A Sure Way to Keep Workers Gainfully Employed

The government’s decision last week to turn its back on a breakup of Microsoft Corp. seemed inexplicable until a day later, when unemployment numbers reached a four-year high. Suddenly, it all made sense.

The Bush administration’s decision is a sort of Full Employment Act, guaranteeing many thousands of government jobs for as long as Microsoft exists. Since executives in Redmond, Wash.--from Bill Gates on down--continue to insist they are not, and have never, violated antitrust law,

an entire government bureaucracy will have to be created to see they stop doing what they say they don’t. The armies that will soon be working for the soon-to-be-created Department of Microsoft Oversight will quickly put a dent in those scary unemployment numbers.

But let’s back up a minute. Breaking up a company ruthlessly abusing its monopoly power--which is what Microsoft has done--was the fix proposed by the judge overseeing the case. Why? Although disruptive in the short term, breakup is a relatively non-intrusive process once the split occurs. The alternative is what’s called a “conduct remedy,” which, in Microsoft’s case, means the government will have to watch the company day in, day out to ensure it acts properly.

Some have concluded the government will walk away from this quagmire. That’s not going to happen. Even if the new guys in Washington try, there’s the little matter of a horde of honked-off state attorneys general who won’t let Microsoft off the hook.

Because consumers are getting their pockets picked by Microsoft.

For instance, the cost of computer components has plummeted in the last six years, even as the components themselves become vastly more powerful. A 60-gigabyte hard drive costs $200 these days. In 1995, a 1-GB drive cost about $275.

Compare that with the cost of Microsoft’s operating systems. They fell by about 8% a year before 1990--that is, in the days before Microsoft had the OS market cornered, according to evidence in the antitrust trial.

Before 1990, consumers who wanted to use applications that would run in a Microsoft environment but didn’t want to use a Microsoft operating system could choose an OS such as DRDOS or offerings from IBM Corp. This competition drove the cost of the OS down, even as the operating systems themselves became more robust.

After 1990, however, it was tough to avoid using Windows, and, by 1995, Microsoft’s dominance of the operating system market was complete. It is no coincidence that, according to data crunched by the Consumer Federation of America, once Microsoft achieved market dominance it raised the price of operating systems sold to computer manufacturers by 13% a year.

Instead of the operating system making up about $10 of a new computer, Microsoft’s ability to raise prices with impunity means the Windows 98 OS installed on a new computer costs about $60. No firm figures are available for the current version of Microsoft’s OS--Windows XP--but experts believe that the price for computer manufacturers has gone up further.

Mark Cooper, director of research for the CFA, said he believes that the company is continuing to raise the price of its operating system 5% to 10% a year. “This is completely unprecedented,” he said. “Nobody else in the computer market can do that.”

“And it’s showing up in the bottom line. Microsoft has a 40% profit margin, while the rest of the industry is 20% or even less. This isn’t due to better management at Microsoft or a more innovative product. It’s due to the fact that they have monopoly power, and they abuse it.”

In addition to forcing consumers to pay too much for software, the company uses its dominance in operating systems to eliminate choice in other markets as well.

Microsoft’s Internet Explorer Web browsing software has crushed its competitors. That means Microsoft no longer has to include features consumers and developers like.

All the spin in the world won’t make those hard facts go away. Which means the government has no choice but to ride herd on Microsoft until the company changes its ways. And don’t count on that soon.

Microsoft’s executives must shoulder responsibility for this sloppy outcome. They could have simply conceded what they do violates the law and promised to stop.

Now, like career criminals, they won’t be able to do anything without intrusive supervision. That’s bad for Microsoft, since dealing with that kind of oversight draws resources away from product development. But all those new probation officers in charge of making sure Microsoft doesn’t keep ripping off consumers will be great for the unemployment numbers.

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Dave Wilson is The Times’ personal technology columnist.