In a damning report on Microsoft pricing, the Consumer Federation of America has concluded that Microsoft has a monopoly, is abusing it, and should be fined a minimum of $10 billion. The Federation says that the monopoly is "literally a license to print money that comes directly out of the consumer's pocketbook." Which is a curious way to put it, when you think about it - any whirring noises from your pocket? But the report, (Full Report) The Consumer Cost of the Microsoft Monopoly: $10 billion of Overcharges and Counting, is one of the most detailed studies yet of Microsoft pricing, how it relates to Microsoft financial performance, and how it affects the industry as a whole. It uses independently derived figures along with data that has come into the public domain via the antitrust trial, and backs its case with copious quotes from many of our favourite Microsoft executives. OEM VP Joachim Kempin plays what is arguably a starring role. The report's minimum fine recommendation is derived from its studies of what Microsoft pricing has been, and what it thinks it should have been, the difference so far being in the vicinity of $10 billion. It also predicts that if no action is taken overcharges during the next two years will total $15 billion, so says "it is critical to quickly obtain a final result that stops the abuse of monopoly power." That is, a remedy that forces Microsoft prices down and keeps them there needs to be found. One of the report's key conclusions, supported by Kempin's Desktop Operating System Strategy memo to Bill Gates in December 1997 (Microsoft's plan to levy annual rental fee for Windows), is that Microsoft's insistence on keeping the cost of the OS above $100 has severely hampered the development and sale of low-cost PCs. The Federation reckons that without this, 50 per cent of the US homes that don't have PCs would now have them. It (or alternatively, our old friend Joachim) concludes that this strategy puts Microsoft at fundamental odds with the low-cost PC business. In Kempin's words: "Expand the high-end market [by giving OEMs] air cover by promoting high-end PCs purchases by providing more future technology direction" while on the other hand "Prevent low-end systems from expanding market share [by resisting] < 1k PC royalty prices firmly." And in the report's: "The evidence is overwhelming that Microsoft overprices its products and is engaged in the vigorous defence of those excessive prices. In order to defend its monopoly profits, Microsoft has launched a campaign against the low cost PC." But the Federation also points out that the amount of cash Microsoft has built up would make the fine more or less chump change, and that the company's reserves allow it to "pay huge premiums to purchase companies as strategic investments to defend its market power in the operating system." Which of course suggests that some form of remedy is necessary to deal with this as well. "The irony is that the monopoly has been so potent that even if Microsoft were force to pay this sum as a fine, it could write a check from cash on hand and still have more cash, relative to its ongoing operations than most companies keep. At the end of the third quarter of 1998, Microsoft had $17 billion in cash. It had added $7 billion in 1998," says the report. Also using Kempin as the source, the report points out that Microsoft doesn't expect major revenue increases from expanding the market (which would occur with the rise of the low-end PC), but via software upgrades "Microsoft expects 80 million consumers will be forced to buy new computers to support its operating systems," and via the shortening of PC lifespans in general. The report reckons that average Microsoft revenue per PC for preinstalled software rose from $25 to $62 from 1990 to 1996. Price increases, despite Microsoft denials, it puts at from 4.1 per cent to 7.9 per cent annually from 1990 to 1998, using its own, Microsoft (Joachim again) and PC Data numbers. Compared to this it quotes Microsoft memos as putting CPU prices decreasing 10-15 per cent over 1996-98, and software costs in general being in steady decline (-2.8 per cent per annum from 96, according to PC Data). This has resulted, the report says, in spectacular profits: "The other companies in the industry earned just about the national average return on equity in 1996, 1997 and 1998. Thus, the overall computer industry is a good barometer for estimating competitive returns. Microsoft's return on equity is much higher than the other comparison groups of companies. It has a ROE of above 30 percent in the past three years. The return on equity is approximately twice as high as the industry as a whole. "Microsoft's profit margins are extraordinarily high. In 1996 Microsoft had a profit margin of just under 26 percent. The margin was over five times higher than the software and services sector and the hardware sector. The advantage over the other groups was even greater. While the profit margins of the other companies were stable in 1997 and 1998, Microsoft's profit margin rose to 30 percent in 1997 and reached 37 percent through the first three-quarters of 1998. Its margin is three times that of the other firms in the software/internet business. It is eight times that which the hardware sector earns." Over to you, Mr Gates... ® Complete Register trial coverage