"The Microsoft Tax" Definition

The Microsoft tax is an unofficial, but commonly used term that refers to the licensing fee that Microsoft charges major suppliers of personal computers for each unit sold and that purchasers thus usually pay for such computers, regardless of whether or not they want or intend to use a Microsoft operating system.

This tax1 exists because of pressure that Microsoft exerts on computer manufacturers and sellers in the form of charging higher licensing fees for computer sellers that do not comply. Microsoft has been able to exert such pressure because of its monopoly power2, and the ability to dictate that nearly all new personal computers come with Microsoft Windows preinstalled has been a major factor in its ability to perpetuate this monopoly.

An important part of Microsoft's strategy to enforce the Microsoft tax has been its unrelenting propaganda campaign against the supposed evils of selling computers without operating systems or with alternative operating systems installed, claiming that they result in so-called software piracy. The company has even coined a dramatic term for such computers, naked PCs, in order to try to shame vendors into not selling them and to try to influence governments to pass legislation to outlaw them.

Another factor that facilitates extracting this tax is the fact that most purchasers of personal computers are not aware of it, and most of those who are aware of it believe that they have no choice but to pay it. The former situation exists because the share for Microsoft in the total price for each computer is not itemized separately, in contrast to the separate itemization of the sales tax in many countries or localities.

The Microsoft tax is not cheap. Although precise figures are not available, it could easily amount to US$50 or more per computer for large volume sellers. This represents an increasingly large fraction of the total cost of a computer, as the average total cost per unit has continued to drop at a rapid rate in recent years while this tax has remained roughly constant.

Although not quite as convenient as buying a brand name computer, it is both possible and perfectly legal to avoid paying the Microsoft tax in the event that a buyer does not intend to use a Microsoft operating system with a new computer. Moreover, it is also highly advisable for several reasons, in addition to saving money. Perhaps the easiest way to avoid the tax is by assembling a desktop computer oneself, which has become fairly easy even for people with only basic technical skills, or purchasing a white box PC without a Microsoft operating system preinstalled. A white box PC is a personal computer that is assembled from off-the-shelf components, usually by small, local companies that specialize in selling computer parts and assembling computers to customer specifications. Such companies are relatively free to supply computers without operating systems or with alternative operating systems preinstalled.

In addition to saving a not insignificant amount of money, not paying the Microsoft tax and using an alternative operating system, such as Linux, can provide a substantially improved computing experience, including far greater stability and security (i.e., virtually eliminating problems with crashes, viruses, spyware, etc.). Moreover, it can benefit the economy as a whole by promoting competition in operating systems, which can result in lower prices and improved quality.

There are several factors that may work together to make the Microsoft tax less of a tax and more of a voluntary payment in the future. They would operate mainly by facilitating major computer retailers making computers with Linux preinstalled readily available to computer buyers. These factors include the growing popularity of Linux3 and the consequent gradual weakening of Microsoft's monopoly power as well as the continued decline in the cost of computer hardware.

New desktop personal computers can now be purchased for as low as approximately US$200, although notebook computers are still considerably more expensive. However, it will likely be just a few years until both types are available for around $1004. Thus, the gap in prices in percentage terms between computers sold with the Microsoft tax and those sold without it will become greater and greater. This will make it more tempting for sellers to go against Microsoft and offer computers without the tax, and it will likewise make it more tempting for consumers to purchase computers that are not encumbered with the tax, even if they are not well known brands such as Dell and HP.

1A tax is usually defined as an involuntary fee paid by individuals and/or businesses to a government, or to some organization in lieu of a government.

2What many people who are knowledgeable about computers find highly annoying about this tax is not only that it increases the prices of computers even for people who do not want to use Microsoft products but also that it is far higher than the cost of developing the operating system plus a reasonable profit. This has resulted in the accumulation of vast profits that are used largely to perpetuate the monopoly rather than for true innovation.

3This growth in popularity is the result of continued improvements in performance together with an increasing awareness of Linux and its benefits. For links to articles about the accelerating worldwide use of Linux, see Linux Success Stories, The Linux Information Project, 2006.

4That $100 personal computers are a practical goal and not far in future can clearly be seen by the rapidly growing interest in the $100 laptop project, which is intended to provide low cost notebook computers for students in low income countries. Already, strong interest in such computers has also been expressed by individuals and organizations that are not students and that reside in high income countries.

Created September 26, 2006.
Copyright © 2006 The Linux Information Project. All Rights Reserved.