The Micro$oft Monitor

This issue of the Micro$oft Monitor features an in-depth analysis by Nathan Newman of Microsoft's strategy for monopolizing the U.S. higher education market. As Nathan explains, if Microsoft succeeds in capturing the campus software market, it could effectively turn our state university systems into private workforce training programs. To help students mobilize against Microsoft's campus software deals, NetAction intern Mitch Stoltz has created a Campus Action Tool Kit, with samples of letters and petitions, a flyer which can be printed for campus distribution, and tips for campus organizing. You will find the Tool Kit at: http://www.netaction.org/. Write to Mitch at: mitch@netaction.org.

Microsoft Goes to College: The Education Software Market and Microsoft's Expanding Monopoly

Early last month, the state of Texas agreed to pay Microsoft $6.3 million to distribute a full Microsoft Office software package to every University of Texas student at the subsidized price of $5 per student. Few students are likely to pay the full price for any competitor's package. De facto, the Texas state government has just handed Microsoft a monopoly over software in the state's university system.

This follows a deal last Spring by the Indiana University system for a similar Microsoft-only deal for their students, a broad Microsoft-only deal agreed to this summer for most of Pennsylvania's state government, the failed attempt last year by the California State University system to adopt a Microsoft-only software deal, and numerous campus-by-campus deals where state government has given Microsoft mini-monopolies.

Which is odd given the fact that state governments recently sued Microsoft for antitrust violations. And even odder given the fact that Microsoft has publicly deplored government interference in consumer decisions, yet here it is making deal after deal to have governments interfere with student decisions over technology choices.

Of course, some of the states giving these monopolies to Microsoft are different from those suing Microsoft and it is different parts of government -- namely education officials -- who have granted the software monopolies versus those parts of government -- namely Attorneys General -- who are investigating the company.

Which all highlights how confusing and misleading it is to talk about "government interference" in the singular when government is enmeshed every day in "interference" in software decisions in multiple ways, both on behalf of Microsoft and in investigating its abuses.

Nowhere is the issue of "markets" versus "government" more confusing (and potentially more important) in the software arena than in education. Here is where government intervenes in all sorts of ways, where the prices of software careen wildly from retail levels, and where companies battle today to control the minds of the workforce of tomorrow.

And the danger is that Microsoft is using strategic monopolistic pricing in the education market, with the government's assistance, to turn our state university systems into private workforce training programs for Microsoft.

Education and Monopolies

The state of Indiana is paying Microsoft a flat fee of $6 million to give all of its 100,000 students, staff and faculty free copies of Microsoft Office and a package of other Microsoft software for the next four years. Texas will be paying $6.3 million this year for its deal. This $12 million will be paid to Microsoft from pooled student fees and other general university funds.

The question is: why are general school funds being used to subsidize the choice of one piece of software instead of leaving the choice up to each individual student? Lots of companies offer educational discounts for students, but these deals are using students' own educational fees to force the choice. So why force one software choice on students?

The answer, interestingly enough from Microsoft, is that software choices should not be left up to the marketplace and are better made collectively by government fiat. Instead of targeting individual students with discounts, Microsoft has declared that cost savings will come from, "Colleges and universities grappling with the issue of software standardization," in the recent words of Rebecca Needham, Microsoft's Education marketing manager. So the best solution is "working out custom agreements with institutions, like the University of Texas system."

Ironically, Microsoft is just echoing in marketing terms what many Microsoft critics have argued: the drive to technology standardization, what are often called "network effects," puts pressure on companies and institutions to reinforce Microsoft's monopoly and restrict consumer choice.

However, if Microsoft is going to argue that software is a natural monopoly, the company should not be surprised if others notice this fact and question if a private, unregulated monopoly should control technology choices. And they should especially not be surprised if critics question the methods Microsoft has used to become that monopoly.

The question of methods is especially acute in the area of education, since the choices made there will radiate outward to the rest of the economy. Technology innovation on campus has been a wellspring of high technology economic entrepreneurship; if that campus innovation is exclusively done in a Microsoft environment, off-campus entrepreneurship will likely follow suit. And if all students in a state are trained for four or more years solely on Microsoft products, few private companies will opt for the costs of training workers in use of a Microsoft competitor when the graduating students come pre-trained in using Microsoft software.

Campus Software pricing and Monopolistic Practices

Given the broad economic advantages of campus software monopolies, one would not be surprised to find companies selling at a loss on campus in anticipation of locking in profits in sales when graduating students enter the workforce. With hardware, there is a natural limit to such discounts compared to regular retail sales given the raw marginal costs of making each item. However, in the case of software, the marginal cost of each new sale is nearly zero, so the room for price manipulation in support of monopoly marketing practices is almost infinite.

In the case of Microsoft, that manipulation of campus pricing looks rather suspiciously like traditional monopolistic "dumping" in order to expand its market share in the broader economy. In line with its Indiana and Texas deals, Microsoft has announced licensing deals with large institutions that promise packages of software normally retailing for hundreds of dollars for as little as $13 per student.

Microsoft frames these discounts in terms of a "commitment to education," but it stretches credibility for the company to argue that discounts of 90%-95% are merely civic-mindedness and not part of its broader marketing strategy of locking in its software monopoly. And if one looks at Microsoft's official "charitable" donations to education, the suspicion that Microsoft is dressing economic dumping in the guise of generosity just grows. While Microsoft, a company worth over $100 billion, managed to give only a miserly $2.4 million to universities in cash between 1995 and 1997, it dropped Microsoft software worth over $50.6 million (but costing Microsoft nothing, of course) on various colleges and universities in the same period.

If a company fails to demonstrate serious charity that is not directly connected to its core business, one can fairly suspect that "charitable" donations such as Microsoft's software gifts are more about marketing and illegal economic dumping than about civicness. Add in monopoly deals like the Indiana and Texas university systems and you have a pattern of aggressive product dumping that merits full investigation by all legal authorities.

The Consequences of Monopoly

The unfortunate fact is that university officials, desperately short of funds, are falling for Microsoft's monopoly strategy. Unfortunately, not just for the dangerous economic and technological monopoly it may reinforce in the rest of society, but for students in the future.

The danger of monopoly is that once economic dumping leads to dominance in a sector, the company is then free to raise prices. This is especially true in an area like software where network effects reinforce standardization around the monopoly. In corporate settings, Microsoft has increasingly raised prices in software areas where it has achieved dominance. A recent report by the Gartner Group, a Stamford CT-based consulting organization, noted that last year after Microsoft achieved 90 percent of the Office suite market, it changed all its corporate licensing rules for Office software in ways that tripled the cost of software for many companies. Similarly, it recently changed licensing rules for its BackOffice products in ways that have radically increased costs.

The Gartner Group highlighted how Microsoft uses such practices to undercut its competition by luring in customers with low-cost licenses that are later changed so that users end up paying a total fee equivalent to what competition charges up front. "Don't assume what you see on the surface and project for future costs is going to be your actual cost," warned Mary Welch, Gartner Group analyst, in a recent CNET News.Com article.

What this means is that once Microsoft achieves full dominance in the education market and knocks out any competition, the sweet deals being offered to universities will likely disappear and students will see prices jacked up exponentially. And with training and software all standardized around Microsoft, campuses will likely find it too expensive to switch back to a more diversified computing environment.

In exchange for what may be extremely short-term savings, universities may be trading off higher expenses in the future and a much narrower range of technology choices for both students and the broader society.