Watch Video of Steve Ballmer Interview

Steve,

Last week you did an interview with analysts Tom Austin and Dave Smith at the Gartner Symposium at which you talked about Lindows.com and had some strong comments about our $199 computer. While we appreciate the exposure, I did want to challenge some of your answers because I thought they were misleading. Below I've taken quotes from your talk that I watched from News.com (video) and from the Gartner website (video). After each quote, I've added some of my own thoughts. Feel free to email me with any response you might have.

First up, the interviewer asked if lowering the cost of Microsoft software would spur sales of personal computers and open a whole new market.

Ballmer: "Would there be a material difference in sales between a $475 computer and a $500 computer? ...We're not blind to the issues that you're saying, but we're trying to be smart about it because I don't think people's gut reaction is right. I don't think a $475 machine outsells a $500 machine so radically as to be worth our taking the precipitous action you talk about."

I think you used a classic "straw man" argument - where you use incorrect information to draw a favorable but inaccurate conclusion. You're probably right that if the price difference were just $25 then it wouldn't matter all that much, but $25 isn't a realistic number. Rather than work with a hypothetical, lets look at actual numbers for a computer outfitted with Microsoft software versus the identical computer outfitted with LindowsOS. All price quotes are from Walmart.com as of 10/02.

* Included at no additional cost in the Click-N-Run Warehouse along with hundreds of other programs.

As you can see, the price difference is dramatic for a general purpose computer running a typical set of productivity programs. The total cost for a Microsoft solution is over $1,000 versus less than $500 for a LindowsOS solution. That's more than 20 times the $25 difference you cite in your example. Over $700, or more than 70% of the total cost of a general purpose computer is monies going to Microsoft. That's why your $25 illustration is inaccurate. New markets will emerge and the tech industry will grow as consumers realize that modern computing for their home, business or school has become much more affordable.

Concerning the $199 PC from Walmart.com you said:

Ballmer: "Somebody is subsidizing that hardware. Somebody is losing -- I mean, people know what power supplies and disks and processors all cost."

Actually Steve, I don't think most people know what individual components cost. You seem to think they cost more than $200, but that's not true in this case. I assure you that we're not subsidizing these computers - they're just very affordable because hardware prices are dropping dramatically. This is why we believe that if we can make the accompanying software more affordable many more people will use computers or buy multiple computers. Even though we're not subsidizing these computers, if we were I don't think there's necessarily anything wrong with that just as Microsoft subsidizes their Xbox machines. But in this instance we are not. They're just a great value.

Ballmer: "Well, if you take a look at our price for a home computer, which is what you find actually on Walmart.com, I think, you wouldn't find it in the stores -- it doesn't sell well enough to be in the stores, but on Walmart.com you'll find a $199 computer."

I have to admit this comment made me angry and let me explain why. As you know Steve, one of the main reasons LindowsOS and other products aren't in more retail outlets is not because there isn't demand, but because Microsoft wields incredible financial clout which is used to extort companies not to work with competing products. Yes, after two anti-trust violations you're obligated to offer equitable pricing to the largest computer builders for the Microsoft Windows XP software, but what Microsoft does now is use MDF (market development funds) to pressure the behavior you want from many OEMs. You give computer companies a price break on Microsoft software in the form of a rebate for every computer they've sold. This program is disguised as a "marketing" program but OEMs only qualify if they agree to terms such as not working with competitor's products. Since most hardware companies operate on slim margins, they can't afford to defy Microsoft's demands and lose millions in kickbacks. If you wanted to spur innovation and give consumers a true choice, then you would allow them to carry competing products without jeopardizing their pricing terms. Until then, it's highly misleading to suggest that because of consumer demand or lack of sales that competitor's products aren't on the store shelves.

Ballmer: "We agree it would be nice to have have a variety of different options in our licensing - per user, per device. The key question is, how do we do that and not have the level of complexity explode?"

With the price of hardware dropping so quickly, many people will have multiple computers and we agree that they should only have to pay for one copy of software - since that's all they can use at a time. Maybe they have a laptop and a desktop or even multiple computers in their house or office. Per user rather than per machine pricing is most fair and offers dramatic savings in these increasingly common situations. If we use the above numbers for a person owning 2 computers, the difference is a startling: $2,134.20 (2 computers running Microsoft software) versus $755.56 (same computers running LindowsOS). Per user licensing is not nearly as complicated as you might think. Feel free to use our license as a template since we already offer per user licensing. We think it's the only thing that makes sense as we move to a world where we're surrounded by inexpensive computers dedicated to specific tasks or locations.

Sincerely,

Michael Robertson

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