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Hanging, Drawing and Quartering – American Style:The Brutal Dissection of Microsoft
Microsoft Corporation is the world's largest and wealthiest software company, with billions of dollars of cash sitting in its bank account. Today it is under siege like never before. It is embroiled with the United States Department of Justice (DOJ) and several US states on a protracted antitrust case, which it has just lost. (See Judge Thomas Penfield Jackson's Findings of Fact, Conclusions of Law and Final Judgment, United States District Court for the District of Columbia, 5th November 1999, 3rd April 2000 and 7th June 2000 respectively. These can be found at the following web address: http://www.microsoft.com/presspass/trial/. In the Final Judgment, Judge Jackson, following the DOJ's recommendations, ordered Microsoft to be split into an operating systems and applications company. He also mandated a number of conduct regulations on the company. The next stage is Microsoft's appeal, allowed for in the Final Judgment, which will be in the Court of Appeals and/or the Supreme Court.) Microsoft also faces a number of lawsuits from competitors. It is regularly slated in the IT press, especially by the more technically elite section of that press. Many of its competitors complain about its business practices, even if they do not always bring lawsuits against it. By contrast, most customers seem sufficiently satisfied with the company's product offerings. In short, Microsoft seems to be hell for competitors but heaven for consumers. Many critics consider Microsoft to be merely a lucky upstart with a well-oiled marketing machine that churns out slick, but technically inferior, products on an unsuspecting public. I beg to differ on this opinion. Below I discuss several factors that I consider the principal reasons for its success. I then analyse the more serious charges of its critics and include a theoretical analysis of issues such as antitrust, competition and monopoly. I also provide a mini-glossary at the end of the essay that defines various technical terms I use throughout. Why Microsoft is Successful A widely held belief puts Microsoft's success down to a combination of luck and marketing. It is true that Microsoft was lucky in being awarded the contract by IBM to supply the operating system for its new personal computer at the start of the 1980s. It is also true that Microsoft has a very good marketing machine. However, "luck" can be interpreted as "preparation meeting opportunity." Microsoft must have been doing something right, from IBM's point of view, to even be considered by IBM a viable supplier. Secondly, although luck may have played its part at the outset, to maintain its position in the market must have required more than luck. In other words, had Microsoft rested on its laurels it would not be where it is now.
Also, good marketing is no guarantee of a product's success, just as bad marketing is no guarantee of a product's failure. The saying that "no amount of advertising will sell a bad product" does hold. And this is confirmed by the fact that not all Microsoft's undoubtedly heavily marketed products have been successful. Quite apart from its controversial business practices, which I will discuss later, I think the principal reasons for Microsoft's success are, in no particular order of importance: The Bandwagon Effect Brand Name Persistence Lack of Complacency Low Cost Entrepreneurial Alertness Added Value Ease of Use Wooing of Independent Software Developers The Bandwagon Effect When Microsoft produced its first useable version of Windows it was first off the mark with a standard software package for the business office, Microsoft Office; and it produced decent versions of its word-processor and spreadsheet applications before companies such as WordPerfect and Lotus got their acts together. Microsoft had, in fact, being telling independent software vendors to port their applications to Windows for up to five years prior to the release of Windows 3. Everyone ignored them, probably because Windows was dreadful prior to Windows 3 and, at the time, Microsoft was a relative small fry compared to the likes of Lotus Corporation. Once a sufficient number of companies had bought Microsoft Office, others joined the bandwagon for want of anything better to do. Consequently it has been able to ride on its own momentum. Although people seem to overlook how quickly this phenomenon can be reversed. Brand Name Bill and Monica > pictured before the Microsoft case began A former soap salesman, Rowland Hanson, hired by Microsoft in its early days, came up with the idea of including the Microsoft name in every product. Hence, not just Windows, Word, Excel but Microsoft Windows, Microsoft Word, Microsoft Excel. Simple, but effective. A glance at the IT press provides an indication of how often Microsoft products are referred to by their full names. There is also a perception among end-users that Microsoft is more likely than others to produce better-designed applications for its own operating system. After all, as the creator of Windows it must know what it's doing! There is some merit in this. Although it should be noted that, in the pre-Windows MS-DOS days, Microsoft's own applications were marginal. Most people hadn't even heard of Microsoft. In mainstream applications, the likes of Lotus, WordPerfect and dBase ruled the roost. Borland rode high in development tools. All this, despite Microsoft's owning MS-DOS. Persistence
With the first two, Microsoft did not start to experience significant success until it reached version 3 of those products. Indeed, most people had not even heard of Windows until it reached version 3 and it did not really graduate beyond a platform for playing Solitaire until version 3.1 was released in 1992. Excel was trounced by Lotus 123 (Ironically, in view of what some think is Microsoft's extreme attachment to the Windows platform, one of the reasons that the first version of Excel was trounced by Lotus 123 was because Microsoft tried to make it available on multiple operating systems.) The first version of Windows NT was something of a damp squib in terms of market acceptance, despite the efforts of Microsoft's much-vaunted marketing machine. It did not start to make serious headway until version 3.51, which (despite the numbering) was the third release of the product. Lack of Complacency Once Microsoft assumes domination of a sector, such as operating systems or office suites, it does not rest on its laurels. Microsoft could quite easily get by for a few years on sales of Office 97, without bothering to release a new version. But it doesn't do this. Instead, it releases Office 2000. It acts, in other words, as though it is not the market leader and must continually add impressive new features in order to catch up with the competition. For an excellent analysis of this phenomenon see Virginia Postrel, Creative Insecurity, Reason Online, January 1998, http://www.reasonmag.com/9801/ed.vp.html. Low Cost Microsoft's products are relatively cheap. Microsoft Office was a way of substantially reducing the price for a decent spreadsheet or word-processor. Without such an innovation Microsoft would have found it quite difficult to take away Lotus's and WordPerfect's market shares. Entrepreneurial Alertness Microsoft is a world-class commercial organisation. Or perhaps, more precisely, Bill Gates and a handful of his colleagues are very astute entrepreneurs. The manner in which Microsoft Office, for example, chalked up sales by value that eclipsed those of Windows, almost destroying the likes of Lotus and WordPerfect as independent companies, was nothing short of astonishing. In effect this was made possible by a combination of branding, the bandwagon effect and low cost. Added Value Microsoft Office epitomises the phenomenon of added value. By packaging together several programs from widely used application categories (e.g., word-processing, spreadsheet, database) and selling the combined package for less than the cost of each program separately Microsoft was able to greatly increase its sales both in number of seats and total value. For example, most businesses use word-processing, spreadsheet and database software. Microsoft Office includes all these programs so it was very convenient for customers to shell out once for this, rather than purchase each program separately from different vendors. Moreover, most businesses probably benefited from the so-called competitive upgrade. I'm not entirely sure whether this was a Microsoft innovation but, if not, Microsoft certainly exploited it to the full. "Competitive Upgrade" means that a purchaser can buy a product for a discounted upgrade price, rather than the full price, provided that they are a registered owner of a competing product. Thus, suppose a user owns a copy of WordPerfect for DOS. Then a competitive upgrade would enable them to qualify for an upgrade to Microsoft Office, obtaining several new products for a comparatively low price. The list of competing products that Microsoft allows for Microsoft Office has historically been very large. This must be a good part of the reason why it has amassed its huge 80-90% market share in the integrated office suites market. Microsoft Office is its most famous example of an added-value product but added-value products are quite common from Microsoft. The Visual Studio suite of software development tools is a more recent example. Ease of Use Many of Microsoft's products, especially its applications software, are easier to use than competitors' products. Technical gurus often overlook this. They tend to promote technical proficiency as the only, or main, consideration when evaluating software. Ease of use is a very important feature for the average end user. Typically, they want to be productive as quickly as possible. Personally, I almost always favour a technically adequate but easy to use product over a technically superior but difficult to use one. Life is just too short. A feature related to ease of use, though not being quite the same thing, is usability. Microsoft generally scores high here as well. Much of this may well be due to the Usability Laboratories that it tests its new products in prior to release. "Usability" refers to the intuitiveness or convenience with which certain tasks can be performed. Here are some examples. Suppose you're using Microsoft Word 97 in Windows 95. You invoke the File Open dialogue box to open a document but the document you want is not in the current folder. So you have to change to the relevant folder first. You open the document and return to Word. The next time you do a File Open the folder that it looks in is the folder in which you just opened the document. Nine times out of ten this is precisely what you want, so this is very intuitive. However, not all programs work in this way. Here is another example. If you select a word in Word 97 and drag and drop it to another location it automatically keeps the spaces on either side of the word. Again, this is almost always what you want. But not all word-processing software works in this way. Often usability can be a very small thing. Often it's something you take for granted and you don't notice how well a software application has been implemented from a usability point of view until you use something that's worse. Speaking from experience, much Unix software seems to fall into the poor usability category. Wooing of Independent Software Developers Microsoft has always established a good relationship with independent software developers by practices such as making available software development kits for its products prior to their release. Although one of the complaints against Microsoft is that it does not publish all its application programming interfaces (APIs), thus giving it an unfair advantage, it does nonetheless publish vast quantities of information for developers. An examination of the Microsoft web pages for developers or the online help for its development tools gives an indication of this. By providing lots of information for developers it was able to get large numbers of them to write applications for Windows rather than for competing operating systems, such as IBM's OS/2, thus further entrenching the Windows platform. So much for the discussion of what I think are the principal reasons for Microsoft's success. Its critics, however, have repeatedly cited far less praiseworthy reasons for its success – reasons that are either bordering on the illegal or are actually illegal. These have culminated in the most serious accusations to date and have led to one of the biggest and most important antitrust lawsuits in recent years. Although there are a number of lawsuits currently being contested against Microsoft, the most important is the US Justice Department antitrust lawsuit. I believe this lawsuit is unjustified, not because Microsoft is not in breach of antitrust laws (it may well be) but because these laws are themselves unjust. Microsoft and Antitrust: Introductory Arguments The current US Justice Department (DOJ) lawsuit against Microsoft dates back to the early 1990s. Microsoft was originally the subject of a Federal Trade Commission probe into its business practices in 1991. The Commission did not reach a consensus but handed the case over to the DOJ. This culminated in the 1994 oxymoronic "consent decree" that Microsoft was forced to sign. The consent decree concerned its licensing practices, which were deemed unfair to competing operating system vendors (See Richard M. Salsman, The Injustice of Antitrust Laws as reflected in the High-Tech Lynching of Microsoft. Adapted from a lecture presented to Harvard University, 6 May 1999. See http://www.moraldefense.com/microsoft/). It is oxymoronic because it suggests "both agreement (consent) and compulsion (decree)." On October 20th 1997 the DOJ launched an antitrust lawsuit against Microsoft alleging that it had violated this decree by bundling its Internet Explorer web browser with its Windows 95 operating system. IT industry commentators and other critics commonly level the following charges:
One, Microsoft is not a monopoly. It has a very large market share (over 90%) of operating systems for IBM-compatible personal computers (PCs). Apart from the fact that there are PCs other than IBM-compatibles, such as Apple Macintoshes, Microsoft's "monopoly" is not like that of the Post Office's for delivery of first class mail. If I decide to go into competition with the Post Office tomorrow I will be shut down and arrested. If I decide to offer a competing operating system to Microsoft's tomorrow I will not be shut down and arrested. This is a profound difference and means that a monopoly established in the free market always has to act as if it has competition even if it hasn't. This is why the price of Windows has stayed low relative to its functionality. In other words, a monopoly, or near-monopoly, in a free market can only maintain this state by continuing to offer ever better and/or cheaper products. This applies to Microsoft. Whatever one may say about Microsoft's "monopolistic" conduct vis-à-vis its competitors it does not act like a monopoly in servicing its customers. A 1998 survey cites 46 percent of respondents saying that Microsoft provides the best training to its customers. IBM came second with 14 percent, followed by Novell -- 8 percent, and Sun -- 4 percent. (“Annual Reseller Training and Services Survey,” Computer Reseller News, April 6, 1998) Two, Microsoft has indeed behaved badly by the standards of the antitrust laws. But so have many companies who have not been prosecuted under these laws. Prosecutions seem only to arise if the company has a sufficiently large market share of some arbitrarily defined market and/or enough of its competitors are politically connected and complain loudly enough. The antitrust laws betray a fundamental misunderstanding of the free market. A free market does not require that there be some arbitrary number of competitors in a given area. It just requires that should anyone wish to compete in that area they may not be stopped from doing so by the government or by private criminals. If Microsoft chooses to offer its operating system or web browser for sale on terms such that if an Original Equipment Manufacturer (OEM) or Internet Service Provider (ISP) does not accept them it does not get the product this does not constitute a violation of the freedom of the market. It is indeed true that with its near-monopoly on PC operating systems, Microsoft has enormous economic power. But this is not unlimited power and over time the market tends to evolve responses to such power. One such response is the Java programming language. Another, possibly more promising, response is the Linux operating system and the open source movement in general. "Open source” software is that for which the user does not have to pay a licence. The user is also free to modify its source code but is forbidden to make commercial gain out of any modification, i.e., to license commercially the modified software.. If it were not for the fact that Microsoft is so dominant on the desktop, both in operating systems and mainstream desktop productivity applications, Java and Linux would not have attracted nearly the level of attention they have. Three, even if we accept Microsoft's guilt, dismemberment seems disproportionate to the alleged crimes. Ordering Microsoft to be broken up is a manifestly unjust measure. It is a punishment that does not fit the crime. Such a punishment would be appropriate if it were considered that being a monopoly per se is a crime. However, the DOJ has insisted that Microsoft was not prosecuted for being a monopoly as such but for the manner in which it attempted to "protect and extend" that monopoly. The major charges against Microsoft related to exclusionary business practices, product tying and the like. Any punishment should be appropriate to these "crimes" and not to the fact that Microsoft has a monopoly. Thus any punishment should consist of Microsoft's being fined, ordered to desist from such practices and, perhaps, to pay damages to the "victims" of such exclusionary practices. (Though I don't believe these actions of Microsoft's should be considered crimes, as I argue below.) A Commentary on the Antitrust laws The freedom of the market is the freedom to produce and to trade what one has produced. Free trade means that individuals are free to enter into mutually consenting exchanges, either singly or in cooperation, as business organisations. Because the market recognises private property, people are free to cooperate as producers as a way of securing the cooperation of the consumers. Cooperation as producers results in independent productive units, that is, companies. Competition then typically emerges as an outcome simply because freedom implies that producers are free to associate in any manner they like and typically won't all associate within the same productive unit. Consequently there is nothing, legally, to stop many different companies providing the same type of service. They must then compete in order to secure the cooperation of the consumers. In a particular market, one company may emerge as being better at securing the cooperation of the consumer than others and its products may become dominant. However, other companies remain legally free to challenge it. The question then arises as to what the dominant company should be allowed to do to continue to secure the cooperation of the consumers. The fundamental characteristic of the free market is that whatever goods you wish to obtain you can do so only by securing the consent of others. This rules out the use of force and fraud. So outright theft should be illegal because you acquire a good(s) without the owner's permission. Fraud should be illegal because you acquire a good(s) in exchange for deliberately supplying something that the other party did not contract to be supplied with. There will also be intentional and unintentional contractual disputes, according to which the party that is in breach of contract should be obliged to repair the damage in some way. Other than possible harmful or dangerous third party effects on persons who are not part of a trade, anything else should be permitted in the free market. This means that if a company becomes so popular with the consumers that it can price some of its goods so low that no one else can compete with it that's just tough on the competition. It does not matter whether the low price is due to sheer productive efficiency or whether the price is "below cost" or zero. As the owner of its own products it should be free to dispose of them as it sees fit provided only that customers are free to walk away from the trade if they do not like its terms. Suppose I develop an operating system to compete with Microsoft Windows. Suppose further that this operating system is capable of running all Windows applications. What should be my goal as an operating systems vendor? It is this: in every case in which a potential consumer is in a position to choose my operating system rather than Windows I should want them to choose my operating system. Suppose I were able and willing to provide my operating system to OEMs for a price of $2 on condition that they do not sell Microsoft's. A large number of OEMs accept my offer. If Microsoft were to go out of business as a result this would be no concern of mine. And it should be no concern of government bureaucrats either. If a software company offers an operating system for sale to an OEM with certain exclusive conditions this is not a violation of the freedom of the market. The OEM is free to accept those terms or to go its own way. Of course, this is precisely the kind of thing that Microsoft does and is what has got it into trouble. It can be objected that if a company, such as Microsoft, with 80 or 90% of the market for PC operating systems draws up exclusive contracts in this way then an OEM has to accept them or be faced with bankruptcy. Because any alternative operating system that it uses will not enable it to sell enough computers. However, this is to assume that an OEM has an automatic right to be supplied with the Microsoft operating system, despite the fact that the operating system belongs to Microsoft. It created it, not the OEM. Microsoft should be free to set the terms under which it supplies its own operating system. The antitrust laws are supposedly designed to serve the interests of the consumer. But, typically, antitrust cases have been brought by disgruntled competitors of the accused company, or by politically mischievous politicians, not by the consumer. Nevertheless, first, I think it is wrong to give primary importance to the demands of the consumers. Philosophically, production is primary. Without production, consumption can't take place. Consumers are able to consume only because prior production has enabled them to produce and to trade what they've produced with others. As Robert Levy writes (Robert A. Levy, Microsoft Redux: Anatomy of a Baseless Lawsuit, Policy Analysis 352. The Cato Institute, September 30, 1999, p2.)
The Clayton Act section 2 outlaws price discrimination, allows for exceptional cases and then permits the Federal Trade Commission arbitrarily to overrule the exceptional cases. There are also a number of sections relating to price discrimination, price fixing and mergers where these are outlawed if their effect is "substantially to lessen competition" or to "tend to create a monopoly." The Federal Trade Commission Act section (a) (1) states: "Unfair methods of competition in commerce, and unfair… acts or practices in commerce, are hereby declared unlawful." Apart from the fact that the free market must necessarily include the things that the antitrust laws prohibit in order for it to allocate assets to their most productive and valued uses, their very vagueness is responsible for their being invoked arbitrarily. Sometimes companies with relatively small market shares (as low as 5%) have been successfully prosecuted, sometimes those with large market shares have not been. The laws are such that businesses cannot know in advance what is a "crime" and what isn't. Businesses can be prosecuted for charging prices that are too high ("intent to monopolise"), too low ("predatory pricing") or the same as those of competitors ("collusion"). It is no wonder that a former antitrust chief has described the antitrust laws as a system of tyranny. As for serving the interests of consumers, politicians cannot know in advance what sort of market arrangements will do this. It does not necessarily follow that 10 companies with roughly equal market share is better than 10 companies where one has 80% market share and the other 9 have 20% between them. The dominant company's large market share may enable standardisation and low-priced and/or more integrated products. It may enable other related market sectors to be more productive, providing greater value to the consumers. The best guarantor of the interests both of producers and consumers is the free market. The great fear conjured up by the antitrust laws is that, without them, large and/or monopolistic companies will charge high prices and offer low quality. But in the hallmark case of Standard Oil, one which is held up to be the defining instance of a valid antitrust lawsuit, even the plaintiffs admitted that, as a matter of fact, Standard Oil actually always increased production and reduced prices. For example:
A major error in looking at the market is to view it statically. The key thing is that its dynamic nature ensures that no dominant position is unchallengeable indefinitely. It can only be made so by government intervention that legally prohibits competitors. Though even in these cases it may be possible to find substitutes for the monopoly service. The dynamic nature of the market also means that a Microsoft that does not continue to innovate in its established market or to investigate complementary markets may, some years hence, wind up in the state of a Digital or IBM. IBM (International Business Machines) and Digital (Digital Equipment Corporation) were the two most successful computer companies up until the PC era. Then both declared heavy losses. IBM soon returned to profitability. It is still the world's biggest computer company by sales but no longer calls the shots in the IT industry. Digital's demise was more protracted, culminating in its acquisition by Compaq Corporation, a PC manufacturer. |
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< Janet Reno -- Persecutor of Microsoft and Hero of Waco.
Quite often Microsoft's first attempt in a new product line results in a far from satisfactory product or in one that's far less successful than rival products. But it just plugs away until it gets it right, whereas most companies would throw in the towel. Some examples of poor initial versions are:
