Think Tank: Unbundle Windows from PCs

Globalisation Institute made its recommendation, essentially the unbundling of Windows from PCs, a week after a European appeals court delivered Microsoft a stunning defeat. The think tank released its two-page report earlier today.

The appeals court ruling gives Neelie Kroes, European Union's competition commissioner, more oomph for taking on—or perhaps trying to take out—Microsoft. Bundling is a key area of precedent and empowerment. Globalisation Institute wants Kroes to go much further than pulling pieces of technology out of Windows. The think tank claims that the effective way for Kroes to achieve her goals of "'a significant drop in market share' for Microsoft Windows" is to "insist that operating systems are purchased separately from desktop and laptop computers."

"This, we believe, would have a significant effect on the market share of Windows, providing the competitive marketplace that Ms. Kroes has called for. Price conscious consumers, including many students, would opt for cheaper operating systems."

I disagree with Globalisation Institute's recommendation. But I must admit that a single market, Europe, as a test case would be most revealing.

Quick list:

• Current macroeconomics don't support Windows unbundling.
• Competing products aren't good enough.
• While prohibitive, Windows OEM licensing terms aren't exclusive.
• Microsoft has shifted major bundling and vertical integration to its Business division applications.
• Businesses are the major consumers of PCs, and they typically choose operating systems based on applications.
• The more effective unbundling should take place with server products.

Windows Economics
Like it or not, there is a huge—what Microsoft calls—ecosystem built up around Windows. Microsoft's operating system supports hundreds of thousands of component manufacturers, dealers, OEMs, retailers, system integrators and software developers. Any meaningful change must be organic, creating new business opportunities for these incumbents or new entrants coming into the market place. Web 2.0 is an example of that change, as computing relevance—and some of this vast ecosystem—shifts to the Internet.

Windows XP is the best example of how the ecosystem works and how resistant it is to change. Microsoft's Windows Vista problems have many causes. One cause often overlooked: Windows XP's length of time in the market place. The operating system's maturity benefited the vast Windows ecosystem, creating stability and certainty about applications (commercial and custom), components and hardware drivers. Compatibility defined Windows XP in 2006. By comparison, Vista isn't as compatible, in part because of architectural changes and also because of the stable economy built around Windows XP.

What Competition?
If the stable Windows XP economy works against Vista, how can another operating system do near as well or even better? Apologies to Linux lovers, but the operating system isn't yet ready to take on Windows. Nearly two weeks ago, technology columnist Walt Mossberg said, after testing Ubuntu preinstalled on a Dell laptop, that "Linux is still too rough around the edges for the vast majority of computer users." He's right.

Mac OS X is a worthy competitor to Windows Vista, but Apple doesn't ship the operating system for just any PC. Additionally, Globalisation Institute discounts Mac OS X for other reasons: "We consider the Mac to be a premium, niche product, like a Bang and Olufsen television, which is difficult to justify in the business world outside of the publishing sector." I don't agree, but this is a response to the think tank's position.

OEM Licensing
If there is any party requiring Windows relief, it's PC manufacturers. Microsoft savaged its OEM partners over the years. While bad form to maul your customers, it took two U.S. antitrust lawsuits for Microsoft to take its claws out of OEMs. Some background is required to explain current OEM licensing.

In the early 1990s, the U.S. Justice Department brought a lawsuit against Microsoft for operating system bundling. Microsoft required OEMs to pay for a DOS/Windows license for all PCs, even those shipping with competing software like OS/2 or PC DOS. The situation meant that some buyers would pay more for a PC shipping with, say, DR-DOS than MS-DOS/Windows 3.1. The OEM paid for the Microsoft software, even if the PC only shipped with a competing operating system.

The Justice Department and Microsoft settled the case in 1994, but the overseeing judge refused to approve the deal, claiming that it wasn't in consumers' best interest. He was later removed, and in 1995 his successor, U.S. District Judge Thomas Penfield Jackson, approved the settlement, which removed the exclusionary provisions.

In 1998, the Justice Department brought against Microsoft another antitrust action that Jackson oversaw. The trial revealed that some of Microsoft's most egregious, anti-competitive acts were against OEM partners rather than competitor Netscape. Microsoft's November 2001 settlement (approved a year later) stipulated that a uniform license would apply to all OEMs. While seemingly a fairer approach, OEMs lost certain negotiating rights for new licensing contracts. Microsoft can still offer incentives, based on sales volume and other factors, that effectively make Windows the majority or only operating system offered by some OEMs.

Rather than a forced unbundling, new licensing contracts could give OEMs equal terms regardless of installed operating system— or even no operating system.

Who's Minding the Office?
Last week's appeals court ruling gives the European Competition Commission more authority to regulate Windows. Globalisation Institute would like Kroes to use that authority. Problem: Microsoft has shifted the most significant bundling—and related desktop-to-server integration—to Office, which is free and clear of the ruling.

Additionally, the major consumers of software are businesses. In my experience, most IT organizations make operating system decisions primarily based on applications. Based on various analyst surveys, more than 90 percent of businesses use Office for Windows. Unbundling Office from Windows—meaning availability on rival software like Linux—would be a more effective mechanism for creating more operating system choice. The March 2004 EU antitrust ruling and last week's appellate court ruling don't give the European Commission authority to unbundle Office.

Target: Server
Where the European Commission has some authority that could open up competition: server software. Microsoft's big bundling effort is the aforementioned vertical integration from desktop applications to server software. By compelling Microsoft to better document server communications and other protocols, the EU could effectively unbundle some of the desktop applications and server software technologies.

Incidentally, there is operating system competition on the server, which could eventually create more options on the desktop.

The question: Should the European Commission regulate Microsoft? Unlike Globalisation Institute, I'm not convinced. Microsoft shouldn't be allowed to maul its customers, such as OEMs. Government should asset there, methinks, if the market cannot. What is the objective. If Kroes would like to turn the European technology economy into a series of English hedgerows, strict regulation of companies like Microsoft is a good way to go about it. But is choice behind walled gardens no choice at all?

Related Posts:

• What Microsoft's EU Ruling Means to You, Microsoft Watch, Sept. 19, 2007
• EU Ruling: A Reporter's Notebook, Microsoft Watch, Sept. 18, 2007
• The European Drama Unfolds, Microsoft Watch, Sept. 17, 2007
• Microsoft Employees React to EU Appeals Decision, Microsoft Watch, Sept. 17, 2007
• Microsoft's Stunning Court Defeat, Microsoft Watch, Sept. 17, 2007
• Microsoft's Antitrust Cases Stand in Judgment, Microsoft Watch, Sept. 10, 2007
• Did Microsoft's Consent Decree Benefit You?, Microsoft Watch, Aug. 31, 2007
• Search This, Google!, Microsoft Watch, June 26, 2007
• Microsoft Will Modify Vista Search, Microsoft Watch, June 20, 2007
• And There Was One, Microsoft Watch, March 8, 2007
• Microsoft Competitors' 'Wow' Moment, Microsoft Watch, Jan. 26, 2007

• Microsoft Resubmits Technical Documents to the EU, Microsoft Watch, Nov. 23, 2006
• Microsoft's Antitrust Control Problem, Microsoft Watch, Nov. 22, 2006
• Who You Gonna Call? Trustbusters!, Nov. 17, 2006
• Interoperability: Is Microsoft All Talk?, Microsoft Watch, Nov. 15, 2006