- The Microsoft Monopoly -

This month's "technology topic in the mainstream press" is, once again, Microsoft.  For those who haven't heard, the European Union recently declared Microsoft's bundling of their Windows Media Player with the Windows XP operating system to be an abuse of a monopoly position in the marketplace, and fined them roughly $600 million.  The EU also insisted that Microsoft publicly release some of its source code and required Microsoft to release a version of Windows XP in Europe that does not include the Windows Media Player. Microsoft is, needless to say, appealing the decision.

While the recent ruling is new, the accusation is not.  The United States Department of Justice began antitrust proceedings against Microsoft back in 1998, claiming at the time that the integration of Internet Explorer into the OS was an abuse of monopoly power.  While that case was eventually settled, the DOJ also considered fines and the required release of source code, as well as more drastic remedies such as breaking the company into pieces (a la the DOJ's AT&T ruling).

Do Not Pass Go, Do Not Make Obvious Monopoly Puns

The premise behind both complaints (and many others not mentioned here) is that Microsoft has become a monopoly provider of PC Desktop operating systems (and with 90+% market share in that space, it is hard to argue the point).  The argument continues, however, by suggesting that monopolies are inherently bad because they stifle competition in an industry, which discourages innovation and ultimately hurts consumers by limiting their choices and making them too dependent on a single provider of services.

That's all well and good in an economics textbook, but here's the big newsflash from the world of empirical evidence: The technology industry loves monopolies and has since its inception.  Over the years, monopoly providers for key technologies have created a critical mass of users, technical support, marketing and inter-operability that has made technology the fastest growing field in history.  This hyperactive growth has, in turn, led to the creation of thousands of profitable companies, intense competition, millions of jobs, and some of the most rapid and creative innovation ever achieved.

To illustrate the point, let's look back at some  notable technology monopolies:

• In the 1950's and 1960's, IBM established a monopoly in the mainframe computer market.  Just about every mainframe was an IBM, and it was inconceivable to anyone at the time that any company would ever challenge IBM in that market.
   

• In the 1970's, Wang created the Office Information System (OIS), which was a desktop computer dedicated exclusively to word processing.  Again, their market dominance was astounding, and no one at the time would have dared to predict that another word processor could possibly dethrone Wang in that market.
   

• In the 1980's, with the popularization of the general-purpose personal computer, OIS virtually vanished, and more than 90% of the word processors in the world were WordPerfect.  Also in the 80's, Lotus created 1-2-3, which achieved almost total market dominance in the world of spreadsheets, displacing the original spreadsheet application, VisiCalc.  As before, technologists of the day assumed that the ubiquity of WordPerfect and Lotus 1-2-3 would prevent anyone from ever creating another successful product in these spaces.
   

• In the 1990's, the trend continued with America Online, which became the sole significant online service provider; Netscape, which released the only significant World Wide Web Browser; and 3Com, who's Palm Pilot single-handedly launched the Personal Digital Assistant marketplace.
   

• In the early 2000's (the decade, not the millennium.  And hey - what are we calling this decade, anyway?), Apple's iPod achieved relative dominance as well (55% market share in late 2003) in the portable digital music player space.  A rash of competing products appeared quickly around iPod, but it still maintains at least double the market share of its nearest competitor.

Each of these monopolies represented a major leap forward in some facet of personal computing.  In fact, one is hard pressed to find a significant segment of the technology market that did not begin with a monopolistic position.  The direction of this cause and effect relationship can be debated, but not its existence.

Before I go on, I should acknowledge that I intentionally left Microsoft off of the above list.  This is not meant to suggest that Microsoft doesn’t have its own litany of products that would fit the list (e.g., Windows, Internet Explorer, and others), but to emphasize the point that very little about Microsoft's situation is a new phenomenon in the technology space.

Doubles . . . Roll Again

To be sure, Microsoft's market dominance is a familiar tale, as is the resulting litigation.  As early as 1952, the U.S. Department of Justice sued IBM for antitrust violations in the mainframe market, settling the case in 1956.  The particulars of this agreement were still being modified and agreed to by the parties as late as 1997.

In the early 90's, with 1-2-3 at the height of its popularity, Lotus successfully sued Paperback Software for creating a software package that used the same user commands as Lotus 1-2-3.  A week later, they sued Borland, claiming that their product, Quattro, used some of the same commands as Lotus 1-2-3, and could be customized to resemble it even more (Lotus lost that suit).  Also in the 90's, Apple Computer sued both Microsoft and Hewlett Packard, claiming that their graphics-based operating systems looked too much like Apple's interface.  Xerox, makers of an operating system called Star, then sued Apple, claiming that their interface was stolen from Xerox.  In each of these cases, the defendant prevailed.

Of course, the legal battles don't tell the whole story.  Microsoft has endured more than a decade of criticism from the technology and mainstream press about its behavior in the marketplace.  Once again, history is replete with similar examples.

In the early 1990's, America Online was routinely criticized for its "carpet bomb"-style marketing.  For a number of years, those of us who belonged to several technology mailing lists received enough free copies of AOL's software to wallpaper our home offices in a nice, circular pattern of metallic silver.  AOL was also criticized for some of its software functionality, its "easy to use" interface, and even the demographic of people it brought to a previously pristine world of online technophiles.

As the 90's progressed, a group called the World Wide Web Consortium (the W3C) defined a set of HTML standards for the burgeoning world of web developers.  Netscape, then the 800-pound gorilla of web browsers, was routinely and harshly criticized for violating this standard with what they called "extensions," which provided additional functionality that would only work properly in a Netscape browser.  Many of these extensions, such as frames and bold text, have long since become part of the standard language, primarily due to Netscape's prominence at the time.

Turning Houses into Hotels

All of this history begs a basic question: Why, if technology monopolies are so harshly discouraged in both the press and the courts, do they continue to emerge as the vehicle for significant growth in their industry?

The answer lies in what Robert Metcalfe famously described as the "network effect," where the value of a system grows roughly by the square of the number of users it contains.  In other words, having a product that everyone uses is more important than having the best product.

Take, for example, the Dvorak keyboard.  Study after study finds the Dvorak layout to be superior to the more common "QWERTY" standard.  Nonetheless, the near universal acceptance of QWERTY has made it the preferred layout of just about every keyboard, and the subject of just about every typing class and tutorial on the market, rendering the "superior" Dvorak keyboard an oddity.

Another great example is America Online's Instant Messaging platform (AIM).  There are several IM applications with superior features and functionality to AIM.  However, if you install one of these "better" products, you can't chat with as many of your friends and colleagues (since most of them are on the AOL network).  Since the reason you installed IM in the first place was to chat, all of those extra features aren't nearly as valuable as the size of AIM's install base.  Another inferior product wins the day.

Let's look at Microsoft Windows in this context.  The hardcore Apple faithful fill gigabytes explaining to the rest of us that the Macintosh user interface is superior to Windows in vast and varied ways.  Yet, to their continued chagrin, Windows remains the standard for more than 90% of the desktop computing world.  Why?  Because of Metcalfe's law.  Because a spreadsheet produced in MS Excel is likely viewable by just about everyone you'd ever send it to.  Because your question about MS PowerPoint can likely be answered by a random passerby in your office, or at least in the hundreds of chat rooms and discussion groups spawned by such a popular product.  Because folks all over the world are constantly devising new and creative ways to use these products, documenting workarounds to known bugs, and writing add-ins and extensions to achieve commonly desired goals.  The point is a sore one for the Mac zealots.  What they fail (or refuse) to realize is that Windows is not number one because of its quality; it's number one because of its ubiquity.

The counter arguments to all of this are cross-product compatibility and industry standards.  After all, the fact that QWERTY is the standard keyboard doesn't mean that only one company can make keyboards.  My telephone can communicate with any other phone in the world, and hundreds of companies produce phones.  All cars run on the same roads, with the same fuel, and the gas pedal and steering wheel are always in the same place, even though lots of companies make cars.  So why couldn't we have dozens of competing operating systems, all either adhering to an agreed upon industry standard (like the QWERTY keyboard) or including functionality to work effectively with competitors' products (like the telephones)?

The short answers are greed and complexity, respectively speaking.

Industry standards don't work because companies can't seem to help themselves when it comes to issuing extensions or alternative versions of the standard.  Examples include HTML and Netscape (mentioned above), but also EDI and Wal-Mart, Java and Sun, and Java and Microsoft.  The big irony here, of course, is that by innovating, these companies pollute the standards and make it harder for users of various products to communicate, lowering the value of the technology as a whole (as per Metcalfe).  So the solution to preventing monopolies, which ostensibly stifle innovation, only works if we limit the type and amount of innovation that is permitted.

Cross-product compatibility doesn't work because software is too complex and fast moving.  Those who have tried it typically achieve near-compatibility with the standard bearer relatively quickly, but then spend years trying to achieve a perfect match.  They typically succeed only when the standard bearer has moved on to another version of their product, effectively freezing the target format long enough to work out the emulation.  Here are some excerpts from a review of WordPerfect Office 12, written just last month:

Most of the changes to WordPerfect Office 12—which consists of the WordPerfect word processor, the Quattro Pro spreadsheet, and WordPerfect Presentations slide-show maker—are in the area of increased compatibility with Microsoft Office’s Word, Excel, and PowerPoint applications, said Wendy Lowe, the suite’s product manager.

The product is on Version 12, and they're still trying to get compatibility right.  To be fair, many will say (as Scott McNealy so famously said in 1997) that word processors, etc. are over-featured, and that the last few hundred features are things most of us will never (or should never) use.  Mr. McNealy may have a point, but let's take a look at the features WordPerfect enhanced in Version 12:

Among the changes to the WordPerfect-Word file filters in version 12 are ones to better handle footnote formatting, more accurately display tables originating in Word, and properly show text wrapped around graphics or photographs, she said.

I think it's safe to say that footnote formatting, tables, and embedded graphics are not esoteric functions that few of us will use.  More likely, Microsoft has been enhancing the way MS Word handles these features over the years, and WordPerfect is struggling to keep pace.

Given these uncertainties, WordPerfect users must either avoid luxuries like footnotes and tables, or run the risk that their audience sees an unclear/unprofessional version of their ideas.  Since so many people are already using MS Word, the easiest way to ensure clear communication between parties continues to be a common software platform.

How to Get Out of Jail Free

Most of the technology monopolies mentioned above seemed as invincible in their day as Microsoft seems today.  Over the years, many would-be competitors chose to complain loudly and/or sue the market leader, in an attempt to clear a path for their product.  In almost all cases, this strategy ultimately failed to achieve it's goal.  Those who compete with Microsoft would be well advised to study the stories of previous monopoly holders, and identify a more practical approach.

One of two things happened to the former monopolies mentioned above:  either they retained their monopoly position in their market, but the market ceased to be the forefront of modern technology, or a competitor with a better product appeared and, seemingly overnight, overtook the monopoly holder.

IBM, for example, is still the monopoly provider of mainframes.  Competitors have simply ceded the relatively stagnant mainframe market, and have chosen to compete with IBM in different arenas.   On the other side of the coin, MS Excel began life as yet another spreadsheet that wasn't Lotus 1-2-3.  Within a couple of years, MS Excel was suddenly the only name in spreadsheets, and Lotus 1-2-3 had begun its rapid descent into obscurity.

Winning the Game

So what lies ahead for Microsoft?  I don't believe anyone will attempt to challenge them on the PC desktop, leaving them a permanent monopoly position in that arena. Like IBM's mainframes, though, the desktop is not the driving force it once was, and all signs point to its continued decline in importance and influence.

Like IBM did through hardware development (the IBM PC in 1981), software acquisition (Lotus in 1995), and consulting services (IBM Global Services in 2002), Microsoft has used its monopoly position in one market to help it compete in other markets.  Also like IBM, however, Microsoft has not been granted automatic market domination in these areas and has, in fact, struggled to achieve market leadership (and profitability) in many of them:

• In the server operating system space, Microsoft has seen success, but has not yet surpassed Unix as a market leader.  A new competitor, Linux, has offered stiff competition in this space as well.
   

• In the PDA/Wireless space, the "out-of-the-box" monopoly was 3Com's (now Palm's) Palm Pilot.  Again, Microsoft has competed well here with their Windows Mobile O/S, but has failed to achieve market dominance.
   

• In the gaming space, the "undefeatable" monopoly was Nintendo.  Sony made a significant attempt at challenging them with PlayStation, and then Microsoft made it a three player game in November of 2001 with the introduction of XBox.  Leadership in this space is still up for grabs.
   

• Intuit's Quicken package remains the "team to beat" in the personal financial software space, with MS Money showing a strong second place.  Even poorly reviewed releases of Quicken have not seemed to vault Microsoft into the leadership position here.
   

• Microsoft even entered the television/cable news arena with MSNBC in 1996.  The "monopoly" in this space at the time was CNN.  In the past eight years, MSNBC has been relegated to a distant third place finish in most cases, but the monopoly was successfully defeated by Fox News Channel, which appears to be the new ratings juggernaut in cable news.

The most ironic technology area in which Microsoft has failed to dominate is that of multi-media players, the very product they were fined $600 million by the EU for bundling with MS Windows this past month.  Neilsen/Net Ratings says Microsoft had a 34% market share, compared with 20% for Real and 9% for QuickTime (Apple's player) in February, 2004 (these are U.S. figures, although one sees no reason why Europe would be significantly different).  This hardly represents market dominance, despite almost three years of bundling Windows Media Player with Windows XP.

Obviously, no one knows what the future will bring, but this much seems clear: Microsoft won the early battle for the PC desktop, and will likely continue to dominate that space in perpetuity. As time goes on, this will matter less and less, except for the endless source of capital it will provide Microsoft to compete in other, related areas. As it stands now, Microsoft has around $50 billion in the bank, and competition in many of these areas is fierce. Nonetheless, it seems that more and more attention will continue to be paid to a story that matters less and less.

And remember - if IBM vs. DOJ is any model, our tax dollars will still be paying to sort out the last remaining details of the "desktop wars" in 2043.  We can at least take comfort in knowing that the citizens of the EU will be helping to foot the bill.