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Microsoft's OEM Licensing Agreements: Theory and Evidence on the Sale of MS-DOS and Windows

MICHAEL PATRICK AKEMANN Law and Economics Consulting Group (LECG), Inc.


    This essay analyzes the competitive impact of contractual arrangements used by Microsoft to license operating systems to computer hardware manufacturers. I describe the operating system market for personal computers with a particular focus on Microsoft's strategy for selling its operating systems software. I present and evaluate several competing explanations for Microsoft's use of per-processor licensing agreements, including the DOJ's claim that these agreements were de facto exclusive dealing arrangements that served to foreclose entry. I argue that existing explanations for the licensing agreements have focused incorrectly on the per-processor metering device as the key element of the contracts. Instead I maintain that the primary economic impact of the contracts was due to the minimum commitment provisions and the long contract length. The evidence suggests that the primary motivation for the contracts was not anticompetitive foreclosure but rather it was to procompetitively price software. The agreements functioned as two-part tariffs that allowed Microsoft to price discriminate among OEMs, provide volume discounts, and set marginal price near marginal production cost. The per-processor meter served as an anti-fraud and anti-piracy device and enabled a certain type of price discrimination across hardware manufacturers.
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