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November 24, 1998

WINDOWS RENTAL SCHEME PROPOSED TO MAINTAIN MARGINS

By CBR Staff Writer

One of the threads to emerge from last week’s court proceedings in Washington was that Microsoft Corp has been considering renting out its Windows operating system software to consumers as a way of keeping its profit margins high. An internal memo sent to Bill Gates by Joachim Kempin, Microsoft’s senior vice president for sales to PC makers, was released at the trial. The memo set out a proposal to charge consumers an annual fee for the use of Windows software. The leasing model would be the best thing long term the memo said, with the most likely time to instigate such charges set at the time of the next major Windows release, around 2001. Microsoft has consistently increased prices over the last ten years while other component prices have come down. But as PC hardware prices plummet down to $500 and below, it will become increasingly hard for Microsoft to maintain its high royalty rates through its usual bundling deals with manufacturers. In the memo, Kempin speculated that the PC makers might eventually rebel against high prices for the operating system software, which might soon account for up to 10% of the total system’s price. This year, Kempin said, Compaq Computer Corp might pay us $750m, enough to fund a competing operating systems effort. Consumers currently don’t pay a separate fee for Microsoft Windows if it is bundled in with the overall PC purchase. Charging a separate fee would add to the user administration load and might require user registration, Kempin said. After the memo had been revealed, a Microsoft spokesperson dismissed it as simply an idea that is thrown out there to look into. But the issue is one that, from Microsoft’s point of view, needs to be addressed. And Microsoft need only look to a company such as the SAS Institute, which has always leased its software, for a model. Because of a renewal rate said to be around 98%, revenues at SAS have grown by double digit percentages for over 22 years, according to a recent Wall Street Journal analysis. But perhaps what Microsoft should have done – before it was accused of antitrust tactics – was to give Windows away for free after the Linux model. It would have eliminated the competition at a stroke and prospered in the sector where the real money is to be made – applications.

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