Here published with kind permission by Cybersource Pty. Ltd.

Why the Unbundling Windows Sceptics are Wrong

By: Con Zymaris <conz@cybersource.com.au>

Updated: 2007-10-10

Numerous industry observers have long-called for the adoption of policies by competition regulators which will spur competition in the personal computer operating system platform market - a market which has had a Microsoft choke-hold, gained through legally dubious business practices, over the past 20 years.

Now aligned with this group is an influential free-market think-tank, which has called on the European Union (EU) to make good on its promise to foster greater competition in personal computer platforms, in the aftermath of the recent court ruling which yet again found Microsoft abusing its monopoly power to diminish market forces. The think-tank, the Globalisation Institute, has called upon the EU to demand that PC vendors stop the practice of automatically bundling Microsoft operating systems with personal computers.

In doing so, the Globalisation Institute draws a distinction between open, free markets, which exist for computer hardware and demonstrate phenomenal innovation and price performance, and laissez-faire markets, dominated by the corporate equivalent of Somali warlords – specifically, operating system platforms.

In response, others have replied with reasons they believe would prevent such an approach from succeeding.

The following are the key arguments they introduce against the unbundling of Microsoft Windows from consumer PCs, along with an explanation as to why these arguments from the 'unbundling sceptics' are invalid:

Firstly, why should competition regulators even bother pursuing this?

A few years ago, I ran through a couple of scenarios

which showed that the reduced competition in the PC platform software space cost consumers over $10 billion per year. More recently, a court-case in Europe showed an incredible 52% of the price of a new Acer laptop was constituted by the forced-bundling of Microsoft and other Windows platform software. It is also obvious that none of this additional expense for software would be necessary if Acer shipped Linux instead, because all the functionality delivered by the bundled software is available on Linux, at no cost. When you find that the price of Microsoft's software tax is more than the price of the computer hardware, you know it's time to act.

If nothing else seems to convince you that the personal computer market needs a competition boost, then all you need to consider is that one company, Microsoft, has had a 90-95% market share position for perhaps 20 years. What other large, hugely lucrative and business-critical markets do you know where one incumbent has that size of market share for that length of time? It is the surest indication that the free market has been waylaid and needs assistance. It's time to set the wheels in motion to stop this egregious aberration.

Why should Windows users support this proposal?

The mechanism for ensuring an open and free market for PC operating systems outlined in this document will have far reaching benefits for Windows users as well as the obvious benefits for Linux users. A cursory review of the history of the computer industry shows that consumers benefit most when there is strong competition in each market segment. Windows users will benefit because:

• Microsoft will become less complacent, due to increased Linux competition.
• Microsoft will become more responsive to customer needs, due to increased Linux competition.
• Microsoft will build better software, to compete with Linux.
• Microsoft will build more secure software, to compete with Linux.
• Microsoft will have to price its software to compete with Linux, meaning lower prices for Windows users.

It should be an obvious truism to anyone, that the only way to keep any vendor honest is for there to be another vendor breathing down their necks, vying for their customers. To Microsoft, Linux is that other vendor, and by letting it compete on a fair and level playing field, Windows users will benefit substantially.

You can go and buy an un-bundled PC today. Why

should competition regulators push for all PCs to ship without Windows by default?

Most, if not all of the PCs you can buy without a pre-installed Microsoft operating system, are from what are known as 'white-box' or no-name brand PC makers. Generally, these are perfectly acceptable computers, but many consumers, certainly most businesses, will shy away from buying them. This then gives Microsoft a huge competitive boost in the market, as pretty much most of the computers that consumers or businesses will buy, they can only buy with a bundled Microsoft operating system platform.

Secondly, by limiting consumers who prefer not to run Windows to only those computers which ship without an operating system, you are limiting those consumers to a fraction of the potential range of computer hardware otherwise available. This is less than fair. Most systems, most options, most hardware innovations, are therefore not made available to consumers who want unbundled PCs.

Yes, these consumers could buy a PC with Windows and then wipe Windows, but then that means they are paying, as we note above in the Acer case, possibly hundreds of dollars/Euros, needlessly. And all this does is benefit Microsoft, essentially establishing a 'tax' on a product category - a category which sells over 100 million units globally every year. This is a vast distortion of the principles of an open marketplace.

What about the Apple Mac? Shouldn't that also

have the OS X operating system unbundled?

No, for two reasons. Firstly, the Apple Mac is a product with hardware and software from a single vendor. If Microsoft wanted to sell a Windows PC that it itself made, then this also wouldn't be a problem. It would substantially tick off Microsoft's hardware OEM partners, but wouldn't be a problem from a competitiveness perspective. In fact, if that happened, there would be a substantial acceleration of hardware partners adopting alternative platforms, like Linux.

Secondly and more crucially, the Apple Mac doesn't have 95% market share, and the immense leverage that such market share delivers unto Microsoft. If Microsoft Windows only had 5% of the market, then there would be no pressure to unbundle it from consumer PCs. We wouldn't be having this discussion in the first place.

But Walt Mossberg said that desktop Linux still

isn't ready for the average user.

The usability and technology world doesn't revolve around Walt Mossberg. Mossberg may have indicated that desktop Linux isn't for the average user, but it's also possible to find many pundits who will say that desktop Windows isn't for the average user either; that doesn't stop most PC makers from bundling Windows with their PCs.

In the end, it's all about what you're used to. Mossberg is used to Windows, so it seems more 'normal' to him. In time, people will, due to the increased uptake of Linux brought about by a liberated market, also find that it too is 'normal'.

But Dell (and others) aren't selling as many

Linux boxes as they're selling Windows boxes. Doesn't that mean that there's less market for desktop Linux?

Yes, for now. But the market for alternatives to Windows will never be given a chance unless competition regulators force that market to be open and free to competition. The best and fastest way to do this is through unbundling Windows from PCs. If consumers still want Windows, they'll be free to elect to acquire it at the time they purchase their PC, but this should be through conscious decision-making, not through forced bundling.

But Windows only constitutes a mere 10% of the

price of a PC, right?

Incorrect. In markets for lower-priced hardware, the cost of even the OEM (ie, cheaper) version Windows has reached 35% of the price of a new computer. What's more, each year, this percentage increases. 10 years ago, the operating system was only 5% of the price

of the PC. When additional software, in fact the bare essentials for running a functional desktop, are shipped with Windows, this figure for bundled software reaches to over 50% of the total cost of a new PC, as evidenced by the Acer court case.

More importantly, the existence of a bundled copy of Windows on each PC affords the owner of the platform, ie, Microsoft, an incredible leverage not permitted any other software competitor. In fact, it gives Microsoft a beachhead through which it can sell office suites, server-based products which hook into that desktop operating system through proprietary means and dozens of other add-ons, in a manner which amounts to an unfair advantage over those competitors.

Ensuring that Windows is no longer the default operating system platform on all new PCs, will help those who compete against Microsoft by providing a market space opening to an alternative operating system platform, one that Microsoft doesn't or can't own. This means that unbundling Windows from PCs wont just open up the platform market, but all application market segments that Microsoft now dominates as well.

But there wont be any uptake of Linux unless

there's a huge marketing effort

Incorrect. Linux grows in much the same way as the Internet grew, through word of mouth and general meme-transfer. The Internet, a technology developed by the same army of geeks who are now making consumer Linux a reality, has over 1 billion mainstream users. It gained those users without a marketing department, without sales people or corporate bosses. In time, Linux will do the same. Here's how.

If all PCs in Europe are now offered to consumers with the option of a free Linux desktop, then that will translate into a jump in desktop Linux adoption. If even 10% of these consumers take up the Linux option, that would translate into a doubling of desktop Linux users, in effect, hastening the onset of an inflection point.

In turn, this increase in users will spur more word of mouth, familiarity and comfort. It's likely that in successive buying cycles, a higher and higher percentage of new PC buys will opt for the cheaper Linux option - a positive feedback loop in platform migration.

Obviously, these consumers will be free to opt out of Linux, at any time, if they decide to return to Windows. All they need to do is pay the OEM licence fee to Microsoft. We'll cover how this works soon.

Removing bundled Windows will make PCs cost more

as hardware vendors wont get volume/OEM discounts

Incorrect. By offering consumers a bootable copy of OEM Windows, manufacturers can continue to make available the lower cost (ie, OEM) versions of Windows. But consumers must still make that decision to pay for using this add-on.

If you think this puts Windows at a disadvantage, consider the following: Microsoft's operating system competitors have had to do this for decades while Microsoft stitched up deals with hardware vendors specifically designed to exclude them from the market. The old approach was unfair, this new approach puts every competitor on an equal footing.

Wont unbundling add complexity?

This notion can be encapsulated with what one pundit wrote :

It would also add complexity for end users, counter to The Institute's claims. People buy operating systems pre-installed with bunch of different applications beyond what comes with the operating system. Office productivity apps, security apps, you name it. An uninstalled OS would force users to find and download or buy those apps. That's an added and inconvenient step that would cost hours.

Obviously this person has never seriously used Windows, or for that matter, Linux.

Unlike Linux, Windows ships with an absolute paucity of high-function applications; from word processing, through accounting software, from graphics through drawing and technical tools, Linux beats Windows hands down in every area of pre-installed application functionality. If PC vendors shipped Linux on their PCs as a default OS that would be a huge reduction in complexity for consumers, as they would have access to thousands of high quality applications, either pre-installed or a few package-installation clicks away.

Consumers will not necessarily opt for the

cheaper, ie Linux, desktop option.

Indeed. However, unless there is a space opened in the market for competitors to try and sell into, how will we ever find out? And yes, while more people know Windows, there are tens of millions now who also know Linux. Linux is fast approaching that first inflection-point. A move by regulators to ensure that there is a breathing-space for competition will likely see that inflection-point come sooner than later.

But if we don't ship PCs with pre-installed

Windows, wont there be rampant piracy?

Microsoft has introduced a number of measures in recent versions of Windows which are designed to stop piracy of Windows. In effect, they have provided their own answer to this question.

But the market has spoken and the market said

'Windows desktops'. Why push this whole unbundling idea?

The market was severely distorted due to the fact that for the better part of a decade, Microsoft made deals with PC hardware vendors, specifically designed to exclude competing operating systems. Such deals were later shown to be illegal by the United States Federal Trade Commission in the aftermath of its 1995 antitrust investigation of Microsoft. This distortion was never rectified however, and governments who value free and open markets must now act through their competition regulators to bring about the kind of competition which will benefit their constituent consumers in the medium-to-long term.

But there's no one to support Linux

This is not correct. There are thousands of large and small organisations worldwide which provide support to Linux and free and open source software. More importantly, if the consumer who buys the new PC believes that there is no one who can support him in his purchase, then that consumer is more than free to opt to install Windows, acquire the Windows licence key from Microsoft and just use Windows.

How is it possible to provide for both consumers

who demand Windows and also ensure a fair and open marketplace for competing platforms?

That's the $64 billion question, isn't it? Here's how it can be done.

All hardware manufacturers should ship personal computers with no pre-installed operating system. They should include within the packaging of the computer a media copy of the then current Microsoft Windows recovery CD. They should also include a copy of one of the main Linux distributions which are freely-redistributable at no charge.

Upon unpacking the computer, the consumer must then make a choice of either:

1. loading Windows from the Windows recovery media, then using the brochure included with the recovery media to contact Microsoft and through some form of financial transaction, acquire a licence to use Windows, or
2. load the Linux operating system from the CD/DVD included, and use it as their computer operating system.

Both the Windows recovery and the Linux installation media must be shipped with the new personal computer with a minimum of additional expense to the consumer. Specifically, it is of critical importance that the consumer receives the cost reduction advantages introduced by removing the licence fee for the bundled OEM Windows.

In order for this approach to work, Microsoft must agree to the free re-distribution of the Windows recovery media by hardware vendors. If it does not, then this will result in consumers only being given the 'out-of-the-box' option of installing Linux. It is therefore in Microsoft's absolute best interest to ensure that the Windows recovery media can be re-distributed and that the loading of Windows on the new PC is as fast and painless as possible. It otherwise risks more users defecting to Linux. As the Windows recovery media will also need a legitimate Windows licence obtained from Microsoft in order to actually function, there should be no additional piracy risks for Microsoft if they allow free re-distribution of the Windows recover media.

What about variations to this deployment method?

I've provided what I believe to be the least disruptive method of ensuring an open and competitive platform market, but other options are possible. Here are some:

1. pre-installing both operating systems, or
2. including no software media, but requiring the consumer to buy an operating system at the point of purchase, or
3. pay a service fee to the retail vendor and have them perform the operating system platform installation on request, or
4. requiring that the PC hardware vendor ship differently-installed computers, using different Stock Keeping Unit (SKU) codes, allowing the consumer to select whichever they prefer at purchase time.

Sure, these can be considered. However, the method I outline above, that of including two separate media packs and allowing the consumer to decide which one to insert into the PC at initial boot time, has certain implementation advantages. Specifically, these are that the consumer buys the PC they want to buy, without the added confusion of having to select a separate boxed product – everything they need will be shipped with the PC they've just purchased. Additionally, the retailers, resellers and e-tailers will not have to track or handle a multitude of additional PC vendor product codes and SKUs – they will merely have to know the one for each PC product, as they do presently.

The onus therefore falls on the PC vendors themselves to include media packs for the version of Windows they would otherwise have installed/imaged onto the PC product in question, and a media pack for a quality Linux distribution, commensurate with the market they're trying to sell into – one which has sufficient driver support to allow most of the core components of the computer (ie, video, audio, drives, network) to function correctly. Furthermore, the hardware vendor need undertake this Linux confirmation process once per product lifecycle, therefore, not a particularly onerous or expensive task for them to undertake. Once again, the main decision criteria for the distribution process outlined in this proposal is that it would cause the smallest additional overhead for the industry and the consumer.

But there are so many Linux distributions!

Yes, choice can be hard sometimes, but choice and competition is also what drives both free markets and innovation. Each PC hardware vendor must make a business decision as to which Linux distribution they are happy to work with and just provide support for that distribution. Obviously, they are most likely to include a distribution which a majority of their target market will find useful and appealing, else risk losing some market share to their competitors which would be doing exactly that. Competition is good for Linux distributions too, with the added bonus that open source code allows each distribution to share in the gains made by its 'co-opetitive' brethren.

But consumers are not tech savvy – they will

not want to install an operating system

Correct. Which is why it is up to both the Linux industry and Microsoft to develop maximally simple installation processes for their respective operating systems. In fact, there should be open and strong competition between the two to create the simplest installation process possible.

The end user should be able to pop the installation/recovery media into the optical drive, reboot the new PC and maybe 10-20 minutes later, once the OS has been installed/imaged onto the PC's hard disk and the media disk has been ejected, they can reboot the PC into their selected operating system. Whichever of Microsoft or the Linux distributors can build the simplest installation/disk-imaging process, so will they have an advantage over the other for acquiring (or keeping) users.

But doesn't Linux lack in terms of driver

support?

Depends on how you measure this. It can be demonstrated that Linux has broader driver support for older, more esoteric or legacy hardware than Windows XP. Linux certainly has broader driver support than Windows Vista. In general, Linux will support most/all of the major video, sound, disk and network devices and many of the wireless cards and web-cams. But yes, there are various consumer and business devices for which Linux driver support is lacking.

This may mean that not every function on every PC which ships with the software installation packs noted above, will function completely under Linux. It is therefore incumbent on the consumer to decide if they want that specific function, say a wireless card, or inbuilt web-cam, for their needs. And if they do, they can then opt to install Windows and acquire the Windows licence key from Microsoft. If, however, they decide that they don't need a functional wireless card or web-cam for which a Linux driver is lacking, then they can opt not to acquire Windows.

The beauty of this approach is that by opening the market and making it possible for consumers to make a choice about the operating system they will use, we are likely to see a jump in Linux usage. We are certainly not going to see a decrease from the monopoly market we have now. This, in turn, will spur Linux driver support from those recalcitrant component vendors. Which in turn will mean that in each successive buying cycle, there will be less reason for consumers to bypass Linux due to lacking driving support. Another virtuous cycle indeed.

Yes, great, but consumers still want Windows!

Fine. They can then opt to install Windows and acquire the Windows licence key from Microsoft. All they've lost is the maybe 10-20 minutes to install/image Windows onto the new PC's hard disk. In the grand scheme of things, when you incorporate the time needed to unpack the PC and cable it up, this isn't a big deal.

Why operating systems must be unbundled from PCs

Regardless of the final mechanism used, competition regulators worldwide must now take steps to increase the real competition for the consumer PC market. Microsoft has not become the biggest monopoly in history through competing on a level playing field. Only governments and national competition regulators now have the power to redress this gross imbalance. If governments don't do this now, then perhaps even they wont have the means to do this later.

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