From MSWord to MSWorld:
How Microsoft is Building a Global Monopoly

Why Microsoft Dominates: The Economics of Networks

If Microsoft was merely using its economic and research strengths to win out in each individual market it enters, it would be a cause for concern in monitoring each market but we would not be highlighting the overall threat of Microsoft to the industry as a whole and to the consumers who will increasingly participate in an Internet-based economy. But the fact is that the nature of high technology makes each individual market inextricably linked to other markets through a combination of software standards, training skills, development tools and physical architecture that must all be able to work in combination.

The key to the economics of networked technology is that products and markets do not stand alone in these high technology markets but instead reinforce one path of innovation versus any alternative path. An operating system attracts software developed around that operating system, thereby discouraging new competition since any alternative faces not only the challenge of creating a better operating system but competing against a whole array of already existing software applications. Businesses train employees in one technology and are reluctant to abandon that investment in training, while the existence of a pool of people trained in that technology encourages other businesses to adopt that technology. And as desktop software has to be able to work with client-server networks and an array of other technologies, it becomes nearly impossible to abandon an established set of technology standards that tie those different parts together. These so-called "network effects" give an incredible anti-competitive edge to companies like Microsoft that control so many different parts of the network and use that control to leverage position in connected markets.[5]

Compounding the economic hurdles to new competitors are the high up-front costs to entering any new market. Research and development costs are extremely high for the first software diskette produced, yet since the unit costs are so low, any established market leader with sufficient financial resources can easily drop its prices to prevent any upstart from recouping its initial investment.

In an industry of relatively equal competitors, one could imagine these economics producing dominance by different companies in different market segments without any one company dominating that many segments all to itself. Such a system would require strong open standards to assure compatibility between each market segment and rigorous policing against abuses by market competitors since even small amounts of abusive market behavior, if it gives advantage in market share, is magnified in its returns to the abuser due to network effects.

However, that is not the world we live in today. Instead, we have one company, Microsoft, that towers over its competitors in most market segments and who is doing everything possible to undermine open standards in favor of proprietary ones that it controls. Because it is making large profits in the areas it dominates like the Windows operating system and its applications "Suites," it can afford to spend lavishly in new market segments not in order to make money in those market segments but in order to reinforce its overall dominance and control the standards on the assumption that it will reinforce profits in other parts of the network chain.

As well, Microsoft has not been averse to engaging in outright anti-competitive practices as needed to assure its dominance of markets, as a string of lawsuits and complaints trailing in its wake can attest to. From his first days in the computer industry back in the 1970s, Bill Gates said repeatedly, "We want to monopolize the software business."[6] And while he has moderated his words, his actions have shown no change in attitude other than the range of industries he wants to monopolize has expanded. When competitors have released new software, Microsoft has announced upcoming better features on its own software - improvements which often would not materialize for months, even years after their "scheduled" release. The result of such "vaporware" announcements was to freeze software purchases in the market until Microsoft had time to marshal its financial and technical resources to overwhelm its opponents. Hidden features of its operating system have been used to give its own application developers a leg-up on the competition. And the bundling of software has allowed Microsoft to use dominance in one market to jump-start a presence in another market by linking software purchases in both markets together. It has used every advantage of its monopoly control of the desktop to leverage dominance of Internet standards and in turn use that control to achieve a dominant position in Internet commerce.

The combination of these natural network effects and Microsoft's acquisition strategies leads consumers to assume that Microsoft will be successful in any market it enters. As individual markets blur and merge over time, Microsoft is seen as the only company that people feel assured will offer compatible applications (and that the company will work to prevent others from succeeding in the same task). This all just reinforces consumer dependence on Microsoft products and furthers its dominance. Any strategic technology which Microsoft cannot produce in-house, it has the financial resources to acquire.

The Internet, while a potential threat to Microsoft's dominance, is also an opportunity for the company to seize control of those Internet standards and thereby gain new network footholds on every computer connected to the Internet. Through the combination of controlling standards in the Web browser market, Web servers, development tools for Internet software developers and development of standards for financial transactions on the Net, Microsoft is not only quickly dominating markets for software sales related to the Internet, it is using its dominance of software technology to leverage a commanding position in consumer-oriented Internet commerce, from auto sales to classified advertising over the Internet. Through its investments in WebTV and cable companies, it is seeking to further reinforce its dominance by controlling standards and connections to the Internet right from the home.

It is worth stressing that Microsoft's monopolistic practices serve a purpose for customers--a fact often cited by Microsoft defenders. In a world of rapidly changing technology, Microsoft's monopolistic grip on standards and different market segments give consumers some assurance of stability and interconnection between products. However, the fact that a monopoly has a social purpose is hardly unprecedented. Most of the monopolies of the past were lauded by many segments of the business community for ending reckless speculation and destructive competition in favor of stability--just look back at the initial respect for John D. Rockefeller in creating Standard Oil. It is only later, as the monopoly matures and upstart competition finally fades, that the abuses of monopoly clearly overwhelm its advantages. At that point it is extremely hard to reverse.

As an alternative to Microsoft's proprietary approaches to integration, a range of companies have worked to promote a language called Java as a system of software exchange over the Net that would be independent of proprietary operating systems like Windows and would promote the assurance of stability and interconnection between different software that Microsoft is able to deliver. However, Microsoft is quickly using its position to undermine Java's open standards in order to prevent a level playing field for software competition. It has used everything from its position in the browser market to its sale of Web servers and applications to its dominance of software development tools to assure that software developed on the Windows platform is not compatible with other systems.

While the "network effects" of technology have played a large role in Microsoft's monopolistic success (as has the company's focused business strategy), much of the blame belongs to the federal government for its failure to curb abuses by Microsoft, block its acquisition of key technology, or step in to support open standards not controlled by Microsoft. Most critically, the government must examine not only individual markets but how Microsoft's expansion from desktop software to investments in enterprise computing, media content, on-line commerce and Internet access to the home all work in combination in anti-competitive ways.

The rest of this report will explore in more detail the specific areas of Microsoft dominance, its emerging interests, and the interconnections that threaten even more pervasive monopolistic abuse in the future if left unchecked. It will illustrate both the breadth of Microsoft's dominance and the tactics and overall strategic domination that has made the company the economic and financial juggernaut it has become. The report concludes with five recommendations for actions that NetAction believes are necessary to ensure consumers of a strong and vigorously competitive market in the information technology industry.

Next: Table: Recent Microsoft Acquisitions

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