The European Union dropped antitrust charges against Microsoft on Wednesday after the software company promised to offer a choice of default Web browsers on Windows-based home computers. According to the settlement, users will be allowed to select from a list of up to 12 options. How does Microsoft—or any other business—make money from a free Internet browser?
By hooking you on its other products. Computer giants like Microsoft and Google use their free browsers to sculpt your computing habits to their advantage. Microsoft wants your Internet use to be highly integrated with your personal computer's operating system and other software, which they probably manufacture. (In a 1997 op-ed opposing the U.S. antitrust action, Bill Gates used the word integrated seven times.) Google's Chrome, in contrast, is customized to handle robust Web-based applications, in the hopes that one day you'll use the Google-dominated Internet for all your computing needs.
A few companies do profit directly from browser design. Revenue for Mozilla, the maker of Firefox, topped $78 million last year, against expenses of just under $50 million. You don't have to pay anything to install the Firefox browser, but its Internet search function—that little text box in the upper right-hand corner of the browser—defaults to Google, and the shared ad revenue from this partnership accounts for almost 90 percent of Mozilla's revenue. Opera, another independent browser designer, pulled in about $86 million against expenses of $72 million in 2008. In addition to making profits from a Google search box, the company charges the manufacturers of mobile devices for the right to use its software.
Browsers haven't always been free; Microsoft pioneered its use as a loss leader 15 years ago. Early Web titan Netscape, whose Navigator dominated the market in the mid-1990s, charged Internet service providers like America Online a license fee—about $5 per copy in 1996 (PDF)—to use its software. The strategy worked pretty well for a while, earning the company almost $200 million in licensing fees in its 1996 heyday.
By then, Microsoft had become concerned about Netscape's dominance. Bill Gates, among others, feared that all computing would eventually become Internet-based, and a computer's operating system—the source of most of Microsoft's income—wouldn't matter as much as its browsing software. So the behemoth spent $130 million annually developing and marketing Internet Explorer in the late 1990s, and the total number of engineers on the project ballooned from five in 1995 to more than 1,000 by the end of the decade. Some executives advocated bundling the program into a suite of applications that would be sold as an add-on to Windows 95. They ultimately decided to offer their browser for free, even going so far as to pay Internet service providers for every customer who switched over from Navigator. To this day, Microsoft allocates resources for development and maintenance of Internet Explorer with very little idea of the product's actual financial value.
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Explainer thanks Eitan Bencuya of Google, Michael A. Cusumano of the MIT Sloan School of Management, Danny Sullivan of Search Engine Land, and Jonathan Zittrain, author of The Future of the Internet—And How to Stop It. Thanks also to reader Robert Formica for asking the question.