Is Microsoft building a monopoly?
To ask the question, one has to ask in what markets, since through a combination of business acumen, hardball tactics that many consider monopolistic, and a buying spree of acquisitions, Microsoft is now involved in almost every aspect of the computer and computer-related telecommunications markets and is emerging as a major player in Internet commerce and on-line media ventures.
It controls the operating system of 94.1% of the personal computers sold on the market today (Dataquest numbers) and just finished off a $150 million investment in Apple Computer to tie the other 5.9% of new desktop sales into an alliance. In major software applications, Microsoft has steadily expanded its market share- in the case of word processors from barely a third of the market in 1995 to over 80% in 1997. It has used its Windows NT server software to rapidly enter the business workstation, client-server and large-scale "enterprise" computing segments. Over sixty-five percent of new intranet sites are deployed on Windows NT servers, while Windows NT workstation clients are growing 177 percent annually. (Source: IDC) It owns not only operating systems and software applications but sells the development tools used by a majority of programmers involved in the industry and has strong dominance of the training programs of information technology professionals. As of March 1997, 87 percent of the 2.4 million software developers were developing for the Windows 32-bit platform, up from 61 percent a year earlier. Fifty-three percent of 2.4-million U.S. professional developers use Microsoft's Visual Basic program as their primary development language. Along with controlling software used by developers, Microsoft is playing an increasing role in their technical education, forging commercial partnerships with both commercial and academic training institutions, while spending millions of dollars subsidizing the training costs of computer vendors and professionals in order to tie them into the Microsoft framework.
Microsoft is using both its control of the desktop and its inroads into the server market to leverage control of emerging Internet standards and commerce. Its Internet Explorer desktop browser is rapidly overtaking Netscape's software for navigating the Internet, while its combination of Internet servers, Web editors, Internet development software, and network-based applications are establishing dominance in control of the evolution of the Internet. Its purchase of and alliance with a range of audio and video "streaming" technology companies is already assuring Microsoft control of the standards for delivery of multimedia over the Net. In the fight over the software standards that will run the Internet, particularly in the maneuverings over the Java language standards that many see as crucial, Microsoft has leveraged every advantage possible to design those standards to suit its own commercial interests.
Through alliances with banks and its financial software, Money and Personal Investor, along with its financial server software, Microsoft is emerging as a key player in shaping the on-line financial transaction system of the future. Microsoft is establishing on-line commercial ventures in airline ticket sales, auto sales, news, games, local events and entertainment (along with local advertising revenue), and a range of other on-line commercial ventures. Its ownership of the Microsoft Network (MSN) and its partnership with NBC in the creation of the MSNBC venture are giving Microsoft strong distribution outlets for its emerging range of media content. Its investments in Dreamworks gives it a position in Hollywood movie and music production that can be integrated into its on-line ventures involving interactive multimedia as computers and television converge in coming years.
Beyond software and content, Microsoft is working to control the way people connect to the Internet from work and home. Its $425 million purchase of WebTV gives it control of a major avenue for non-PC Internet access. Its $1 billion investment in the cable company Comcast and proposed investments in US West cable now make it a major player in designing the standards for accessing the Internet over cable. And in a breathtaking venture, Microsoft's Bill Gates is in partnership (with a one-third stake) in a $9 billion venture to create a low-orbit satellite system called Teledesic that could give high-speed Internet access to anyone anywhere in the world, an investment supported by the US government through a massive free giveaway of radio spectrum to the company.
The raw fact is that Microsoft is now a financial behemoth which, when it fails to create viable competitive software, readily uses its financial resources to buy-out startups and key technology to maintain its stranglehold on the industry. The company had annual revenues of $11.4 billion for fiscal 1997, a 31% increase from the year before, and has a cash and short-term investment war chest totaling $9 billion. With a soaring stock price and a market capitalization of roughly $160 billion, the only company in the country that consistently has a higher market capitalization is General Electric ($228 billion in July). Microsoft rivals Coke in value and has a market value three times that of General Motors.
Microsoft has used that financial clout consistently over the last few years to acquire companies and their software and human assets, while sealing financial alliances with a range of partners. While many of the financial details have not been made public, Microsoft spent an estimated $1.5 billion between 1994 and 1996 on acquisitions. Through these investments, Microsoft has bought out dozens of companies, buying or investing in over twenty companies in 1996 alone. Its investments have only accelerated in 1997 with the $1.5 billion spent in the WebTV and Comcast investments, the $150 million invested in Apple, and the hundreds of millions invested in additional Internet-related companies, including its key investments in audio and video streaming. . It has been acquiring key strategic technologies at a rate of over one per month. These are all in addition to its large strategic alliance investments in MSNBC and Dreamworks over the last few years. All told, Microsoft has spent an estimated $4-$5 billion on acquisitions and equity alliances in the last few years to expand its reach.
Microsoft has acquired or invested in companies involved in 3D animation, web site design, Internet development tools, speech recognition, handwriting recognition, joystick controls, Internet payment security, on-line gaming, technical training, e-mail connectivity, mainframe connectivity, multilingual translation software, business news services and a range of other Internet-oriented companies. In doing so, it has helped assure that companies that might have supported a broad range of different systems, including Microsoft competitors, have instead developed breakthrough technology in-line with Microsoft's goals and strategies for dominance. Microsoft has also traded cash and expanded training subsidies to establish equity stakes in a few key vendors who integrate and manage large-scale computer networks for many corporations in order to leverage their strategic position into a bias towards Microsoft systems.
And as Microsoft acquires both technology and key individuals, it can add them to a research and development department that has grown to a size that threatens to overwhelm any potential competitor. During fiscal year 1997, Microsoft spent $1.93 billion on product research and development activities. That amounts to 16.9% of revenue, an admirable percentage commitment to innovation but a raw amount that tilts the whole competitive nature of the industry towards Microsoft's control.
Most disturbingly, especially when comparing its economic heft to comparable financial powerhouses in other manufacturing industries, Microsoft is not at the peak of an industry's size but at an early stage in markets that are expected to explode geometrically in the next decade. If unchecked, there is a very real possibility of Microsoft becoming an unprecedented financial and technological colossus bestriding more markets and industries than any monopolist has ever aspired to dominate.
Next: Why Microsoft Dominates: The Economics of Networks
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