Settlement in the Microsoft Iowa Litigation

Key Concepts in the Litigation

OVERVIEW  |   WORKING WITH ACADEMIC EXPERTS  |  KEY CONCEPTS IN THE LITIGATION 

Our team worked closely with defense counsel to identify important economic principles that explain the dynamics of the software industry. These included:

Economies of Scale 

The cost to a company of making the “first copy” of a product, such as a book or music CD, often represents nearly the entirety of its costs for the product. Similarly, with a product such as the Microsoft Windows operating system, the costs incurred through R&D, the writing of source code, and testing account for most of Microsoft’s costs. Subsequent copies of the same version cost much less to produce, distribute, and install, which can lead to a potentially high volume of the product in the marketplace at low prices.

Network Effects 

The value of a product such as an operating system is directly affected by the number of users and the number of complementary products. As a product such as Windows becomes more ubiquitous, its value increases. The network effects discussed in this case include:

• Large, installed base: The enormous user base for certain products provides benefits to the consumer. For example, the fact that Microsoft Word has a large installed base means that many users can communicate easily by using the same software program.
• Experience effects: The value of a product can depend in part on how much time and cost are required to learn it. Microsoft Excel, widely used and understood by consumers, has become a standard for spreadsheets. Switching programs would require significant time and effort on the part of consumers.