Consumer Choice in Retail Computer Purchases

Summary of Key Findings

A NetAction survey of retail consumer electronics stores located in Silicon Valley found Microsoft's operating system monopoly firmly entrenched on the home turf of the company's major competitors. The survey found the Windows operating system installed on 100% of the IBM compatible personal computers sold in the retail outlets NetAction visited. Moreover, even though the Silicon Valley is Apple Computer's home turf, NetAction found surprisingly few Apple computers for sale in Silicon Valley computer stores.

Introduction

Looking at the advertising supplements in a typical Sunday newspaper, competition appears to be thriving in the computer hardware industry. Over a dozen companies manufacture hard drives, and there are more than 70 different models available in retail electronics stores for consumers to choose from. But NetAction questioned whether Microsoft's monopoly in the operating system software market rendered these choices merely cosmetic.

To determine how much choice consumers really have when purchasing a computer for home use, NetAction went shopping in the heart of Silicon Valley. The communities that NetAction visited are the home turf of Microsoft's most outspoken competitors, including Sun Microsystems and Netscape. Since the technology industry is Silicon Valley's major employer, the communities are also home to some of the most technically-savvy consumers in the nation. We conducted the survey by visiting several well-known retail electronics stores. Despite the fact that the area's residents are likely to be more knowledgeable about technology than consumers in many other communities, NetAction found that consumers had few real choices when purchasing a computer from a retail outlet. With Microsoft's monopoly firmly entrenched even in its competitors' backyard, NetAction questions whether it will be possible for competition to thrive on the Internet as it emerges as a major sector of the U.S. and global economy.

The Survey

To determine how much choice consumers actually have in operating systems, NetAction surveyed the computers for sale in eight retail stores in four Silicon Valley communities.[1] Five were chain stores specializing in retail electronics, two were discount office supply chain stores, and one was a national department store chain. The survey was conducted on September 30, 1997. At each store, NetAction tallied the number of hardware manufacturers whose products were for sale, the number of product models available, the operating system each computer used, and the processor chip in each model. NetAction asked sales representatives in four of the stores if there were any computers for sale with operating systems other than Windows.[2] In every case, the sales representatives told NetAction there were no IBM compatible computers for sale with alternative operating systems. Two of the sales representatives informed NetAction that it was possible to special-order a personal computer with the MS-DOS operating system, but MS-DOS is also a Microsoft product.

The survey results are displayed in Table A below.

Table A

Store NameW/O WindowsW/O Intel#/Mfg.'s#/Models>Apple Options
Circuit CityNoNo10152
Comp USANo213414
Fry'sNo4197113
Good GuysNoNo1017 1
Office DepotNoNo415 None
Office MaxNo2919 None
Radio ShackNo111 None
SearsNoNo69 1

Survey Findings

Discussion and Conclusions

Despite a 1995 federal court order barring Microsoft from using exclusionary and anti-competitive practices to market its Windows operating system, Microsoft has a complete monopoly in the retail consumer market. Clearly, the Justice Department's enforcement of antitrust laws has not been effective, and more vigorous enforcement is needed to prevent Microsoft from leveraging its operating system monopoly into an Internet monopoly. The Justice Department took a step in the right direction on October 20, 1997, when it petitioned for a federal court ruling holding Microsoft in contempt for violating the terms of the court's 1995 order by forcing computer manufacturers to install the Internet Explorer Web browser on computer desktops in exchange for licensing the Windows operating system. Indeed, the Justice Department's petition is the first sign that antitrust officials understand the implications of Microsoft's operating system monopoly for the future development of the Internet.

While consumers have a reasonable selection of "brand names" to choose from when purchasing a computer at most retail outlets, there is little to differentiate one product from another aside from the manufacturer's name. Consequently, for retail consumers shopping for a home computer, the only meaningful decision is whether to buy an IBM compatible PC or an Apple computer. (And consumers who want a choice of Apple models won't find it unless they visit a store that sells only Apple computers.) For the vast majority of consumers who opt to purchase a PC, the choices are essentially cosmetic. All of the PCS sold on the retail market run on the Windows operating system, and nearly all are powered by the same processor chip.

With Apple's market share steadily eroding, consumer choice is likely to become even more limited. The Software Publishing Association's (SPA) January 1997 survey of the home computer market reported that there are 38 million U.S. households with computers, 85% of which are IBM compatible PCS. Of those 32.3 million households with PCS, 90% are using Windows.[3]

Microsoft's recent $150 million investment in non-voting Apple stock illustrates, rather ironically, the significance of Microsoft's threat to competition. It is difficult to ignore the implication of Apple's accepting a bailout from its competitor in order to stay in business. Apple's decision to stop licensing its operating system to clone manufacturers is likely to expand Microsoft's monopoly since analysts predict that it will push companies making Macintosh products further toward the Windows platform.[4]

Windows applications accounted for 81% of the application software sold in the U.S. and Canada in 1996, according to a SPA report.[5] The recent release of Microsoft's Internet Explorer 4.0, which the company is distributing for free, is expanding Microsoft's share of the Web browser market, which is crucial to the future development of the Internet. Furthermore, IE 4.0 sabotages the cross platform capabilities of Java, the Sun Microsystems programming language that was developed for use with all operating systems and consequently represented a competitive threat to the Microsoft operating system monopoly.[6]

NetAction is concerned that the elimination of consumer choice in operating systems is part of a broader strategy to extend Microsoft's monopoly to the Internet. A Microsoft monopoly of the Internet will give the Redmond-based corporation an enormous advantage in this emerging sector of the U.S. and global economy. If Microsoft's strategy is successful, the company could ultimately control the gateways that consumers use to reach the Internet, the content consumers view on the Internet, and the commercial activities consumers engage in online. This would give Microsoft unprecedented control over society's economic, political, and cultural activities. In addition to the predatory pricing of its IE 4.0 browser, Microsoft is making dozens of investments in businesses and technology related to Internet access, content, and commerce.

See Table B for a list of Microsoft's Internet-related investments.[7]

Table B

Recommendations for Consumer Action

With Microsoft already monopolizing the operating system software market, consumer action is needed to prevent Microsoft from extending its monopoly into cyberspace. Here are some steps consumers can take to ensure a competitive Internet:


Research assistance for this report was provided by Judi Clark, proprietor of ManyMedia, and a member of the NetAction Advisory Board.

The report was written by Audrie Krause, NetAction Executive Director. Feedback about the report is welcome and should be sent to: .

Copyright 1997 by NetAction. All rights reserved. Material may be reposted or reproduced for non-commercial use provided NetAction is cited as the source.


Notes

  1. The stores were Circuit City, Comp USA, Fry's, Good Guys, Office Depot, Office Max, Radio Shack, and Sears. The communities were Mountain View, Palo Alto, Santa Clara, and Sunnyvale.

  2. Circuit City, Comp USA, Good Guys, and Fry's.

  3. Data provided by the Software Publishers Association from its January 1997 consumer survey.

  4. "Mac firms shifting focus, analysts say," by Suzanne Galante, c|net, September 12, 1997.

  5. Software Publishers Association press release, March 31, 1997, "1996 Personal Computer Application Software Sales Pass $10 Billion For the First Time.>"

  6. Sun filed a lawsuit against Microsoft on October 7, 1997, alleging that Microsoft has violated the terms of its Java licensing agreement.

  7. The list was compiled from news reports of Microsoft's investments and is not intended to be comprehensive.