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Microsoft Accused of "Predatory Pricing" on Security

Tags Legal SystemMonopoly and CompetitionPrices

07/08/2006

This week's eWeek features an article Microsoft Security Pricing: Predatory or Correctional?.

The problem, it seems, is that MS has priced its security products "way below fair market value", according to Alex Eckelberry, president of a competing security software company. McEckelberry is quoted as accusing MS of "endangering the entire security ecosystem with ruthless, Standard Oil-style pricing" — 30% to 50% lower than other competing offers. Eckelberry and another CEO in the security space suggest that regulatory authorities should investigate MS's pricing.Is MS really engaging in "predatory pricing"?

The theory of predatory pricing is that a firm will sell at a loss in order to drive out competitors and then raise its prices and earn a monopoly premium. It appears that the accusation of selling below cost is not being made here, only that MS is selling for less than what its competitors sell for.

But what would it mean to say that MS is selling their software "below cost"? Software has the characteristic that the up-front development costs are more or les independent of the volume of products that will be sold. Most of the cost is in the coding and testing of the software. The cost of distributing the software, especially over the internet, is quite small. The average cost of production (per unit) will fall as the number of units sold increases, while the marginal cost of production is near zero. If MS believes that it can ship a large number of units, due to their large installed base and the relative lower cost of marketing to their own customers, then they may be offering a lower price in order to maximize revenue.

It is even more unlikely that MS is "predatory" in the sense that they plan to drive out their competition so they can raise prices. The software space is one of the most competitive and innovative of all industrial sectors. The idea that a single profitable firm could maintain a sole position without competitors for very long is dubious. Even if some existing security competitors lost market share to MS, the company could compete on short notice with MS were they to raise prices.

It becomes clear that what they mean by "predatory" pricing is lower pricing:

David Moll, CEO of privately held anti-spyware vendor Webroot Software, threw his weight behind Eckelberry's concerns, arguing that Microsoft's pricing policy is "consistently out of line with the rest of the industry."

Is MS obligated not to offer the consumer a better deal, only because their competitors are not?

This leads to the question of how is the boundary of the product defined. While some disagreement exists among computer software practitioners about what constitutes the operating system and what is an add-on, it has been the history of operating systems in general, and Windows in particular, to gradually expand the range of services that are bundled into the core of the operating system itself. Graphical user interfaces, networking, the handling of various external devices, the handling of various types of audio and visual media, and wireless communication are all examples of features that, while now considered standard in most operating systems, originated as add-ons. The increasing security baseline of Windows itself constitutes a form of "bundling" in that functions which were formerly provided by add-ons are increasingly part of the off-the-shelf version of the operating system.

The result is, for the general buyer, when they buy an operating system, they are getting an increasingly feature-rich bundle of services that have all been engineered to work together. While the sophisticated user may enjoy picking out the best third-party solutions and assembling them, the average user would prefer to buy a bundle of things that "just works" out of the box. Where MS is deficient, such as in the area of desktop search, many competing alternatives exist, and will continue to exist as long as MS Windows does a poor job of offering that service.

Security publications consistently report that the average computer user is woefully ignorant about computer security and does not take even minimal precautions to secure their computer against threats. The best solution for the unsophisticated consumer would be for MS to make their products more secure out of the box, eliminating the need for third-party security add-ons.

A significant fraction of the security software market exists only because of design flaws in the Windows operating systems. The third-party security add-on market has grown up as an attempt to address these flaws because MS has, until the last two years, not been willing or able to make their own products more secure. There is starting to be some evidence that MS has finally gotten more serious security. Windows XP with the addition of service pack 2, has made some progress in this area, and there are some reports that next version of their operating system, "Vista", which may ship some time in the next five years, will offer additional improvements.

What should the additional price of security software be for a operating system that was engineered to be secure? Zero would the right answer. It is not clear, nor do the CEOs quoted in the article say, why is it a benefit to the consumer to have multiple security companies competing to sell add-ons that solve a problem that could be eliminated from the operating system itself.

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Contact Robert Blumen

Robert Blumen is a software engineer and podcast editor. Send him email.