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January 21, 2009 3:01 PM
Posted by Benjamin J. Romano
Keith Leffler, a University of Washington economics professor and expert witness for the plaintiffs suing Microsoft in the Vista Capable class action suit, was given the task of quantifying the impact of the Vista Capable program on PC prices and on Microsoft. In an exhibit unsealed today, Leffler summarizes his opinions and also estimates the cost of upgrading the 19.4 million PCs sold as "Vista Capable" between April 2006 and January 2007 to meet minimum requirements for running premium versions of the operating system. Leffler put the cost of adding more RAM and graphics cards to these machines in the range of $3.084 billion to $8.522 billion.
That figure could be important if the U.S. District Court Judge Marsha Pechman agrees with the plaintiffs and allows them to use an alternative means of calculating damages to people who purchased Vista Capable PCs -- if, of course, plaintiffs successfully argue that they were, in fact, deceived by the program.
When Pechman certified the case as a class action in February 2008, she limited the scope of the legal claims to whether Windows Vista Home Basic can fairly be called "Windows Vista," and whether the Vista Capable marketing campaign inflated demand for PCs marked with a Vista Capable logo, increasing prices -- the "price inflation" legal theory. Microsoft, in seeking to have the case dismissed, argues that the plaintiffs have failed to prove this theory.
In Leffler's opinion the Vista Capable program increased demand, and thus prices, for PCs labeled Vista Capable -- but not "Premium Ready" -- between April 2006 and January 2007, when Vista was launched. "Microsoft noted that the Vista Capable Program would '[e]nsure sustained demand for current-generation hardware during lead in to Vista launch;' and that the Program would '[k]eep the XP sales momentum,'" Leffler wrote.
"... A number of class plaintiffs have also testified that the Vista Capable program influenced them to not delay their PC purchases awaiting the release of Vista.
"The impact of the increased demand for XP-based PCs as a result of the Vista Capable Program is clear. Elementary economics conclusively shows that an increase in demand will result in an increase in price and in sales. This basic economic proposition was well understood at Microsoft."
Microsoft, in seeking to have the case dismissed, suggested that Leffler's analysis was overly simplistic and general.
"The market for PCs consists of manufacturers and retailers of all types, component suppliers across the world, and consumers with varied needs, resources, and preferences. An increase in demand in this complex marketplace cannot be assumed. Rather, Plaintiffs must prove it through empirical evidence, not mere theory. They have not done so," Microsoft's attorneys wrote.
Leffler does not specify the amount of the price increase he believes was caused by the marketing program. The plaintiffs argue that the increase differs for each individual PC purchased and it would require an inquiry into the purchase of each class member to determine the specific price inflation.
Instead, they're suggesting that after establishing that price inflation did occur on a broad scale, causing injury to the plaintiffs, another method can be used to calculate damages. Other courts have fashioned alternative remedies under the Washington Consumer Protection Act. One common alternative is to calculate repair costs.
Plaintiffs suggest that in this case it would be upgrade costs -- the additional RAM or graphics cards needed to make the PCs in question capable of running a premium version of Vista. That's where Leffler's upgrade estimate of $3.084 billion to $8.522 billion could come in to play.
This alternative remedy could be a significant issue during tomorrow's oral arguments.
Here's Leffler's report, 37-page PDF.