Microsoft is not overcharging for Windows.

In fact they are. Microsoft has a market capitalization greater than any other company in the country by far (over $500 billion as compared to number 2, GE's $348 billion as of July,1999), yet its revenues pale in comparison to other companies. For the 3Q '99, Microsoft had revenues of $5.38 billion as compared to IBM's $21.1 billion. How is that possible? Because Microsoft's profit margins are outrageous. On $5.38 billion of revenue, Microsoft had a net income of $2.19 billion (41% !!!!!). IBM, on the other hand, had a net income of only $1.8 billion on revenues of $21.1 billion (8.5%). How can Microsoft obtain such high profit margins? Through a lack of competition of course. Microsoft operates in a PC industry where profits on hardware are anemic due to rampant competition (they all didn't just get together and agree to sell a $500 PC), yet Microsoft's software produces ethereal margins.

Most people argue this case by comparing the cost of Windows to the "alternatives" out there. However, Microsoft has the distinct advantage of volume, enabled by the existence of their monopoly. To compare the price of a monopolist's product to that of a competitor that is simply trying to recoup its financial outlay is ludicrous.

For instance, many people mention the BeOS. Be Inc. reported net revenues of $775,000 for 3Q '99, a rise of 243%(!!!) from the same period in 1998. Sounds good so far. Yet these revenues resulted in a net loss of $4.5 million. Whereas the net loss for the same period in 1998 was only $2.4 million. For some reason this does not sound like a viable competitor to Windows to me.

The argument then follows, "Well, if Microsoft charges less for Windows, then they will just be accused of undercutting the competition and dumping code". Wrong again. As mentioned in many a post, a large majority of consumers have no idea how much they are paying for Windows, because they are purchasing a new PC on which Windows is preinstalled. I have yet to go out and purchase either a full install or upgrade of Windows from a retail outlet. This is attributable to Microsoft's stranglehold on OEMs. Open up the OEM market to Windows competitors and companies like Be may stand a chance.

Others will point out that a large percentage of Microsoft's revenues are attributable to Microsoft Office and not Windows. This is true, but the same argument applies. It can be easily argued that Microsoft also holds a market monopoly on office suite software. Proving a legal monopoly would be much more difficult. However, the absence of a legally defined monopoly in office suite software does not negate Microsoft's market power in this segment. Microsoft knows this and consequently charges higher prices than the office suite alternatives. Why does Microsoft charge higher prices for Office? As referenced in the Findings of Fact, consider Microsoft executive James Allchin's comments when discussing the abilities of Internet Explorer to overcome Netscape Navigator in 1996 as he says,

"Maybe being free helps us, but once people are used to a product it is hard to change them. Consider Office. We are more expensive today and we're still winning."

In other words, why are they charging more? Because they can.

Whereas Microsoft could have charged $49 for a Windows upgrade and still remained profitable, they chose to charge the "revenue-maximizing" price of $89. People will argue that Microsoft should be allowed to charge whatever they like for Windows. However, a company's only revenue fear should not be consumer rebellion due to high pricing. It should be market competition. I can guarantee that $500 is not the revenue-maximizing price for a PC these days. Who gets overcharged? The consumer. Now, it's not so hard to see how Microsoft achieved such a lofty market capitalization.