redmond consulting services 12 october, 2002 by johnmichael patrick monty monteith

Monty’s hypothesis of the month revolves around Microsoft pricing. Nothing Earth-shattering here, I am afraid, but I will nonetheless waste your time with my silly thoughts: One of the primary reasons we all love to hate Microsoft is very similar to the reason we love to hate consultants. Both have profit levels built into their pricing that is nothing short of ridiculous.

I am going to guess, just based on my non-scientific shopping over the years that candy bars have tripled in price during the past two decades. I remember them costing around a quarter when I first starting programming video games on a Commodore 64, and now they run around three times that at the local convenience store. That is a pretty significant price-hike. Yet, no one appears to be writing letters of complaint to the Hershey board. Why?

Simple economics. We know that each candy bar costs Hershey a certain amount to make, and that they charge the distribution companies a certain percentage above that. This profit percentage is what they need to continue to grow their business. If Hershey’s sells less candy bars one month, they cut back production – but the price generally will not change unless the cost of making the item changes.

Yes, I would flunk some basic economics course based on this logic, but I think you get my point. We rarely complain about the price of something whose pricing model makes sense. The new Ford Thunderbird costs Ford “X” dollars to make, and they charge “1.3X” to the dealers, who then charge “1.6X” to the customer. We do not complain that we are paying 60% more for the vehicle than it cost to make, because we know that each company is only profiting a certain percentage from the sale.

Those specialized consultants that visit businesses to look around and give a ten-page report at the end of their visit do not follow this awful lesson in economics. They charge whatever they can get away with, which often is hundreds of dollars per hour. What do we get for this hefty price? An over-priced ten-page report. While we might have happily paid for it, the report is usually common-sense stuff that any number of line-staff at the organization could have pointed out to management for free.

How can they charge hundreds of dollars per hour when their time is worth maybe twenty bucks per hour? Because there is no competition, and no pricing comparison. The company purchasing it is often forced to have this specialized consultant come in, and they must pay the person whatever ridiculous amount they ask. Why do you think so many people are getting into the consulting business?

Microsoft’s software is the same. We can tell by the enormous amount of money being wasted in Redmond that their profit percentage on Windows XP is astronomical. While no one has real numbers, it would not be surprising to anyone that Microsoft makes more than an eighty percent profit on every copy of Windows XP sold.

How can I make such an assertion? One example: It is estimated the Microsoft is losing over a hundred dollars on every Xbox game console sold. They are doing this to try to capture the video game market from Sony’s Playstation 2. How can a company afford to lose over a hundred dollars per item? Because the sale of Microsoft’s other software is so profitable.

How much does it cost Microsoft to make a copy of Windows XP? Including advertising costs, the expensive packaging they have, and the actual development of the software (and continued maintenance of bug fixes), what do you suppose it actually costs them? Ten bucks a copy? Not even that much, I would bet.

At what point did Microsoft reach the break-even point on the cost of developing and advertising their XP software after it went on sale? Hollywood banks on breaking-even on a movie when it goes to DVD. Most software vendors expect to break even six months into a software release. Microsoft? I bet they broke-even on Windows XP within the first week of going on sale.

If it sounds like robbery, it should, because in many ways it is. Of the popular consumer operating systems out there, Microsoft’s is the most expensive. Let’s compare operating system for a business workstation:

Windows XP Professional Upgrade: $199
Mac OS X 10.2: $129
Red Hat Linux 7.3: Free (download) or $59.95 (CD)

Yes, there is a scaled-back “home” version of Windows XP, but I recommend everyone (including home users) purchase the Pro version. After all, even Mac OS X supports Microsoft’s Active Directory, which Windows XP Home does not.

Sure, Mac OS X 10.2 is no deal, either. The Jaguar upgrade is an additional purchase to the original bucks spent on OS X 10.1, which was additional money spent from OS X 10, which has all happened in the lifespan of XP. But, Apple is getting their fair-share of flack for their pricing issues.

More importantly, Apple does not have a monopoly. The do not have nearly the installed base. Simply put, Apple is not making the ridiculous profit percentage per copy sold that Microsoft is. In fact, a case can be made that Apple makes profits off of their hardware, not the software.

Then there is the Donald Trump lotto theft happening with Microsoft Office. (Four hundred bucks for five productivity programs, of which you will likely only ever use ten percent of the features? What the %^$&#?)

As if this were not all insulting enough, Microsoft now requires that you purchase a copy of Windows XP for every computer you install it on. I understand this in the business world, but a home user that has a desktop and a laptop should not be forced to pay four hundred smackers to upgrade two computers to Windows XP. That is ridiculous.

To make certain you do not ‘cheat’, Microsoft has an activation feature to stop casual piracy of their software. In theory, this means that Microsoft has eliminated a significant percentage of piracy. Knowing this, would you not expect that the price of their product would change accordingly? After all, Microsoft has been saying for years that the cost of piracy is built into the price of their products. So, now that they have eliminated casual piracy, we should all get a price break.

Instead, while I paid $100 to upgrade my laptop and desktop to Windows 98SE (I never used them at the same time, so I felt justified that having one license for the two was reasonable), I now have to pay $400 for Windows XP. Yes, Microsoft will donate a few bucks to the cause if you just purchase an additional license at their web site, but it is not much of a discount. We have five computers running Windows XP in our home (don’t ask), and if it were not for friends that work at Microsoft, the total upgrade cost would have been $1000(!)

On the other hand, Apple has a deal that for $200 I could have installed it on all five computers legally. Better yet, Apple runs their upgrades on the ‘honor system’, without a hint of product activation to be seen. Thanks Apple!

Before Microsoft, operating systems were never profit makers. Previously they were just something thrown in with the computer you bought. The Amiga had, what I believe to be, one of the best operating systems ever made, and the Amiga Workbench was a free product of owning an Amiga. The Macintosh of the time also had free distributions of the latest OS. The same was true on the Atari ST GEM OS.

It was Microsoft that decided that MSDOS, and later MS Windows would become huge cash cows. Microsoft upgrades ran around $80 a copy at the retail level, and consumers would purchase one copy and install it many times. This model worked great until XP came along.

Since Microsoft has a monopoly, and since we are all forced to install their latest operating system, I can think of only one solution to this problem: Regulate the pricing of Microsoft operating systems. Microsoft should be allowed to make a profit on their OS, but not much more of a profit than Ford makes on their automobiles. Fifty percent, should we say? I would guess that would put the pricing of Windows XP in the range of around twenty bucks a copy.

Unfair to Microsoft? I doubt anyone but Microsoft will make such a claim. Why should Microsoft be able to subsidize their take-over of other markets, like their war with Sony’s Playstation, on the profits from their Windows monopoly? Microsoft has been able to take over market after market with the enormous profits from the operating systems, and the only way to make the playing-field fair is to cut off the cash-cow.

We all love to hate Microsoft because every time we purchase one of their pieces of (ahem) software, we know that we are only fueling their take-over of other markets. Because every eighty cents on the dollar we give them goes straight into the Bill Gates Retirement Fund. Because we are only making it more difficult to free ourselves from the Microsoft monopoly every time Redmond releases a new piece of software. Oh well. Gotta go. I said I would install Windows XP on my Mum’s laptop, and I best get to it.