls and Must Consult Someone Else certifications? Isn't that the business model all the free software people advocate?

I don't like Microsoft's history or how they do business, but I'm racking my brains here to find a way that they're evil and my favorite business OS, Linux, is good. All I'm coming up with is either ways to kill Linux accidently or ways that this is a legit thing to do.

Perhaps there's something to do with how the prices are different? Can it be proven discriminatory, or is it along the same lines as airline seat price differences?

The best I have is that foreign governments can prohibit or tariff Microsoft OS imports that are under priced because they're being dumped-- when and only when they have local developers working on Linux and consider that flavor to be domestic. Much like the US is doing (illegally due to WTO agreements) with steel.

Microsoft was evil, in my opinion, when they released IE for free against Netscape's paid-for product. Why is free as in beer Linux good when it's apparently forcing Microsoft to give their OS away for free? Aside from brand hatred of Microsoft, why do I want Linux to succeed? Simply because I can and have modified the source code (but that gets back to it being Free as in libre which I think should stay out of this argument).

If it's reasonable to cast licensing paranoia aside for a moment, Microsoft appears to be offering those who cannot afford their software the ability to get upgrades for free without having to pay for migrating proprietary code to the Linux platform. If I replaced "Microsoft" with another business name, that would be A Good Thing.

Can we write a law that refers to the Microsoft business entity specifically and prohibits them from "selling" their product at a loss as punishment for prior practices?

Re:I don't know how to feel about this...

[RealAlaskan]

If it's reasonable to cast licensing paranoia aside for a moment, ...

I don't know that it is reasonable to cast aside worries about MS's licensing schemes.

... Microsoft appears to be offering those who cannot afford their software the ability to get upgrades for free without having to pay for migrating proprietary code to the Linux platform.

I'm sure that they would like nothing better than to have it appear thataway.

If I replaced "Microsoft" with another business name, that would be A Good Thing.

That would be a deeply insightful comment, EXCEPT: if we were talking about another company, we wouldn't be talking about a company which had been convicted of abusing its monopoly power. Then, we might believe that the object of the exercise was charity, and it would be A Good Thing.

Unfortunately, we are talking about MS, the convicted monopolist. The MS with a history of rude, rapacious behavior towards customers and competitors alike. The MS which has used all means possible to extend and maintain their monopoly, including `` ... offering those who cannot afford their software the ability to get upgrades for free ... ''. Thus, many of us don't see this as A Good Thing. In fact, we see it as more rude, rapacious behavior.

The situation is different when it's MS instead of, say, RedHat, because MS is different than RedHat. At some point, automatic suspicion becomes reasonable rather than paranoid. I think that MS and Charles Manson have past that point at least once. So did IBM, before most slashdotters were born, but IBM has come back to the ``safe'' side of that point since MS lead them down an alley and molested them.

By the way, the postage meter industry is just messy as the desk-top OS industry, except rougher. And except for the fact that anti-trust law worked there, sort of.

Re:I don't know how to feel about this...

[GlassHeart]

Sure, it fits that definition, but Microsoft is lowering its price to that of a competitor who is also selling below cost.

There's a very big difference. Microsoft is a monopoly in the OS market as determined by a US court, and possibly would be in office suite market as well. This means there are actions that are legal for other companies that are illegal for them.

In particular, lowering prices below cost is easily used to destroy smaller competitors, because it's essentially a cash burning exercise. The problem is, after the competitor is destroyed, prices will rise back far beyond previous levels to recoup the "investment". The consumers will only get cheaper products for a limited time, and no competition among vendors in the long run. This is a Bad Thing for the consumers, which is why there are laws against competing this way.

Try to understand that the law is not primarily intended to protect the smaller competitor, but to protect the consumer.

Re:that's great

[Walter Wart]

I'm afraid it's a little short-sighted. To understand this one has to think a little, not just fall back to a reflexive non-thinking response like "Government, taxes, bad, yuck."
<OL>
<LI>The initial one may be free. The upgrade certainly won't be.
<LI>If the TCO of a Linux server is less than that of a Microsoft one the free disk is a false economy.
<LI>If there are no alternatives Microsoft can apply monopoly pricing at some future date. This will raise the price at the next go-around. The only reason they are offering a more reasonable price is that there are credible threats.
<LI>Your taxes are not the only place you spend money. If governments go to Linux/Open Source/Free Software alternatives to Windows/Office/etc will be more readily available in general. The price you pay for your open source software will be lower. And even if you go with MS it will have to lower its prices to compete with its OS competitors.

Re:But ...

[Catbeller]

"MS clearly does not have a monopoly "

It does in the U.S. That Finding of Fact is permanent, legal, and binding. Their is no room for opinion: they are a monopoly. They must play by monopolist rules, which means they can't use the the market power and the wealth generated by that monopoly to dominate new markets.

The reason we do it that way is to prevent a total takeover, horizontally and vertially, of all markets by a small number of supercorporations, or even just ONE corporation.

If such laws were not passed early in the 20th century, Standard Oil would probably own all of the major businesses in the U.S. today.

Antitrust varies from country to country, and frankly we don't really bother to enforce ours, during this admin. So other countries by default have stronger laws.

Re:that's great

[GreyyGuy]

Sure... you get it free this year. Then when you have everything installed and all the people trained, do you expect them to be as generous the next time?

The OS and Office are their only cash sources. They can't afford to give them away forever.

The first one is always free.

Re:Not dumping competing

[jpetts]

All they are doing is matching the price of the software they are competing against, how is that dumping exactly ?

Correct me if I'm wrong, but isn't dumping in this case related to how much it costs Microsoft?

The cost of the competing software is immaterial. If M$ are giving it away for free, that is dumping, no matter what, unless the cost to them of each unit is literally zero dollars, shekels, Flanian Pobble Beads, Triganic Pughs, or whatever...

Re:And the dripping irony is

[Keith Russell]

(sigh) Once again, somebody fails to recognize the segregation of editorial and advertising content. No biggie. It's just one of the fundamental principles of publishing. Hypothetical analogy follows:

Every issue, Car & Driver takes a moment to remind everybody that the Pontiac Aztek is the Ugliest Car On The Planet. Yet Pontiac doesn't seem to have a problem with buying a 4-page spread promoting the new Grand Prix.

Now, let's say General Motors has a hissy fit and withdraws their advertising from the magazine. The obvious message is "You won't get our advertising dollars..." with a thinly veiled "...unless you start writing good reviews of Pontiacs" in the fine print. Car & Driver is left with two choices. Either capitulate, praise the Aztek as the pinnacle of American design, and ruin their credibility for some filthy lucre; or tell GM "Bugger off. Chrysler wants that spread for a Pacifica ad." Either way, GM is screwed, because they're either denying themselves marketing opportunities in a key demographic, or they'll have to start paying for good reviews.

OK, now let's turn the scenario around. Say C&D refuses GM advertising because their cars suck. Who in the industry is going to try to buy space in C&D now? What's the point, if the ads can be refused on a whim? Now, C&D is screwed. Their ad space will become so devalued, the magazine will probably have to shut down, unless they can get by on ads for "magic" oil additives and gadgets that create turbulent air flow in manifolds designed for laminar flow.

Either way, somebody gets screwed. The only way to keep both parties happy is to keep editorial and advertising away from each other. Pontiac can still promote the Grand Prix, and C&D can still ridicule the Aztek, and neither interferes with the others' privilege to do so.

This is one of the few things Slashdot gets right. Microsoft gets the eyeballs of a large, diverse congregation of geeks, the Anyone But Microsoft crowd gets one more reason to add their two cents, and Michael gets to keep his job. See? Everybody's happy!