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date 2001-04-27:20:23 Reading
This is the second part of my commentary on Charles Ferguson's High Stakes, No Prisoners. In the first part I talked a little about what Microsoft is going to do. Now I want to talk about how they're going to do it. The principle I will employ is: most of the time, the same organizations respond to the same circumstances in the same way. It's called "causality".
Evolution and Economics
Microsoft does not like competition. What business does? Who wouldn't want to have a captive market? Viewed in harshly Darwinian terms, every business must either become a ruthless profit-maximizer, or retreat into a specialized niche. In most areas of commerce, businesses adopt a mix of these two basic strategies:there are a few big players in each market, but none of them is clearly dominant, and they all have specialized strengths that make it hard for the other to become completely dominant. So in the proprietary UNIX business, Sun, SGI, HP and IBM are all significant players, each with its particular strengths.
The same is true in biological evolution: most species can't fully dominate their environment, and have to accept some degree of specialization to succeed in some environments, at the price of being effectively excluded from lots of other environments. In fact, only once species that we know of has ever adopted the evolutionary "policy" of pure profit maximization: humanity.
Only we have the capacity to out-compete every other species in every environment on Earth. We need to use that power wisely, though, because we depend on those other species, and the complex interactions between them, to keep us alive. Just because we're powerful doesn't mean we're invincible.
Microsoft is the humanity of the software world, and so far it hasn't used its power very wisely. It has deliberately pursued monopoly power in operating systems, but more importantly--and this is a point that Ferguson makes that I fully agree with--in desktop office suites. Ferguson correctly identifies Microsoft Office as a bigger threat than Windows.
Strategy and History
Before getting to the future, a few words about the past. We know how Microsoft has gotten where it is today: by ruthlessly crushing and assimilating competitors by any means available, fair or foul. And we know, as a matter of ordinary fact, that the foul means can be extreme indeed. Microsoft's theft of Stacker, and the subsequent $100 million judgment against them, provide incontrovertible proof of what the world's largest corporation is willing to do to be the world's largest corporation.
So far as Microsoft is concerned, the law is mostly something that happens to other people.
Microsoft has three basic strategies for crushing competitive threats (although the thought of anyone being a competitive threat to Microsoft today is pretty funny, isn't it?):
- License, enhance, saturate
Cloning is just examining the functionality of a competitive product carefully and writing a copy from scratch. Cloning is the most technically difficult of the three options and therefore the thing Microsoft does least. Despite their ability to attract and retain engineering staff, Microsoft has never adopted engineering solutions when business and marketing solutions will do. Even so, the hardest part of writing software is specifying what it is you want to create, and once a product is out there it is relatively easy for an organization with $20 billion in the bank to reproduce it.
Licensing is what Microsoft did with Stacker and Sybase. Sybase in particular provides a good example of this: I remember when Microsoft's SQL Server was Sybase. I don't imagine Sybase, if it still exists, sells many copies for Windows any more. Licensing code to Microsoft is helping the hangperson put the noose around your neck.
If Microsoft can't license, which seems to be it's preferred solution, it can usually acquire. Again, when Bill Gates comes calling with $20 billion in his pocket and a reputation for treating employees well, most management teams would be hard-pressed to say, "No." Particularly because they know they're doomed if they do.
And that's the cold truth: it is currently impossible to compete with Microsoft on the Windows desktop. Any company that produces any innovation will be immediately subject to one of the three strategies above, and two out of three of them make it very hard to make any money. So on top of the ordinary entrepenurial risk, desktop software developers have the Microsoft risk, cutting their odds by at least another factor of three.
The File Format As A Drug
As well as immoral and sometimes illegal business tactics, Microsoft management have a deep understanding of how to control a software market. It isn't the feature set. It isn't even the applications. It's the file format.
When Bill Gates first surfed the Web, he was upset to find there were no Microsoft file formats out there. That sounds silly if you don't realize how fundamental ownership of the file format is to the maintenance of Microsoft's monopoly on desktop applications. It's far more important in that regard than their OS monopoly is, something I don't think Ferguson fully appreciates.
The file format is a drug, and Microsoft is the pusher. Once you're hooked, you can't get off the endless treadmill of upgrades. Word6 was OK for a while, but then some people started using Word95 and then you just couldn't get the same hit anymore, so you had to boost your dosage to Word95 too, but then Word97 came out and you had to boost again, paying the pusher, and then Word2000 and you realize now you're hooked, you can't get off.
What Microsoft wants is control of the file formats available on the Web, and what they'll do when they get it is upgrade. And upgrade. And upgrade. The first few times there'll be interesting features added--better multi-media integration, stuff like that. But after a while, they'll run out of ideas, and sometime after that they'll run out of excuses, and just announce upgrades on a regular schedule, demanding their tithe from the information addicts they've caught in their web.
It won't last, of course. But it could do a lot of damage while it does.
My utopian libertarian friends will tell me that Microsoft has coerced no-one, and therefore is a danger to no-one, has been a major engine of economic growth in the past decade and should be rewarded with our admiration and accolades as well as with our voluntarily spent dollars.
I think this is nonsense. Suppose an athlete wants to run faster. Suppose the athlete meets a nice person who is willing to sell a substance that will make anyone who takes it run faster. Suppose the athlete takes it, only to find that it has diminishing and ultimately negative effect over time, and that once taken it is completely and irretrievably addictive. We are the athlete: we want faster, better, more interoperable computers and applications. We've got them. But the hidden cost, which we now apparently have no choice but to pay, is far greater than the cost we anticipated. And we are so dependent on the damned things that we can't back out now.
I don't, of course, think that direct government intervention in the markets is generally a good thing. But I don't have to make any wild assumptions about Platonic competition to see that Microsoft's monopoly position is a bad thing. And if faced with the choice, twenty years ago, of being dependent on Microsoft today, and making different technology choices yesterday, I'm not at all sure that most people wouldn't have made different technology choices, forgoing some of the benefits of Microsoft's power (highly standardized hardware available from many vendors, for instance) in favor of keeping the beast on a leash.
But, my utopian libertarian friends will point out, Microsoft hasn't coerced anyone! How can you possibly advocate the use of force against a company that has come by it's monopoly by honest means?
To which I reply: Honest means?
Not only have the means often been at best marginally legal, the whole business of civil law is morally problematic when one party has effectively infinite resources and the other has highly limited resources. I worked for a company once that owned a trademark that Microsoft violated. If there are any libertarians out there who believe that we sued, I know the secret of life, the universe, sampos and everything, and will reveal it to you for a mere $10 million.
In any alleged breach of civil law, as in contract, trademark or patent violations, the harmed party has a piece of paper that is essentially a license to sue. The outcome of that process can take years to materialize, and the costs, particularly when litigating against a behemoth like Microsoft, are basically open-ended. Civil law has some remarkable similarities to the old Danelaw system of "weregeld", by which crimes like murder could be "put right" by payment of a blood-price. In such a system, people with $20 billion sitting around with nothing much to do can act with almost perfect impunity. Sometimes they lose, as they did in the case of Stacker. But not very often.
Microsoft's enormous bank balance and product diversity also gives them the opportunity to do something that libertarians claim never happens: artificially lower their prices to wipe out competitors. The argument goes like this: any business that attempts to artificially lower its prices will just be doing economic harm to itself and will benefit its customers. In the long run, the harm will accumulate and the company will go broke.
The problem with this argument is that if Microsoft decided to reduce it's prices on Office, say, to wipe out Corel, say, it could reduce them by say $100 per copy and it wouldn't have run through half it's cash reserves until it had sold 100 million copies! We can be fairly sure that Corel would go broke long before that, and Microsoft would recoup its losses in rapidly increasing market share.
This strategy, which Microsoft used effectively against Borland, is called a "cashectomy." Artificially lower your prices to cut of your (smaller) competitor's cash flow. This is how big companies stay big: by making sure no little company gets a chance to get big.
As a final point: all power is real power. Economic power is as real as political power. And again, if any libertarians believe that this is not so, my e-mail address is firstname.lastname@example.org, I have a paypal account, and if you want to give me $10 million I'll be glad to reveal the whole truth about the nature of reality to you. Microsoft is, within the software industry today, very nearly absolutely powerful. And we know what absolute power tends to do.
I don't have any magic bullet to deal with this situation. Microsoft has risen to pre-eminence by the ruthless pursuit of market share using anything they thought they could get away with, and their success has given them power far greater than what I think any group of human beings should have. One of the glories of capitalism is that it makes it possible for a such an unsavory organization to create enormous benefits. But they are now going to do enormous harm. Indeed, they already have done, in terms of the cost of marginally useful upgrades to mediocre products and the stifling of innovation.