Deflating Microsoft

by Paul A. Strassmann


March 1, 1999
Arguing that the antitrust suit against Microsoft could hurt the economy, Microsoft has been taking out newspaper ads stating: " ... the government is spending millions of taxpayer dollars in a court case that would stifle competition and interfere with an industry that is responsible for 25% of the nation's economic growth."

If 25% of the economic growth is somehow linked to Microsoft's trial, the prospect of crippling the economy warrants attention. What is the merit of its claim? After all, IT-related employment and revenues are only a small component of the U.S. economy.

As defined by the Department of Commerce, the information technology and electronics industry revenues accounted for 8.1% of the gross domestic product (GDP). Microsoft itself earns only 2.3% of the industry's revenues. So here we have 0.19% of the economy alleging that government may be jeopardizing a quarter of the nation's growth by stifling Microsoft.

Where did the 25% figure come from? A helpful executive at Microsoft's public relations agency directed me to the Commerce Department's report on "The Emerging Digital Economy" ( Indeed, the report stated in its executive summary that "in recent years, IT industries have been responsible for more than one quarter of real economic growth."

There are problems with the data backing up the executive summary. The definition of what is "information technology" included consumer entertainment: household audio and video, radio and TV equipment, radio broadcasting, television broadcasting and cable and pay TV. If I limit IT to computer hardware, semiconductors, instrumentation, office machinery, software, computer services and telecommunications (both voice and data), the size of the entire industry shrinks from 8.1% of the GDP and a growth rate of 14.7% to 5.4% of the GDP and a growth rate of only 8.8%. So that 25% figure is just puffery.

More flagrant is the distortion of the role of the information industry by using adjusted prices instead of actual prices for making comparisons. To adjust IT purchase costs to reflect decreasing prices of computing, government statisticians invented an "information technology" cost index. That's based largely on dollars per MIPS, dollars per megabyte of storage costs and similar favorable trends.

Applying fictional indices amplifies the calculated growth that was attributed to "information technology." Ninety-three dollars worth of cash spending in 1990 was marked down to be worth only $69, while $112 worth of cash spending in 1996 was marked up to $268. By tilting the scales, the spending for IT comes up looking much better than the rest of the economy.

Surely, we're now buying more computing power per dollar. But equating cheaper computing with economic growth is stretching the claims about the favorable economic impacts of computers beyond what is demonstrable.

Though the government included the GDP growth number based on actual prices, that was overlooked in the Microsoft advertisement. Based on actual prices paid by customers, IT has made a noteworthy contribution but a materially lower one than claimed in the advertisements.

The Microsoft advertisement is deceptive on three counts: Microsoft, with only 0.19% of the GDP, shouldn't represent that damage to itself could potentially injure the entire economy. Microsoft shouldn't claim for itself the accomplishments of the entertainment industry. Nor should Microsoft claim that IT is somehow responsible for 25% of the nation's economic growth based on fictional metrics when that number -- on a cash basis -- is much lower.

Microsoft shouldn't selectively use sound-bite statistics out of context to give misleading information about what the IT industry has actually delivered.

Strassmann ( has been plagued by overstatements about the merits of IT since he worked on IBM's CPC calculator in 1954.