A simplified definition of monopoly is: when there is a single supplier to a market. Monopoly power is the power to control prices or exclude competition. In this chapter we will see that, effectively, Microsoft does have a monopoly, which has both positive and negative effects on innovation, and my personal opinion about one possible solution, the break-up.
Does Microsoft have a monopoly on operating systems?
The Court’s Finding of Facts of the judge Jackson in the case United States of America vs Microsoft Corporation (Microsoft) says that Microsoft is a monopoly.Firms that do not currently produce Intel-compatible PC operating systems could do so. What is more, once a firm has written the necessary software code, it could produce millions of copies of its operating system at a relatively low cost. The ability to meet a large demand is useless, however, if the demand for the product is small, and signs do not indicate a large demand for a new Intel-compatible PC operating system. To the contrary, they indicate that the demand for a new Intel-compatible PC operating system would be severely constrained by an unsolvable "chicken-and-egg" problem: The overwhelming majority of consumers will only use a PC operating system for which there already exists a large and varied set of high-quality, full-featured applications, and for which it seems relatively certain that new types of applications and new versions of existing applications will continue to be marketed in step with those written for other operating systems. Unfortunately for firms whose products do not fit that bill, the porting of applications from one operating system to another is a costly process. Consequently, software developers generally write applications first, mainly, for the operating system that is already used by a dominant share of all PC users. Users do not want to invest in an operating system until it is clear that the system will support generations of applications that will meet their needs. Developers do not want to invest in writing or quickly porting applications for an operating system until it is clear that there will be a sizeable and stable market for it. What is more, consumers who already use one Intel-compatible PC operating system are even less likely than first-time buyers to choose a newcomer to the field, for switching to a new system would require these users to scrap the investment they have made in applications, training, and certain hardware.
The chicken-and-egg problem notwithstanding, a firm might reasonably expect to make a profit by introducing an Intel-compatible PC operating system designed to support a type of application that satisfies the special interests of a particular subset of users. For example, Be, Inc. (‘Be") markets an Intel-compatible PC operating system called BeOS that offers superior support for multimedia applications, and the operating system enjoys a certain amount of success with the segment of the consumer population that has a special interest in creating and playing multimedia content with a PC system. Still, while a niche operating system might turn a profit, the chicken-and-egg problem ("applications barrier to entry") would make it prohibitively expensive for a new Intel-compatible operating system to attract enough developers and consumers to become a viable alternative to a dominant system in less than a few years.
Judge Jackson in his verdict (April 3, 2000) concludes that Microsoft maintained its monopoly power by anticompetitive means and attempted to monopolize the Web browser market.
To the extent that developers begin writing attractive applications that rely solely on servers or middleware instead of PC operating systems could cause the applications barrier to entry to erode.
Why was Microsoft afraid of Netscape?
Operating systems are not the only software programs that expose APIs9 (click here) to application developers. Netscape Web browser and Sun Microsystems, Inc.’s Java class libraries are example of non-operating systems software that do likewise. Such software is often called “middleware” because it relies on the interfaces provided by the underlying operating system while simultaneously exposing its own APIs to developers. Currently no middleware product exposes enough APIs to allow independent software vendors to profitably write full-featured personal productivity applications that rely solely on those APIs.
Nevertheless, Netscape and Java were in a position to do this in the near future. That position was not permissible for Microsoft because it could endanger its monopoly in Operating systems.
The competition for the browsing software is not the main reason for this tussle. Its own source of power, its monopoly over operating systems was in trouble. An aggressive, and anti-competitive campaign against Netscape and pressures over developers to use a Microsoft version of Java (non portable to other platforms) started.
The effect on consumers of Microsoft's efforts to protect the applications barrier to entry.
The debut of Internet Explorer and its rapid improvement gave Netscape an incentive to improve Navigator's quality at a competitive rate. The inclusion of Internet Explorer with Windows at no separate charge increased general familiarity with the Internet and reduced the cost to the public of gaining access to it, at least in part because it compelled Netscape to stop charging for Navigator. These actions thus contributed to improving the quality of Web browsing software, lowering its cost, and increasing its availability, thereby benefiting consumers.
· Microsoft milestones
1975 - founded in Albuquerque, New Mexico
1976 - Microsoft develops Applesoft for Apple
1981 - MS-Dos standard on IBM PCs
1983 - Windows 1.0 introduced;
Revenues pass $50m mark
1986 - Stock market flotation
1988 - Becomes the world's top software seller
1995 - Launch of Windows 95
1997 - Department of Justice files anti-trust law suit
2000 - Bill Gates steps down as chief executive;
Launch of Windows 2000
To the detriment of consumers, however, Microsoft has done much more than develop innovative browsing software of commendable quality and offer it bundled with Windows at no additional charge. Microsoft also engaged in a concerted series of actions designed to protect the applications barrier to entry, and hence its monopoly power, from a variety of middleware threats, including Netscape's Web browser and Sun's implementation of Java. Many of these actions have harmed consumers in ways that are immediate and easily discernible. They have also caused less direct, but nevertheless serious and far-reaching, consumer harm by distorting competition.
By refusing to offer those original equipment manufacturers (OEMs) who requested a version of Windows without Web browsing software, and by preventing OEMs from removing Internet Explorer - or even the most obvious means of invoking it - prior to shipment, Microsoft forced OEMs to ignore consumer demand for a browserless version of Windows.
The same actions forced OEMs either to ignore consumer preferences for Navigator or to give them a choice of both browser products at the cost of increased confusion, degraded system performance, and restricted memory. By ensuring that Internet Explorer would launch in certain circumstances in Windows 98 even if Navigator were set as the default, and even if the consumer had removed all conspicuous means of invoking Internet Explorer, Microsoft created confusion and frustration for consumers, and increased technical support costs for business customers. Those Windows purchasers who did not want browsing software - businesses, or parents and teachers, for example,
concerned with the potential for irresponsible Web browsing on PC systems - not only had to undertake the effort necessary to remove the visible means of invoking Internet Explorer and then contend with the fact that Internet Explorer would nevertheless launch in certain cases; they also had to (assuming they needed new, non-browsing features not available in earlier versions of Windows) content themselves with a PC system that ran slower and provided less available memory than if the newest version of Windows came without browsing software.
By constraining the freedom of OEMs to implement certain software programs in the Windows boot sequence, Microsoft foreclosed an opportunity for OEMs to make Windows PC systems less confusing and more user-friendly, as consumers desired. By taking the actions listed above, and by enticing firms into exclusivity arrangements with valuable inducements that only Microsoft could offer and that the firms reasonably believed they could not do without, Microsoft forced those consumers who otherwise would have elected Navigator as their browser to either pay a substantial price (in the forms of downloading, installation, confusion, degraded system performance, and diminished memory capacity) or content themselves with Internet Explorer.
Finally, by pressuring Intel to drop the development of platform-level NSP software, and otherwise to cut back on its software development efforts, Microsoft deprived consumers of software innovation that they very well may have found valuable, had the innovation been allowed to reach the marketplace. None of these actions had pro-competitive justifications.
Many of the tactics that Microsoft employed have also harmed consumers indirectly by unjustifiably distorting competition. The actions that Microsoft took against Navigator a form of innovation that had shown the potential to depress the applications barrier to entry sufficiently to enable other firms to compete effectively against Microsoft in the market for Intel-compatible PC operating systems. The campaign against Navigator also retarded widespread acceptance of Sun's Java implementation, and impeded innovation in general.
This campaign, together with actions that Microsoft took for the sole purpose of making it difficult for developers to write Java applications with technologies that would allow them to be ported between Windows and other platforms, impeded another form of innovation that bore the potential to diminish the applications barrier to entry. There is insufficient evidence to find that, without Microsoft's actions, Navigator and Java already would have ignited genuine competition in the market for Intel-compatible PC operating systems. It is clear, however, that Microsoft has retarded, and perhaps altogether extinguished, the process by which these two middleware technologies could have facilitated the introduction of competition into an important market.
Most harmful of all is the message that Microsoft's actions have conveyed to every enterprise with the potential to innovate in the computer industry. Through its conduct toward Netscape, IBM, Compaq, Intel, and others, Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsoft's core products. Microsoft's past success in hurting such companies and stifling innovation deters investment in technologies and businesses that exhibit the potential to threaten Microsoft. The ultimate result is that some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsoft's own interest.
Empirical case: How Microsoft’s competitive practices can do harm.
Back in 1992 (before Pentium processors and a thing called the Internet), three small software companies in the United Kingdom independently invented an impressive new type of graphics software. Argonaut Software, Criterion Software (back then, called Canon Research, Europe), and Rendermorphics had independently developed real-time 3D rendering software that ran amazingly well on personal computers. A nice little battle for market share and control of this new technology standard began shaping up. Then Microsoft came along. By the middle of 1994, Microsoft wanted real-time 3D software for its push into the PC consumer entertainment space. Privately, it began courting all three British companies. Argonaut were told by Microsoft that Microsoft had chosen to license and promote their technology over others
Finally Microsoft decided to license the software of their competitor, Rendermorphics, and was going to purchase the entire company. Argonaut thought they could still compete. Despite Microsoft's muscle, they software had significant performance advantages. More importantly, it worked on a broad range of platforms, including DOS, Windows 3.1, Windows 95, Windows NT, OS/2, Power Macintosh, Sony PlayStation, and Sega Saturn. Microsoft's Direct3D, by contrast, worked only on PCs running Windows 95. If nothing else, they thought, game developers (who, for obvious reasons, want their games to run on as many different machines as possible) would choose Argonaut.
Soon after that, Microsoft began giving away 3D technology licenses. That's right: The software was absolutely free to anyone who asked (except Argonaut). Free is a very hard price to beat, especially since the software previously had cost $50,000 or more per license.
Price matters--a lot. For example, I originally was a Netscape user, but I tried Internet Explorer because it was free, and as Internet Explorer was originally on my system, two browsers degraded my PC performance and restricted the memory, so, now I use Explorer regularly. This doesn't mean Netscape can't deliver something that would change my mind, but they'd have to work really hard. The chance of a company breaking through with an exhilarating new idea in a market that will return no direct revenues is virtually nil.
Around the same time Microsoft started giving away the 3D licenses, it also quickly announced some very aggressive plans to deliver its 3D software on all the non-Windows platforms that Argonaut already covered. How many of those products were delivered? None. How many will ever be delivered?.
Whether Microsoft was being deliberately deceitful can probably never be proved. What is clear, however, is that, with a few press releases, the software giant successfully undermined one of Argonaut most significant competitive advantages.
Consumers now are assured that any video game will run with the 3D graphics technology they have in their PC, except if they own a Macintosh, a Sony, or Nintendo game console, a Unix system, or any non-Windows 95 machine. The notable absence of Direct3D on these other platforms neatly coincides with Microsoft's well-documented strategy of putting "Windows everywhere."
There were other things Microsoft did, which, although they certainly were aggressive, and perhaps even ungentlemanly.
Argonaut did, however, wonder why, even though Microsoft was thousands of times more profitable and powerful than them, they nevertheless used such strong-arm tactics, as if somehow they were afraid of them.
Microsoft's pricing and vaporware strategy put tremendous pressure on Argonaut, but they believe customers would have continued to pay for this technology if they could have demonstrated an obvious performance advantage. In the end, they suffered from the same slowdown as Microsoft did when they coupled Argonaut 3D software with the new 3D hardware graphics accelerators. All things being roughly equal, developers went with Microsoft's superior marketing and promises of support before the graphics chip sets improved enough to prove that Argonaut software was faster. Microsoft won the market and shifted its competitive focus to contested arenas, like Java.
So a few small companies stopped competing in 3D graphics, but how much damage was really done? The larger world sees none. Consumers, to their knowledge, have not been denied a superior 3D technology. After initial delays and disappointments, Microsoft's 3D is turning out to be an excellent offering, and is being incorporated into many games and other software products. There's little confusion about conflicting "standards."
But there's much more at stake than the fortune of a few small companies and individuals. The bigger question is whether Microsoft's competitive measures are benign in the long run. I think not.
When Microsoft uses its position as the dominant OS vendor to push one technology and kill off competitors, when it gives away software that other companies must sell in order to compete, when it wields vaporware promises against much smaller competitors, competition dries up. On a level playing field, where Microsoft would have to break even between the money it spent developing (or buying) 3D software and the money it made selling it, would Argonaut speed and cross-platform abilities have beaten the company? We'll never know.
If one company is allowed to be a bully, even in a small market, broader ramifications could result. Right now, 3D is used mostly in games, but what about when it's an important part of telemedicine? Will Microsoft then use its 3D dominance (and the same tactics) to win a lion's share of the telemedicine software market? And what about when the battle is in an even more critical market, for example, computer security programs? Where does the dominance end?
The fact that Microsoft invests heavily in research and development does not evidence a lack of monopoly power. Indeed, Microsoft has incentives to innovate aggressively despite its monopoly power. First, if there are innovations that will make Intel-compatible PC systems attractive to more consumers, and those consumers less sensitive to the price of Windows, the innovations will translate into increased profits for Microsoft. Second, although Microsoft could significantly restrict its investment in innovation and still not face a viable alternative to Windows for several years, it can push the emergence of competition even farther into the future by continuing to innovate aggressively10.
Microsoft vs Justice
The US Justice Department is continuing to force a break-up of Microsoft. In my personal opinion, this could be one of the best solutions to improve innovation.
Under the break up, Microsoft will be split into two or three companies.
1.- Microsoft would be forced to be split off the Windows operating system from the rest of the company.
2.- The second company will sell its software applications, such as a word processor and Excel spreadsheet programs. That company also might get parts of the company that make the internet browser.
3.- If Microsoft is divided into the three companies, the third would be an Internet company that would operate the browser and the Microsoft Network (MSN), which is the internet service provider and Web portal that competes with America Online Inc. and other companies.
Assuming a break-up into two companies, the Windows operating system market quote will make up 82 per cent of the operating system market, and between the 90-95 per cent of the Intel-compatible PC operating system. The utilities mainly Microsoft Office company will have the 94 per cent of the market.
Thus, this break-up will destroy a monopoly only to create two of them. Will this be enough to create sufficient competition?. In my personal opinion, it will also increase innovation, too.
The first reason for the break-up is that Microsoft does not have a version of its Office for its main operating system competitor LINUX.
If a new company sells software applications such as Office, its owners and shareholders will not allow the company to forget a market of 12 million Linux users. So, in short time there would be a Word for Linux, an Excel and so on. Thus, there could be more users for Linux, and maybe, in the near future this operating system and others will be able to compete with Windows.
The first conclusion is that the Microsoft break-up will increase operating systems competition.The second reason for the break-up is that Microsoft’s rivals claim that Microsoft owes its success to the close working relatioship of their programmers. That is to say that their software developers design Microsoft applications to fit the Windows operating system. For example, Microsoft Word is the best processor for Windows because is the best system optimizator for Windows. Bill Gates denies this and says that Microsoft owes its success to the quality of their developers and not to any coordination in their software programming.If a company is only an operating system seller, this company would like to have the best applications for its operating system. To achieve this, the best way is allow developers have a better knowledge of its main secret, its APIs.
The second conclusion, Microsoft break-up will increase competition in the applications’ market.
Despite the break-up, these companies will still have a huge availability of resources. For example, these companies will be twice as large as American Online, 5 times bigger than Pepsico and 10 times the Boing company.
New Microsoft companies will have enough resources for innovation, and the increase in market competition will give them strong motivation to innovate. More importantly, they will not have the power to destroy or hide innovation that do not coincide with their own self-interest.
9 What is an API? See apendix for a short explanation of that technology.(apendix)
10 USA vs. Microsoft: Court´s Findings of Facts
11 Linux is an open-source operating system. Linux’s open-source model means that the software can be downloaded for free and, unlike other operating systems, once users purchase or download a copy of the software, they can legally install it on as many computers as they like. (Linux home page)
Author: Pau Klein's Marketing Online