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Bill Gates: Friend or foe?
Ila Patnaik
Business Standard, November 20, 2002

We should tap the free software available rather than go all out to woo Microsoft

The media hype surrounding Bill Gates visit to India was hardly over that new revelations about Microsoft’s profitability have come to light. Disclosures made to the Securities & Exchange Commission, (Financial Times, 17 November) show that the two cash cows of Microsoft i.e. Windows and MS Office gave a profit margin of 85 per cent. In every other business that Microsoft operates in, the company is making losses!

This comes as no surprise because the company has not just been accused of making monopoly profits, but in a court ruling in April 2000, found guilty of illegally maintaining its monopoly in PC operating systems.

The trial highlighted Microsoft’s use of simple bullying in the marketplace. For example, Microsoft appears to have threatened Compaq that unless Compaq discontinued installing Netscape on PCs, Microsoft would stop selling ‘Windows’ to Compaq.

Microsoft was caught with poor ethics in the trial, including tampering with a videotape which was offered by them as evidence.

A think tank known as ‘Consumer Federation of America’ has calculated how Microsoft overcharged consumers with monopoly pricing, its monopoly position a result of high consumer switching costs, compatibility problems confronting competitors, and the large installed base of Windows users.

Their analysis suggested that before Microsoft secured its monopoly in the operating system market in the 1980s, prices were falling by 8 per cent a year. After it secured its monopoly, it reversed the trend and raised prices by 13 per cent a year.

The hype surrounding Bill Gates visit appeared oblivious of this backdrop. The whole of last week, the media was agog with the experience of seeing and shaking hands with Bill Gates.

Economic Times was breathless. The front page was dominated by reports of a dinner with Mr Gates. A Business Standard editorial (15 November) said “It is good to have such a powerful friend and ally”.

But is Bill Gates a friend or a foe? Are consumers and the government in India being set up to pay monopoly prices?

Software is peculiar because the cost of replicating software is roughly zero. A monopoly in an area like steel would leave consumers with little choice as there would be no other place to buy steel.

In contrast, software satisfies the characteristics of a public good: It is ‘non-rival’ and ‘non-excludable’. My usage of a software programme does not diminish the amount of this programme that you can consume. It is artificially made excludable by copyright laws.

The public good characteristic of software has made it possible for universities, individuals and companies to collaborate on making extremely sophisticated software, that is available at zero marginal cost to users. Free software makes a big difference to the economics of computers.

Today, basic PC hardware is available for Rs 15,000, and the overhead imposed by Microsoft is Rs 10,000. By using free software, the cost of a PC comes down from Rs 25,000 to Rs 15,000. Free software has another advantage that engineers in India can read it and modify it at will.

This is a very important difference in a poor country like India. Many millions of households, schools and companies would afford computers and come into the IT age owing to this price difference.

At the level of the government the expenditure saving can be huge. For every million PCs purchased that avoid a price of Rs 10,000 for Microsoft software, the country saves Rs 1,000 crore.

Governments, the world over, have been keen to avoid Microsoft, for other reasons such as not having their core systems dominated by an American monopoly. Governments are highly security conscious, and Microsoft software has been notoriously afflicted by viruses and breakdowns.

Equally important is the impact on the local IT industry. By using free software, governments help foster the growth of domestic skills and the domestic software industry.

The Chinese government, for instance, is trying to adopt Linux as its operating system of choice. It is promoting Linux over Windows or any other commercially available operating system to its population.

There were a number of reasons for this. Before joining the WTO, China had to show that it was doing something to stop its massive software piracy problem. With free software, piracy is a non-issue.

The Chinese government is also uncomfortable with one company dominating its software market. They felt that prices for Microsoft software are too high for many Chinese citizens, and they view Microsoft as a bully. China prefers to develop a software market dominated by Chinese developers.

The German government has signed a deal in June that makes it easier for government offices to use free software. The government said that with this contract, Germany met three key targets — raised the level of IT security, lowered the dependency on single software vendors and is saving money.

In this context, it is puzzling to see governments like Karnataka signing up for Microsoft’s technologies, in contrast with Madhya Pradesh that has decided to use Linux.

The ‘free’ pilots which are being offered here are generally attempts at ensuring that proprietary tools and technologies figure prominently in the future purchase programme of the government.

Apart from questions of price, security and control, governments should see that decades of a monopoly position has stunted innovation at Microsoft. As the editorial in The Economist (November 9) says, “What is striking is how little innovation there has been in the bits of the market that Microsoft dominates, and how much where it has little influence.”

This makes perfect sense, of course. If you are milking a monopoly, why do you need to innovate? Any company which has a monopoly for years develops a corporate culture aimed at defending existing products. It avoids subversive ideas which could hurt existing profit streams. Hence, we suffer year after year with Microsoft software that crashes and gets infected.

In India, the government could aggressively utilise free software, which would play to our strengths in the IT industry. Our software industry has so far been doing simple applications work. Working with free software gives our industry the opportunity of jumping to the next level of complexity. It would give domestic competence and control over the heart of our computers.

Karnataka has a vibrant software community in Bangalore, which would be the biggest beneficiary of such a transformation.

Undoubtedly, Mr Gates is a clever businessman, and it would be useful to interpret his visit to India as being primarily about Microsoft’s bottom line.

The education initiatives are about capturing customers in the future, and the media campaign was designed to make Microsoft acceptable to the government. It is hard to see how much ‘friendship’ is there in these elementary profit-maximising activities.


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