I totally missed another couple of fallacies in Alex Tabarrok’s Marginal Revolution post on Microsoft and bundling.

First, let me start with his take on the EU ruling against Microsoft:

This explains why the European directive requiring Microsoft to sell two versions of its operating system, one with and one without the media player, is pointless. Microsoft will simply sell the two versions at the same price – then which one would you choose?

The one on the cheapest PC.

The PC market, unlike the Mac market, is heavily price-driven. People generally buy the least expensive system they can get away with per feature. Also unlike the Mac market, most operating system sales are from preinstallations on hardware sold by hardware makers/assemblers who license the software from Microsoft, rather than people popping into CompEU and picking up a copy of Windows 2004 — This Time It Really Won’t Crash, We Promise^™.

So in Europe, a manufacturer will have the ability to install another media player besides Windows Media. So if someone has to use RealPlayer, which still is the choice of more commercial sites, or QuickTime, which is still the choice of more artistic and hobbyist sites, they probably won’t care that Windows Media isn’t bundled with the machine.

Second, Alex’s take on monopoly incentives, in addition to not reflecting the reality of the market since 1997, as I argued in my last post, doesn’t pass the common sense test. If I have a monopoly on not one but two systems, and can easily make small changes to keep out competitors (and have reduced the market value of any competition through bundling), why should I invest in R&D to improve my product absent serious competition? I can simply collect fees on my operating system, and if I want to upgrade the browser to IE 7, I make people buy a whole new operating system that they may not want or be able to run on their current hardware (see my point above) to get it.

Indeed, this is exactly what Microsoft has done. They have stopped innovating on the browser entirely, and they haven’t taken advantage of their ownership of both the OS and the browser to integrate the two in any useful way. The only thing they’ve done is mix up the user interface of the file browser nad the Web browser, causing much customer confusion. If this “integration” has resulted in any new efficiencies, productivity, or has enabled new things that can be done with a computer, I and most observers have been completely blind to them. That’s not impossible, but it’s not bloody likely.

Third, I’d point out that the likelihood of a market “naturally” moving to a monopoly depends on the monopoly being good for something. Since it’s not good on the desktop, has it helped Microsoft integrate with servers? Or has it helped Microsoft get its servers out into the market ahead of the competition?

That’s a resounding no. In fact, Microsoft has been losing market share in Web servers ever since it won the browser installation monopoly. So despite controlling both the desktop OS and the browser, it was unable–despite a huge effort–to monopolize the server market. Indeed, the only thing it may have done is prevent itself from losing market share to other OSes and Web servers.

Here, ironically, is the area that Alex might have the best argument–Microsoft’s browser monopoly hasn’t enabled it to inflict its insecure, bug-ridden servers on the rest of the world the way its desktop monopoly has allowed it to inflict its insecure, bug-ridden e-mail client and server on much of corporate America. So when you get the next virus in your e-mail that cripples your corporate network, just think that it’s not Internet Explorer’s fault.

And that’s the best thing I can say about Microsoft’s browser installation monopoly.