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Note on Operating Systems and OEMs
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Info-Policy-Notes | News from Consumer Project on Technology
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June 17, 1998
Note on Operating Systems and OEMs
James Love <love@cptech.org>
http://www.cptech.org
(http://www.essential.org/antitrust/ms/osnoem.html)
Over the past few months I have posted several messages
regarding original equipment manufacturers (OEMs) of
personal computers requiring consumers to buy Windows. To
better understand what is happening, it is useful to take a
quick look at the 1995 DOJ/Microsoft consent agreement on
Windows licensing.
On July 15, 1994, the U.S. Department of Justice filed
an antitrust case against Microsoft. On the same day, DOJ
and Microsoft file a proposed "Final judgement," which was a
settlement agreement. Judge Sporkin rejected the proposed
settlement, on the grounds that it did not adequately
protect the public interest. However, DOJ reversed Judge
Sporkin on appeal, and in 1995 the agreement was approved.
The text of this agreement is found on the DOJ web site
at http://www.usdoj.gov/atr/cases/f0000/0047.htm (no
period). The best known provisions of the agreement banned
the so call "per processor" OS licenses that Microsoft used
with most OEMs. This was defined in the agreement as
follows:
11. "Per Processor License" means a
License Agreement under which Microsoft
requires the OEM to pay Microsoft a
royalty for all Personal Computer
Systems that contain the particular
microprocessor type(s) specified in the
License Agreement.
This was supposed to get at the so called "pay twice"
issue. Since OEMs had to pay for DOS or Windows whether or
not the products were shipped, the OEMs and their customers
would have to "pay twice" if a competing product was
shipped. This Microsoft OS "tax" on each computer sold had
been a major deterrent to the marketing of DR-DOS, a product
generally considered technically superior to MS DOS. Few
OEMs or consumers wanted to pay for DR-DOS, given the fact
that the computer already came with MS DOS.
However, while the 95 agreement banned the so called
"pre processor" licenses, it specifically permitted a "per
system license" approach, which was defined as follows.
12. "Per System License" means a
License Agreement under which Microsoft
requires the OEM to pay Microsoft a
royalty for all Personal Computer
Systems which bear the particular model
name(s) or number(s) which are included
or designated in the License Agreement
by the OEM to Microsoft, at the OEM's
sole option and under the terms and
conditions as set forth herein.
13. "Personal Computer System" means a
computer designed to use a video display
and keyboard (whether or not the video
display and keyboard are actually
included) which contains an Intel x86,
or Intel x86-compatible microprocessor.
In other words, Microsoft is permitted to require an
OEM to ship Windows on every one of a particular model. It
does. One OEM told us that Microsoft offers significant
price cuts for the "per system" licenses, which most OEMs
take for their "client" PCs. Microsoft was also prohibited
from entering into:
". . . any License Agreement in
which the terms of that agreement are
expressly or impliedly conditioned upon:
(1) the licensing of any other
Covered Product, Operating System
Software product or other product
(provided, however, that this provision
in and of itself shall not be construed
to prohibit Microsoft from developing
integrated products); or
(2) the OEM not licensing,
purchasing, using or distributing any
non-Microsoft product.
These were the provisions regarding tying of other
products, the "integrated products" exemption, and the
provision against market exclusivity.
One should note that the 1995 DOJ/MS agreement only
covers some Windows products. Basically, Windows 95 and 98
are covered, but Window NT specifically is excluded.
Applications, including Microsoft Office, are also excluded
from the non-exclusivity provisions.
What can consumers actually choose?
It is useful to compare the choices consumers have for
hardware to the lack of choices in the software area.
For example, the Dell's Dimension XPS D Series is a
desktop PC for home or office use. You can customize the
following items on the online web page.
Memory 64 to 384 Megs of SDRAM
Hard Drive SCSI or ATA, 4 gig to 16.8 gig
Monitor None, 17 inch, 19 inch, 21 inch,
14 inch flat display, different
brands
Video cards three different brands
Disk drives CD-ROM or DVD drive
Sound card with or without
Speakers four choices including none.
Modem 56k, 56k "win modem," or none
Network card Three 3com models or none
Tape Backup six options including none
Storage Iomega internal or external
Keyboard Three different styles
Service two options
When the OS is concerned, you have five choices, but they
are all Microsoft, and there is no "none" option:
OS Windows 98
Window 95
Window 95 w MSIE 4.0
Windows NT with MSIE 4.0
Windows NT workstation
Likewise, for applications, you are offered three
Microsoft options and no "none" option.
Applications: MS Office Professional
MS Office Small Business
w/Encarta
MS Office Small Business
w/Bookshelf
These are not untypical of options offered by the major
x86 OEMs.
SERVERS AND NEW SYSTEM MODELS
In theory, OEMs can offer PCs without Windows, if they
create a different "system." It is quite easy to do this.
According to the agreement:
"Any New System created may be identical
in every respect to a system as to which
the Customer pays a Per System royalty
to Microsoft provided that the New
System has a unique model number or
model name for internal and external
identification purposes which
distinguishes it from any system the
Customer sells that is included in a Per
System License.
Basically, all the OEM has to do is put a different
model number on the front of the box. OEMs say they don't
do this for the consumer market, because they don't want to
anger Microsoft. However, they can do it in the "server"
market, where it is less "controversial," because
Microsoft's market share in the server market is much lower.
These are PCs that often run Unix or other non-Microsoft
software (Microsoft is rumored to be using PCs with Sun's
x86 Solaris to run the Hotmail web pages, for example) and
it is possible to buy them without Windows.
One myth is that PC vendors can't sell PCs without
Windows because they need Windows to "test" the hardware.
In the server market, it is possible to PCs with a bare hard
drive. For example, we received Email yesterday from a
consumer who bought a Compaq with a bare drive. If an OEM
can sell a server without Windows, it must be *technically*
possible to sell a PC in the consumer market without
Windows. The PC he bought is described on the web at:
http://www.compaq.com/products/servers/prosignia200
As the URL indicates, the PC is sold as a server.
Servers are often advertised without sound cards and a few
other things that many consumers want from a computer, but
today you can buy a low end server that is fairly
inexpensive. Compaq offers a number of OS options on its
servers, including two versions of IBM's OS/2, and products
from Novell, SCO and Computer Associates, as well as MS
Windows NT.
ISSUES REGARDING DUAL BOOT MACHINES
An ambiguous issue in the 1995 consent degree concerns
the issue of dual boot machines. (PCs that run more than
one OS, such as Window 95 and Linux, or example). We have
asked DOJ whether Microsoft can bar OEMs from selling PCs
with Windows and a non-Microsoft OS on the same machine, and
we have asked Microsoft if they permit these types of
licenses. At our offices, we currently have four computers
configured as dual boot computers, that can run different
operating systems. With very large hard drives, this
becomes an important issue.
THE NEED FOR NON-DISCRIMINATORY LICENSING OF MS WINDOWS AND
MS OFFICE.
While PC vendors can sell computers with no OS or an
alternative OS, none of the major branded x86 OEMs do for
the general consumer market (although a persistent consumer
can figure out how to buy such a machine from some OEMs,
like Compaq, if they ask for server models). Moreover,
there is a dearth of choice for applications for the
consumer market.
We believe consumers would have much more choices if MS
was prohibited from the using the per system licenses, and
probably more important, if MS was required to provide non-
discriminatory licensing of MS Windows and MS Office to
OEMs. Right now prices for Windows and Office licenses are
negotiated, and while MS can't tell OEMs not to sell their
competitors products, the OEMs are plainly intimated by MS,
who has products (Windows and Office) that most business
users want, and the OEMs need to get a competitive price.
(Hence our July 15, 1998 letter to Joel Klein.
http://www.essential.org/antitrust/ms/jkjun151998.html)
Jamie Love
love@cpech.org
202.387.8030
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