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Witness argues Windows would cost $2000 if Microsoft really ruled the world. Start worrying...

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Microsoft would be charging $900, even $2000, for a copy of Windows if it really did have a monopoly, claimed company witness Richard Schmalensee yesterday. Instead, he said, it charges around $50 a pop to OEMs, QED it isn't a monopoly. But Judge Thomas Penfield Jackson expressed scepticism: "Why must you always assume that a monopolist maximises the price?" he said. "It seems you can think of reasons why a monopolist would not maximise the price in quest of some larger glory at a later date." Judge Jackson may well be musing on the collected works of Microsoft OEM chief Joachim Kempin, whose internal documentation has produced a pretty clear picture of the kind of lock Microsoft has on OEMs, and how it maintains it. According to Kempin Microsoft is concerned first about keeping the price of Windows up despite falling PC prices, and despite rising PC sales -- that means that Microsoft's percentage take of each system has been rising, while system sales themselves have been rising too, thus helping increase absolute revenue. Other Kempin concerns have been keeping the upgrade mill churning, so Microsoft gets new sales to the same customers every couple of years, and slowly but determinedly moving towards a rental model. Note that the proposed Win2K registration routine we covered here yesterday (MS cunning plan makes people register) is a step in that direction. If you can't use the product without Microsoft knowing who you are and where you are, then Microsoft winds up knowing this about everybody, and another mechanism to support the rental model clicks into place. The answer to Schmalensee's point about Windows not costing $2000 is of course that pricing at this level could not be sustained in the PC market as we currently know it. System prices of $500-$1000 are becoming commonplace, so Microsoft's take on these is 5-10 per cent. It might be just about sustainable for the company to charge ten per cent or thereabouts, depending on the price of the machine, but anywhere beyond that would kill the market -- an entry level PC cost of $2500 would be impossible, while $4000 for the class of hardware that currently cost $2000 wouldn't be entirely helpful either. The effects, if Microsoft actually tried this, are fairly easy to predict. As Kempin explains, if pricing is too high it will trigger a revolt by OEMs. The trick for Microsoft is to keep prices as high as it can, but below the level where it starts to make obvious commercial sense to OEMs to develop alternatives. Another obvious effect would be, considering that system costs would have been knocked back to what they were in real terms at the beginning of the 80s, hackers would once again start knocking together cheap machines and operating systems. One of these (we might mention the L-word here) might turn into the new Microsoft. You can see how this almost becomes an argument as to why Microsoft isn't a monopoly, but it is of course a faulty one. Microsoft could destroy its monopoly if it pushed to hard on pricing, and actually it may well already be doing this -- Kempin understands that this is a possibility. But that doesn't mean it isn't a monopoly. ® Complete Register trial coverage

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