Bushwhacking Microsoft: The Economic Impact

Glenn Yago is the Director of Capital Studies at the Milken Institute. He is a consultant to Microsoft.

The remedy proposed by the litigating states in U.S. v. Microsoft1 would require drastic changes in marketing and design practices that were not found to be anticompetitive by the Circuit Court of Appeals for the District of Columbia. More important, it would undermine both Microsoft’s ability and its incentives to produce software that consumers value.

In particular, the remedy threatens to “break” the Windows operating system – and consequently software that runs on top of it – as well as destroying the value of Microsoft Office2. And in light of the central role Microsoft now plays in the ecosystem of the ubiquitous personal computer, American consumers, businesses, and investors would acutely feel the resulting damage to the company. Consider some key facts:

Software Firms in the United States

  • In 2000, approximately 11,000 firms in the United States produced software of some kind3. Of these firms, 84 percent produced at least some software that runs on Windows operating systems. Ironically, the two states with the largest number of software firms, California (with nearly 1600 firms) and Massachusetts (with about 750), are leading the litigating states’ effort to impose harsher remedies on Microsoft. In these states 82 percent and 85 percent of firms, respectively, write software for Windows. See Table 1 for a full state-by-state listing.

    Microsoft Resale Partners in the United States

  • Microsoft has more than 115,000 resale partners in the United States4. These range in size from small family-owned stores to large retail outlets like Circuit City and Office Depot. They also include small computer makers and corporate account resellers that service large corporations. California accounts for about 15 percent of the total. See Table 2 for a full state-by-state listing.

    Personal Computer Ownership and Use in the United States

  • As of Sept. 2001, 60 million households (57 percent of total households) in the United States owned at least one personal computer5. Furthermore, 174 million individuals in the United States used personal computers, implying that roughly 150 million Americans – 55 percent of all Americans – use computers running Windows6. See Table 3 for a full state-by-state listing of household computer ownership.

    Expenditures on Personal Computers in the United States

  • In 2000, businesses in the United States spent $48 billion on Intel-compatible PCs. Government and educational institutions spent an additional $10 billion, and home users spent nearly $26 billion7.

    Computer-Related Employment in the United States

  • In 2000, approximately 2.7 million people (about 2.1 percent of the entire labor force) in the United States worked as computer scientists, computer engineers, programmers, computer systems analysts, support specialists, administrators, or operations research analysts8. Approximately 2.2 million people (1.7 percent of total employment) worked in the Commerce Department’s standard industrial classification (SIC) 737 (Computer Programming, Data Processing, and Other Computer Related Services). Of these, approximately one million people (about 45 percent of jobs in SIC 737) were employed as computer scientists, computer engineers, programmers, computer systems analysts, support specialists, administrators, or operations research analysts9. California had the largest population of professional software developers in the country. See Table 4 for a full state-by-state listing.

    Holdings of Microsoft Stock

  • Microsoft has about 5.4 billion shares of common stock outstanding, worth $327.2 billion dollars at current market prices10. Institutional investors, including many of the largest mutual funds, hold more than 40 percent of those shares. In all, millions of Americans hold Microsoft stock either directly or indirectly. If the imposition of the litigating states’ remedies reduced the stock price by just one-fifth, shareholders would lose $65 billion in savings.

    Pension Fund Holdings of Microsoft Stock

  • Pension funds in the United States hold approximately 220 million shares of Microsoft stock, worth $13.3 billion at current market prices11. Thus, if the value of Microsoft stock were to fall just 20 percent, these pension funds would lose $2.7 billion dollars in value. In California alone, public employee retirement systems hold shares of Microsoft stock worth $2.4 billion.


    1 New York v. Microsoft, Civil Action No. 98-1233 (CKK), Plaintiff Litigating States’ First Amended Proposed Final Judgment, March 4, 2002. The nine litigating states are California, Connecticut, Florida, Iowa, Kansas, Massachusetts, Minnesota, Utah, and West Virginia. The District of Columbia joined these states in pursuing litigation.

    2See David R. Henderson, Evaluating the Litigating States’ Proposed Remedy for Microsoft, available at http://www.davidrhenderson.com/Consumer%20Harm%20White%20Paper%20Henderson%20final1.pdf.

    3Data purchased from Corporate Technology Information Services and modified as described in Josh Lerner, “Did Microsoft Deter Software Innovation?” Working Paper, January 2002.

    4Microsoft Corporation, http://www.microsoft.com/freedomtoinnovate/industry/fin_us_partners.asp, downloaded March 28, 2002.

    5“A Nation Online,” Department of Commerce, Economics and Statistics Administration, February 2002, available at http://www.esa.doc.gov/508/esa/pdf/nationonline_020502.pdf.

    6In 2000, Microsoft client operating systems accounted for 85 percent of the total installed base of client operating systems worldwide. Al Gillen, Dan Kusnetzky, Akihito Sayama, and Martin Hingley, “Worldwide Client and Server Operating Environments Market Forecast and Analysis Summary, 2001–2005,” International Data Corporation, No. 25118, Table 5. While precise figures for the United States are not available, there is no reason to believe that Microsoft’s share of operating systems is significantly different.

    7IDC, PC Tracker Database. Intel-compatible PCs are defined as all processor categories identified by IDC excluding Power PC, 60830 and below, and 68040. IDC tracks PC sales for the following categories of processors: 386+Below, 486, 5th Gen. 101-149 MHz, 5th Gen. 150-179 MHz, 5th Gen. =180 MHz, 6th Gen. 201-299 MHz, 6th Gen. 300-399 MHz, 6th Gen. 400-499 MHz, 6th Gen. 500-599 MHz, 6th Gen. 600-699 MHz, 6th Gen. 700-799 MHz, 6th Gen. 800-899 MHz, 6th Gen. 900-999 MHz, 6th Gen. =1 GHz, 7th Gen. 500-599 MHz, 7th Gen. 600-699 MHz, 7th Gen. 700-799 MHz, 7th Gen. 800-899 MHz, 7th Gen. >=1 GHz.

    8“2000 National Occupational Employment and Wage Estimates,” Bureau of Labor Statistics, available at http://www.bls.gov/oes/2000/oes_15Co.htm. IDC includes all of these occupations in its definition of professional developers. Stephen D. Hendrick and Ludovica Bruno, “The 2001 IDC Professional Developer Model,” International Data Corporation, No. 24765, June 2001, p. 8.

    9“2000 National Industry-Specific Occupational Employment and Wage Estimates: SIC 737 – Computer Programming, Data Processing, and Other Computer Related Services,” Bureau of Labor Statistics, available at http://www.bls.gov/oes/2000/oesi3_737.htm.

    10As of March 28, 2002.

    11As of March 28, 2002.