This is dated, but relevant again now that the FTC is looking at the software warranty issue. -

The "Full Warranty" Remedy

John Nagle
14 FEB 2000

For some years, I and many others have been dissatisfied with the quality of Microsoft software. Until now, there was little that could be done about it, other than avoiding Microsoft products, which is difficult in many product categories. That situation has now changed.

With the recent findings of fact by Judge Jackson that Microsoft is a monopoly, discussion of antitrust remedies is in order. Various remedies have been discussed, but none offer direct relief for consumers from Microsoft's quality problems. We suggest that the following be part of any remedy, in addition to other remedies.

Microsoft shall provide a "full warranty" as defined in Federal law (the Magnusson-Moss Warranty Act, 15 USC Sec. 2304) on all its products.
The public benefit of this is obvious.  The antitrust rationale for it is based on sections 409 and 410 of Judge Jackson's findings of fact. The key lines are:
"The same actions forced OEMs either to ignore consumer preferences for Navigator or to give them a Hobson's choice of both browser products at the cost of increased confusion, degraded system performance, and restricted memory. By ensuring that Internet Explorer would launch in certain circumstances in Windows 98 even if Navigator were set as the default, and even if the consumer had removed all conspicuous means of invoking Internet Explorer, Microsoft created confusion and frustration for consumers, and increased technical support costs for business customers."
Thus, the court has ruled that Microsoft has been able to use its monopoly power to force products with defects on customers.
Any remedy should directly address this problem. This offers a way to take a big step toward higher quality of consumer software products.

What does this mean?

A benefit to consumers, not competitors

Most of the vocal complaints and litigation in the antitrust arena come from injured competitors. But that's not why we have antitrust law. We have antitrust law to keep monopolists from harming their customers. Remedies which directly benefit competitors are supposed to "trickle down" to customers in the form of lower prices and better products. The "trickle down" process takes years and sometimes does not occur at all. The 1995 Microsoft antitrust settlement has done little if anything for end users. So this time, more direct remedies are in order.

This is a remedy the courts can easily enforce

This remedy doesn't require the courts to micromanage Microsoft. It leaves Microsoft complete "freedom to innovate", subject, of course, to the warranty costs they will incur if their innovations don't work.

What is a "Full Warranty"?

This phase has specific legal meaning under US law. A full warranty requires that all defects reported by a customer must be fixed within a reasonable time and without charge.
From the United States Code, Title 15, Chapter 50:
In order for a warrantor warranting a consumer product by means of a written warranty to meet the Federal minimum standards for warranty -
(1) such warrantor must as a minimum remedy such consumer product within a reasonable time and without charge, in the case of a defect, malfunction, or failure to conform with such written warranty;
(2) notwithstanding section 2308(b) of this title, such warrantor may not impose any limitation on the duration of any implied warranty on the product;
(3) such warrantor may not exclude or limit consequential damages for breach of any written or implied warranty on such product, unless such exclusion or limitation conspicuously appears on the face of the warranty; and
(4) if the product (or a component part thereof) contains a defect or malfunction after a reasonable number of attempts by the warrantor to remedy defects or malfunctions in such product, such warrantor must permit the consumer to elect either a refund for, or replacement without charge of, such product or part (as the case may be).  The Commission may by rule specify for purposes of this paragraph, what constitutes a reasonable number of attempts to remedy particular kinds of defects or malfunctions under different circumstances.  If the warrantor replaces a component part of a consumer ent shall  include installing the part in the product without charge.

Why a "full warranty", not a a limited warranty?

A full warranty is defined in Federal law. A limited warranty is defined by a contract written by the vendor. Microsoft has a history of evading the normal warranty obligations of a a manufacturer by drafting warranties which provide no useful consumer relief. Mandating a full warranty avoids the possibility that Microsoft will be able to escape its obligations through clever drafting.

Full warranties do exist in the computer industry

Full warranties are not common in the computer industry, but they do exist.

This analysis is consistent with critical opinion within the industry

The object of an antitrust remedy is to change the behavior of the monopolist in a way that will benefit its customers. Critical opinion in the industry indicates that economic pressure for greater quality will in fact result in improved quality.

BugNet's statement

        from their "Frequently Asked Questions"

Q: Why don't the software vendors do more to prevent bugs and/or fix them in
 their products?

 A: There are many powerful market forces that exert pressure on the vendors to
 hustle new products out the door before the bug fixing process is complete -- they
 want to maximize cash flow, which always peaks with new product release; they
 want to inflate their stock price, which will enable them to acquire other firms.
 Meanwhile, as real competition in PCdom recedes to a dim memory, there are
 fewer market pressures on vendors to produce solid products, apart from BugNet.

Cem Kamer's "Quality Cost Analysis: Benefits and Risks"
"The point of quality-related litigation is to transfer some of the costs borne by a cheated or injured customer back to the maker or seller of the defective product. The well-publicized cases are for disastrous personal injuries, but there are plenty of cases against computer companies and software companies for breach of contract, breach of warranty, fraud, etc.

The problem of cost-of-quality analysis is that it sets us up to underestimate our litigation and customer dissatisfaction risks. We think, when we have estimated the total cost of quality associated with a project, that we have done a fairly complete analysis. But if we don't take customers' external failure costs into account at some point, we can be surprised by huge increased costs (lawsuits) over decisions that we thought, in our incomplete analyses, were safe and reasonable."

Mark Minasi's "The Software Conspiracy"
"As the century ends, journalist and computer expert Mark Minasi exposes the conspiracy of greed, complacency, and arrogance that lies behind the shoddy standards we've come to accept as "business as usual" in the software industry."
(From the book  jacket)

This remedy will not cause irreparable economic harm to Microsoft or its customers

The economic effect of this remedy would be to transfer some of the costs of computer ownership from computer users to Microsoft. Microsoft is currently profiting from an externality, in that it has found a way to compel its users to absorb costs associated with its quality problems. This would cease. Microsoft would incur costs related to increased technical support requirements. Microsoft might pass these costs on to its customers in the form of increased prices. However, since users can in general recover only their actual costs via warranty actions, and since Microsoft can achieve economies of scale in handling the problems created by their own product quality problems, overall cost of ownership of Microsoft products should decline. Over time, Microsoft and its customers will find a new balance of quality vs. cost, one which reduces Microsoft's warranty costs to a level acceptable to Microsoft by providing quality levels which keep customer claims down. This has been the experience with other complex consumer products, most notably automobiles.

An example with financial data

In the gambling industry,  vendors routinely take full financial responsibility for their errors and downtime. One of the leaders in lottery and gaming systems, GTech, discusses this issue in their 10-K filing with the Securities and Exchange Commission. This provides some insight into the actual costs of taking responsibility for errors in large, complex systems involving hardware, software, and a large user base. The costs are suprisingly small:
Liquidated Damages Under Contracts
The Company's lottery and EBT (electronic benefit transfer - ed.) contracts typically permit termination of the contract  at any time for failure of the Company to perform and for other specified reasons and generally contain demanding  implementation  schedules and performance  schedules.  Failure to perform  under such  contracts may result in substantial monetary liquidated damages, as well as contract  termination. Many of the Company's lottery contracts permit the lottery authority to terminate the contract  at will and do not  specify  the  compensation,  if any,  to which the Company  would be  entitled  should  such  termination  occur.  Certain of the Company's  United States lottery  contracts have contained provisions for up to $700,000 a day in liquidated damages for late system start-up and provide for up to $10,000 or more  in  penalties  per minute for system downtime in excess of a stipulated grace period,  and certain of the Company's international  customers (most notably the United Kingdom's National Lottery) similarly reserve the right to assess substantial  monetary damages in the event of contract  termination or breach. Although such liquidated damages provisions are customary in the lottery industry and the actual  liquidated  damages  imposed are  generally  subject to negotiation,  such  provisions in the  Company's  lottery  contracts  present an ongoing  potential for substantial  expense. Liquidated damages are generally deducted directly  from revenues  the  Company has  otherwise  earned from the lottery authorities and are budgeted by the Company on an annual basis. Lottery contracts generally require the vendor (i.e., the Company) to post a performance bond, which in some cases may be substantial,  securing the vendor's performance under such contracts.     ...  Liquidated damages paid or incurred by the Company with respect to its contracts  equaled 0.42%,  0.53%,  0.50%,  0.23% and 0.25% of annual revenues in each of the five fiscal years ending February 1993 through 1997, respectively.

Because  the Company  retains  title to the system  under a  Facilities Management Contract,  no warranty is provided on the Company's products supplied under such  contracts.  The  Company  does  repair or replace  such  products as necessary to fulfill its obligations  under such contract.   ...  With  respect to computer  software,  the Company typically  modifies its  software as necessary so that the software  conforms to the specifications of the contract with the customer.

So there's a company which takes on obligations roughly comparable to those we propose for Microsoft. GTech doesn't seem to find these a significant business expense.

Microsoft provides useful warranties on some of its products now

Microsoft sells some of its products, notably Internet Explorer, "AS-IS", avoiding to the greatest extent possible warranty obligations of any kind. But in some product categories, Microsoft offers a meaningful warranty. The major terms of the warranty for Microsoft Visual SourceSafe 6.0 appears below. Emphasis ours.
LIMITED WARRANTY. Except with respect to the REDISTRIBUTABLES, which are provided "as is," without warranty of any kind,  Microsoft warrants that (a) the SOFTWARE PRODUCT will perform substantially in accordance with the accompanying written materials for a period of ninety (90) days from the date of receipt, and (b) any Support Services provided by Microsoft shall be substantially as described in applicable written materials provided to you by Microsoft, and Microsoft support engineers will make commercially reasonable efforts to solve any problem. To the extent allowed by applicable law, implied warranties on the SOFTWARE PRODUCT, if any, are limited to ninety (90) days. Some states/jurisdictions do not allow limitations on duration of an implied warranty, so the above limitation may not apply to you.
Thus, it's not outside the scope of Microsoft's business practices to offer meaningful warranty terms. But Microsoft does so only in some markets. This particular example is from a business area, source-code management software, in which Microsoft faces significant competition, both from commercial and open source products. So there may be a relationship between Microsoft's monopoly power in a given market and the warranty terms it offers.

Microsoft has been shown to harm its customers by introducing bugs as part of anticompetitive acts

Judge Jackson's findings speak directly to this (emphasis ours):
172. Microsoft's refusal to respect the user's choice of default browser fulfilled Brad Chase's 1995 promise to make the use of any browser other than Internet Explorer on Windows "a jolting experience." By increasing the likelihood that using Navigator on Windows 98 would have unpleasant consequences for users, Microsoft further diminished the inclination of OEMs to pre-install Navigator onto Windows. The decision to override the user's selection of non-Microsoft software as the default browser also directly disinclined Windows 98 consumers to use Navigator as their default browser, and it harmed those Windows 98 consumers who nevertheless used Navigator. In particular, Microsoft exposed those using Navigator on Windows 98 to security and privacy risks that are specific to Internet Explorer and to ActiveX controls..

173. Microsoft's actions have inflicted collateral harm on consumers who have no interest in using a Web browser at all. If these consumers want the non-browsing features available only in Windows 98, they must content themselves with an operating system that runs more slowly than if Microsoft had not interspersed browsing-specific routines throughout various files containing routines relied upon by the operating system. More generally, Microsoft has forced Windows 98 users uninterested in browsing to carry software that, while providing them with no benefits, brings with it all the costs associated with carrying additional software on a system. These include performance degradation, increased risk of incompatibilities, and the introduction of bugs. Corporate consumers who need the hardware support and other non browsing features not available in earlier versions of Windows, but who do not want Web browsing at all, are further burdened in that they are denied a simple and effective means of preventing employees from attempting to browse the Web.

174. Microsoft has harmed even those consumers who desire to use Internet Explorer, and no other browser, with Windows 98. To the extent that browsing-specific routines have been commingled with operating system routines to a greater degree than is necessary to provide any consumer benefit, Microsoft has unjustifiably jeopardized the stability and security of the operating system. Specifically, it has increased the likelihood that a browser crash will cause the entire system to crash and made it easier for malicious viruses that penetrate the system via Internet Explorer to infect non-browsing parts of the system.

Microsoft is currently able to avoid direct responsibility for these acts only because it is able to avoid the obligations of a full warranty on its software products. Thus, a warranty remedy is appropriate.

Drafting issues

A remedy drafted to have the effect of providing full warranties must be crafted so that it cannot be evaded by Microsoft. The aftermath of the1995 consent decree indicates that this will be tough. As a minimum, the following points must be covered:


Recent press reports indicate that Microsoft Windows 2000 will ship with over 63,000 known defects. Yet Microsoft has sufficient monopoly power to sell a product with such low quality. We must not miss this opportunity to make Microsoft accountable for its quality problems.

John Nagle
Menlo Park, California