This week's eWeek features an article Microsoft Security
Pricing: Predatory or Correctional?.
The problem, it seems, is that MS
has priced its security products "way below fair market value",
according to Alex Eckelberry, president of a competing security software
company. McEckelberry is quoted as accusing MS of "endangering the
entire security ecosystem with ruthless, Standard Oil-style pricing" --
30% to 50% lower than other competing offers. Eckelberry and another CEO in
the security space suggest that regulatory authorities should investigate
MS's pricing.
Is MS really engaging in
"predatory pricing"?
The theory of predatory pricing
is that a firm will sell at a loss in order to drive out competitors and then
raise its prices and earn a monopoly premium. It appears that the accusation
of selling below cost is not being made here, only that MS is selling for
less than what its competitors sell for.
But what would it mean to say
that MS is selling their software "below cost"? Software has the
characteristic that the up-front development costs are more or les
independent of the volume of products that will be sold. Most of the cost is
in the coding and testing of the software. The cost of distributing the
software, especially over the internet, is quite small. The average cost of
production (per unit) will fall as the number of units sold increases, while
the marginal cost of production is near zero. If MS believes that it can ship
a large number of units, due to their large installed base and the relative
lower cost of marketing to their own customers, then they may be offering a
lower price in order to maximize revenue.
It is even more unlikely that MS
is "predatory" in the sense that they plan to drive out their
competition so they can raise prices. The software space is one of the most
competitive and innovative of all industrial sectors. The idea that a single
profitable firm could maintain a sole position without competitors for very
long is dubious. Even if some existing security competitors lost market share
to MS, the company could compete on short notice with MS were they to raise
prices.
It becomes clear that what they
mean by "predatory" pricing is lower pricing:
David Moll, CEO of privately held anti-spyware vendor
Webroot Software, threw his weight behind Eckelberry's concerns, arguing that
Microsoft's pricing policy is "consistently out of line with the rest of
the industry."
Is MS obligated not to offer the consumer a better deal,
only because their competitors are not?
This leads to the question of
how is the boundary of the product defined. While some disagreement exists
among computer software practitioners about what constitutes the operating
system and what is an add-on, it has been the history of operating systems in
general, and Windows in particular, to gradually expand the range of services
that are bundled into the core of the operating system itself. Graphical user
interfaces, networking, the handling of various external devices, the
handling of various types of audio and visual media, and wireless
communication are all examples of features that, while now considered
standard in most operating systems, originated as add-ons. The increasing
security baseline of Windows itself constitutes a form of
"bundling" in that functions which were formerly provided by
add-ons are increasingly part of the off-the-shelf version of the operating
system.
The result is, for the general
buyer, when they buy an operating system, they are getting an increasingly
feature-rich bundle of services that have all been engineered to work
together. While the sophisticated user may enjoy picking out the best
third-party solutions and assembling them, the average user would prefer to
buy a bundle of things that "just works" out of the box. Where MS
is deficient, such as in the area of desktop search, many competing
alternatives exist, and will continue to exist as long as MS Windows does a
poor job of offering that service.
Security publications
consistently report that the average computer user is woefully ignorant about
computer security and does not take even minimal precautions to secure their
computer against threats. The best solution for the unsophisticated consumer
would be for MS to make their products more secure out of the box,
eliminating the need for third-party security add-ons.
A significant fraction of the
security software market exists only because of design flaws in the Windows
operating systems. The third-party security add-on market has grown up as an
attempt to address these flaws because MS has, until the last two years, not
been willing or able to make their own products more secure. There is
starting to be some evidence that MS has finally gotten more serious
security. Windows XP with the addition of service pack 2, has made some
progress in this area, and there are some reports that next version of their
operating system, "Vista", which may ship some time in the next
five years, will offer additional improvements.
What should the additional price
of security software be for a operating system that was engineered to be
secure? Zero would the right answer. It is not clear, nor do the CEOs quoted
in the article say, why is it a benefit to the consumer to have multiple
security companies competing to sell add-ons that solve a problem that could
be eliminated from the operating system itself.
Robert Blumen
Robert Blumen is an independent
software developer based in San Francisco, California
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