Part of an occasional series from our industry insider who writes under the pen name El Nino.
In case you haven’t heard, Bill is a fairly smart individual. He probably would break Mensa’s applause-o-meter, but it’s in the world of street-smarts where he really takes the crown. The other weekend, Bill and his lawyers decided that they’d had enough, and should go to court; they could outspend and outlast the government. What’s amazing is that Bill has fallen for a trap of exactly the kind he’s set so many times for his business opponents: even if he wins, he loses. Of course, it’s American tradition to think that governments are bad and business is good. No red-blooded citizen would cave in to the oppressions of dunderheaded government droids. There’s only one problem with Bill’s thinking: monopolies are in fact a bad thing, and he owns a doozie. Operating systems and, to a lesser extent, middleware and low-level application infrastructure (read: database, naming, networking, shared components, security, administration..BackOffice) are terrific examples of a natural monopoly. Once you’ve got a capable vendor established in the market, even if you put competitors out there with gub’ment subsidies, they’d quickly die. And in the computer industry as in no other, customers actually want only one supplier (even when they don’t like their one supplier, they want to replace it with one other supplier). It’s actually beneficial in practical terms that all this software come from one vendor. Multi-vendor squabbling actually hurts the user and the growth of the industry overall. Unix is a good example of this phenomenon. So, beneficent dictatorship works in software. Much as I might object conceptually, I am actually better off with Windows killing OS/2, and NT killing Netware, AS400 and Unix. But there is a problem: it’s unhealthy, not only for competitors but for Microsoft itself. And in not realizing this, Bill is blowing it.
Nothing can escape
A monopoly is the economic equivalent of a neutron star, the curiosities with gravitational force so powerful that nothing can escape it. Not even the light it generates, or the light of nearby stars. These black holes are interesting to think about, but they are dangerous to the objects around them and they don’t seem to serve much of a purpose in the cosmos. What’s worse, they are a trap that otherwise useful stars fall into. In the case of the economics, the monopolist’s market power can be readily extended into new markets like browsers and applications where healthy competition had existed before. Microsoft’s essential monopolies in operating systems and desktop application suites make meaningful competition impossible in those, as well as adjacent markets. The problem is, all vendors need competitors to keep them on their toes. Even if you have high levels of internal paranoia, eventually the fundamental need to innovate just isn’t there. Then arrogance and hubris creep in. Intel actually needs AMD and others to push it forward, just as Microsoft has needed Digital Research, IBM, Lotus, Apple and Netscape to keep its creativity flourishing.
The $64bn Question
Bill may have, for an instant, achieved a personal net worth of $64bn. The Big Question now before the government is what to do about Microsoft’s market power. The capitalist freedom fighters claim that Redmond is just a plucky competitor with the spoils of victory. And historically this is true: Microsoft has outmaneuvered and out-executed everyone in its path. It may not have been all that innovative technically, but it has been terrific in commercializing and popularizing the product and the product category. The whole problem is, Microsoft is so successful and so competitive that it does, in fact, wipe out just about everything in its path. It’s difficult to think of a successful competitor in Microsoft’s home markets since about 1991. Every economist and lawyer will tell you that monopoly industries are less innovative than competitive industries, but this observation is not the result of some evil government regulation. It’s because the market power of the monopoly (which has been documented in market shares of as little as 40%) is so overwhelming that the firm no longer has to innovate. Unfortunately for Microsoft, the competitors are essentially an extinct species (mixing metaphors for a moment), having long since fallen into an orbit around the gravitational field of Redmond. And new competitors, no matter how good a job they do, will be dead before they start. The government wouldn’t be punishing Bill for being bad, it would merely be recognizing that it’s done a terrific job, beaten everyone, and finally declaring game over for the product category. Nobody, but nobody can win against Redmond on their home turf, and it’s actually best for all players if the government institutionalizes this by declaring operating systems as commercially off limits.
Give the man a dollar
One of the interesting antidotes for monopoly (one supplier) is monopsony (one buyer). The formula would run like this: Microsoft owns the product category, Operating Systems. An authorized cartel representing all computer vendors is the only consumer of this product, and there is a fixed transfer price. This price is typically low, but it guarantees a fair profit for both sides. Why does everyone sign up for this? Because the government threatens to tie them up in court for years. The computer vendors would actually like the situation more than Microsoft would, but life could be worse for the folks in Redmond than guaranteed profits and freedom from lawsuits (that is, lawsuits of any kind regarding the operating system). Having a low price for the operating system also virtually guarantees that Big Bad Bill will be less interested in bundling all kinds of new stuff in the operating system. Why bother, if he can’t charge for it anyway? By clearly demarcating the monopoly zone (essentially, identifying what is already a dead market) and keeping surrounding markets competitive, the legal system could do a favor for Microsoft and its competitors at the same time.
