More on Annuity Licensing Fee Possibility
junkbusters.com
"A study of the privacy and competitiveness implications of an annuity model for licensing Microsoft Windows 2000
This report was authored by Jason Catlett and was released March 4, 1999. [Press Release] It may be cited and distributed freely under the GPL.
Summary: coerced mass registration threatens privacy and competitiveness
Documents disclosed in court during the Department of Justice's anti-trust suit against Microsoft indicate that the company has considered switching to an annuity model for licensing Windows, a move that ''may require registration'' of users. This report concludes that allowing Microsoft to make the switch in a manner that apparently maximizes its short-term gains would significantly compromise both consumer privacy and the competitiveness of electronic commerce. We recommend swift action from various parties to prevent this.
Background on Kempin's proposal for limited-time licensing
During the Department of Justice's anti-trust case against Microsoft Corp., the Department released an internal Microsoft memo on November 19 that showed the software giant has considered charging PC users an annuity (periodic fee) to use its Windows operating system. People who buy new computers currently pay a one-time fee for a Windows license, which is included in total purchase price of the PC.
The memo's author, Mr Joachim Kempin, proposed the switch in December 1997 under the heading ''License for Limited Time and Create Annuity Business.'' He pointed out that the proposal could not be implemented until 2001, when a new version of Windows is due to be released, and commented that ''This is the best thing long-term but it might disrupt end-user operations and could require end-user registration.''
From the viewpoint of Microsoft's commercial interests this proposal has considerable merit. It would provide a steady revenue stream that does not rely on upgrades. The need to produce a constant stream of upgrades has resulted in criticism of the company's products as "bloatware" suffering from "featuritis" that runs too slowly despite faster hardware. A large slice of the market has remained stubbornly on Windows 3.1. The idea of software "rental" is appealing to many producers; the major difficulty seems to be getting consumers to accept it.
We have not seen the full memo, but press reports did not mention the possibility that registration would give Microsoft's non-operating systems (OS) businesses a windfall advantage, which we discuss below. Nor did we see mentioned the possibility of using the model for applications products such as MS Word, though this seems plausible.
How an annuity model might appear to the consumer
Under this model the cost of Windows would change from being hidden to being paid periodically directly by the consumer, like a utility such as gas, telephone or electricity. The following sketch speculates on plausible options that Microsoft might choose if it adopted this model.
A screen might ask users to register identifying themselves the first time the PC was used, or they might simply have an online agreement requiring the user to accept a limited time license. Assuming that the billing cycle was annual, and that the first year's fee is included in the purchase price of the PC, the user might start up her PC some eleven months after its initial use to find a message on the screen stating that only one month remains until the license expires, and inviting immediate payment of the referral fee to avoid a disruption of service in the future. A choice of payment options would probably be offered: mailing a check, calling in a credit card number over the phone, or filling out an online form (possibly through a web browser). Another option might be electronic bill presentment; a Microsoft venture for this is discussed below.
What would happen to consumers who fail to pay the fee? The software could be programmed to deny the PC owner access to the files on the PC after a predetermined period of time. Given that many consumers use PCs to maintain information essential to the conduct of their daily lives (such as data for personal finance software), most would feel compelled to pay the fee and identify themselves.
Attempts to evade payment (for example, by setting back the clock of the PC) would probably be anticipated by Microsoft and met by technical countermeasures. For PCs connected to the Internet, software could report the license status to Microsoft whenever a Microsoft web browser or email handler connects to the Internet. The company has even sponsored research on developing software that can cause PCs to emit identifying signals which can be interpreted by equipment in a truck parked nearby.
Fee payment generally requires identification
Our key concern with the shift to an annuity model is that it entails what Mr Kempin called ''end-user registration.'' When making a payment, the identity of the payor is in general disclosed to the payee. This raises two separate concerns: privacy and competition. Underlying both is the extremely broad range of Microsoft's businesses, which gives it opportunities to cross-sell and to exchange information about its customers.
Microsoft's broad surveillance of consumer behavior will extend further
Microsoft businesses span many areas: operating systems software, applications software, ecommerce services on the Web, and Internet Service Provider (ISP) businesses including Microsoft Network (MSN) and WebTV, a consumer appliance which resembles a cable TV set top box. Microsoft's many web sites provide diverse services recently brought under the umbrella brand of MSN, a strategy Chairman Bill Gates refers to this as the company's "megaserver strategy." The sites include Sidewalk (city guides), Expedia (travel), Hotmail (free Web-based email), Carpoint (auto buying), Home Advisor (real estate), Investor, and MSNBC (news). Each of these ventures is among the top few players in its class. These sites encourage users to identify themselves, and track their users through cookie technology.
In November 1998 Microsoft announced it would purchase LinkExchange, a barter-based Web advertising company that serves ads on more than a million web sites covering an extremely broad range of topics. This breadth is significant because through cookie technology it will allow Microsoft to monitor online behavior. By ''synchronizing'' cookies and matching them to the identity of the surfer and offline information about her, the company could improve its view of her to an unprecedented level of detail.
It is clearly valuable to Microsoft to unify their view of customers by tying together their records of visitors' behavior at different sites, and they have taken steps to do this, including making the registration process more centralized.
Coercing consumers to register would reduce competitiveness
By using its monopoly of the Windows OS to coerce identification of consumers, Microsoft would obtain considerably more information about individual online consumers than any of its competitors in application software, web media, and electronic commerce. In many of these areas two top points of differentiation are personalization based on historical behavior, and a consumer franchise with established billing relationships. By switching to an annuity model Microsoft will gain a competitive advantage in the new areas by exploiting its leverage over consumers arising from its OS monopoly.
As an illustration consider Amazon.com's beginnings as a bookseller. After competitors such as Barnes and Noble moved online, Amazon moved ahead by extending its offerings to CDs, which existing customers can conveniently buy without re-entering their billing information (a feature Amazon calls "1-Click ordering.") Further, Amazon has invested heavily in "personalization" of its site, enabling it to recommend titles to each customer based on her previous purchases and on information recorded as she moved around the site on previous visits. Both these advantages make an established customer less likely to leave Amazon for a competitor.
Microsoft can quickly seize both these advantages by coercing consumers to register and pay their ''rent'' for Windows. These advantages can be leveraged across the many properties in its ''megaserver strategy.'' This would place at an unfair disadvantage its many diverse competitors who are not able to push customers over the registration hurdle and share behavioral data within a large brotherhood.
Many consumers are reluctant to type their credit card numbers into a computer, and Microsoft has unique power to be the first business with whom the consumer establishes an online billing arrangement. Buying from a Microsoft property rather than a competitor requiring another registration then becomes the path of least resistance.
Information obtained from registrations will be used for marketing
Microsoft's view of the consumer is extending beyond its own virtual walls. Since 1997 it has been working with First Data Corp. in a joint venture on electronic bill presentment, previously named MSFDC and now named Transpoint. First Data maintains a database of more than than 160 million individuals and 10 million businesses across the USA. The same year Microsoft also entered into an agreement to exchange unspecified information with Metromail, a major vendor of demographic, psychographic and behavioral information, the world's largest letter shop (junk mail factory), and now a subsidiary of Experian, one of the three US credit reporting agencies.
Microsoft has indicated in posted policies that it may sell information about consumers to other companies, a common and profitable practice in the direct marketing industry. What is unparalleled is the breadth of this information, and its potential depth if Microsoft puts its OS users under a virtual compulsion to identify themselves. It can use information obtained for the one purpose (the license payment and verification) for another (marketing and tracking). Some countries have laws preventing such "secondary use" without consent, but the U.S. is not one of them.
As a hypothetical example of what Microsoft would be able to do, suppose that a consumer is browsing some pages on the Web concerning life insurance, and that the site is one of the million or so sites that allows Microsoft's LinkExchange subsidiary to serve its banner ads. If Microsoft had a registration and a synchronized cookie in place, it could sell the consumer's phone number to an insurance company, possibly in real time, allowing the insurer to make a telemarketing call to the household while the topic of insurance is still on the householder's mind.
Microsoft has a poor record on consumer privacy
Microsoft's record on privacy is regarded as poor not only by privacy advocates but by independent industry observers. Perhaps its most notorious incident was a 1995 version of Registration Wizard, which transmitted the names of files found on the user's hard drive via modem to the company. Many other incidents are described on Junkbusters' news page.
When a consumer registers with Microsoft, software records and reports the hardware identification number from the PC's hard drive, an unusually intrusive step. Its potential usefulness under an annuity licensing model is obvious.
Microsoft has the motive and opportunity to amass surveillance data
To summarize our concern on privacy: Microsoft has an increasing opportunity to gain access to truly vast amounts of personal data cheaply, the commercial motivation to do so, a history of disregard for consumer privacy concerns, and weak stated policies that impose few voluntary restrictions on itself. These factors add up to a level of urgency for action that far exceeds anything previously seen from the private sector. Microsoft's potential powers of surveillance would make most law enforcement agencies envious, and indeed a major concern would be that agencies in the many countries where the company operates might help themselves to it via subpoenas. From the viewpoint of privacy advocates, allowing Microsoft to follow its obvious path of profit maximization by exploiting the opportunities presently available to it would within a few years lead to a privacy disaster of unprecedented magnitude.
What can be done, and by whom?
We now move consider some possible actions by various parties to avert this scenario.
Options for consumers and consumer groups: Individual consumers and consumer groups should consider several questions, for themselves and in their communications with others.
Should we seek alternatives to Microsoft's software and services, avoiding a dependence in it that may later disadvantage us?
Should we avoid identifying ourselves at Microsoft properties, deliberately withholding identification information?
Should we indicate to Microsoft in advance that we regard registration as unacceptable?
The position of consumers and consumer groups will of course depend on Microsoft's response to their reaction, which so far has merely been a statement that the introduction of an annuity model is not imminent. But if introduction is to take place in 2001, that leaves consumers who wish to avoid registration with little more than two years to shake off their dependence on Microsoft, which would be difficult for most on even a longer time scale.
Options for hardware manufacturers: The Kempin memo said Microsoft's goal was to get the "highest amount of dollars" possible from computer makers for loading Windows on their machines, and that Microsoft must "resist ... royalty price decreases firmly" for low-priced machines. Mr Kempin anticipated that PC manufacturers may one day rebel against the ''tax'' that Microsoft currently burdens them with. If Microsoft decided to shift to an annuity model and some consumers found this a disincentive to purchase new hardware, it would be in the interests of the manufacturers to offer them an alternative without that disadvantage, particularly if it cost them less than Windows. Some manufacturers including Dell already offer Linux, a freeware operating system. People familiar with it already know that it is offered under a license that will keep it free in the sense of being available anonymously for perpetual use, with no threat of compulsory registration. By developing the market for Linux hardware, manufacturers can not only save on their own licensing fees, but also guard against a potential disincentive to purchase.
Options for Microsoft's competitors: We see little that competitors can do to avert being put at a considerable disadvantage by the move, other than petition regulators. Competitors may consider a public awareness campaign to educate consumers on the consequences of use of Microsoft software and registration on their sites, but ultimately the 90% of people who are seemingly stuck with Windows will be forced to register. Apple could come out with a pledge never to coerce its users in this manner. Linux vendors could stress that free software is not just about price, but freedom from such coercion.
Options for regulators: U.S. regulators should want to address the question of whether and how to prevent Microsoft from exploiting this advantage derived from its OS monopoly.
European regulators should also want to ensure that Microsoft's practices comport with the European Union's Directive on Data Privacy and the relevant national statutes.
Options for legislators: Legislators should consider the introduction of a statutory requirement on certain classes of businesses to provide and conspicuously display options for anonymous payments. This might be one way to reduce the compelled identification of consumers. Such issues have been addressed in the multimedia laws of other countries such as Germany.
Options for Microsoft itself: Microsoft could and should act to avert these privacy concerns by undertaking to abide by widely understood principles of Fair Information Practices, as defined by the OECD in 1980. Doing this will also go a long way towards assuring compliance with European requirements, which it would do well to extend to the rest of the world.
The most important principle here is the prohibition against secondary use: information gathered for one purpose (payment for the OS) should not be used for other purposes (such as marketing and personalization) without affirmative consent. Microsoft should not seek blanket exemptions from consumers for such use under an ''opt-out'' model, as is typical practice in direct marketing in the US.
Summary: coerced mass registration threatens privacy and competitiveness
We have argued that Microsoft has the motive and opportunity to switch to an annuity model, but unless it abides by the standards of Fair Information Practices (to which it has made no commitment in the US), it will become the preeminent menace to consumer privacy and gain unfair advantages over its competitors in electronic commerce."
If Microsoft has its way, the shares are worth a lot more than currently priced. Microsoft may be in a position to enforce and collect fees for other software companies as well. Even more money comming in!
Hal
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