I think this is the first question we should ask about Microsoft.
This is an important question because monopolies are not natural. Usually,
when a company becomes big and monopolistic, it also becomes inefficient.
Then, the market throws up competitors who see the overpriced products
of Big Inc. as an opportunity. Understand, bigness and inefficiency go
together. The larger a firm, the more likely it is to suffer from friction
(when people and processes run into each other and jam); to suffer from
destructive politics and conspiracies, and to lose creative focus. So,
for a monopoly to develop, there have to be other issues involved, for
example, political connections, the need to raise huge amounts of capital,
or fundamental technological necessity. So, when a company goes from nothing,
to monopoly, in only twenty years, there has to be a reason that goes beyond
the market. In the case of Microsoft, I think there are two reasons. First,
whenever you have a communication or data system there have to be standards.
That means that there has to be so meone to create standards, and someone
to enforce the standards. Second, new technology. I’ll start with technology.
New Technology
Whenever a new technology opens up and goes into a dynamic
growth mode, the first players gain huge advantages because they
are the first to gain the experience, the invested capital, and the people.
So, when competitors come into the market, they have to catch up (with
a firm that is probably a moving target) before they can compete. Microsoft
is a good example of this; back in 1981 (after creating Applesoft Basic
for Apple Computer) they entered the OS market with MS DOS 1.0 (the first
Macs didn’t appear until 1984). Within a few years Microsoft had over 90%
percent of the OS market. The Microsoft monopoly was possible, in part,
because of the incredible advantages of being first. And, the monopoly
made Bill
Gates the wealthiest man in the United States. Understand,
there is nothing new about this, let me give you a little history. Between
1850 and 1890, several technologies (steam power, metallurgy, and electricity)
went dynamic almost simultaneously. Naturally, the first people in on the
technology had enormous opportunities, and many became incredibly wealthy
as their firms became monopolies. There were, for example, railroad barons,
steel tycoons, and shipping magnates. It was being involved with the new
technologies at the beginning that gave these men (and a few women) the
chance to become awesomely wealthy. Of course, there were excesses. These
men gained an inordinate amount of power, and were probably very arrogant
to begin with (it’s arrogant belief that I’m right, and the world is wrong
that makes someone abandon a perfectly good job to work in a garage on
some blue sky project, say, a “personal computer”). What if you owned all
the railroads going into say, Boston, Massachusetts, back in 1880? Today
that would be like owning the airports, the freeways, and the railroads
going into that town. And you could make everyone would have to pay your
rates. Eventually, Congress responded with various “Antitrust” statutes.
The first targets of the Justice Department under the new laws were the
railroad trusts, and the Standard Oil Monopoly (imagine what it would be
like to have just one brand of gasoline, motor oil, and heating oil?).
More recently, in the late 1970’s, digital microelectronics technology
went dynamic, and the monopoly creation cycle started again. As a result,
today we have Microsoft. Understand, Microsoft is a traditional technology
generated monopoly, and Bill Gates is a traditional tycoon (and he is behaving
like a traditional tycoon). So, the federal courts are once again being
asked to bust a trust.
The Economics of Communication Systems
Before I go on with Microsoft, there is something I should explain.
Communications systems have their own unique economic rules. So, there
is a telecommunications sector of the economy because of these rules. (I
know! I know! Economic rules are supposed to be made in Washington by Newt
Gingrich, and we shouldn’t say anything “unholynomic”). The basic economic
rule is this: A communication system is only valuable in terms of the number
of people who can participate. The more participants in the system, the
greater the value to individual users, and the greater the profits to the
promoters of the system. For example, when we speak, or write, we use a
language standard to ensure understanding. The language standard we use
(in this case English) is enforced by the public schools, where most of
us learned to read, write, and spell. The fact that we (mostly) use the
same language standard has enormous benefits; it makes our public life
go more smoothly, it makes our businesses more profitable, and it improves
the quality of our lives. Another case is the telephone system in the United
States. In the early years of this century the telephone system grew enormously,
dominated by the AT&T monopoly. After the Bell patents expired, many
new companies entered the telephone business; but AT&T was able to
maintain its monopoly in spite of the pressure. Here again, the value of
the telephone system to individual users (and profitability to its promoters)
depended on the total number of users. So, to maximize the value of the
telephone system to AT&T’s stock holders, the value to individual users
had to be maximized. To maximize the value of the telephone system, every
telephone had to be able to connect to every other telephone in the world.
So, there had to be common standards. Having twenty (or a hundred, or a
thousand) little standards would have destroyed the value of the phone
system for it’s users and it’s promoters (and AT&T’s stock holders).
So, someone had to create common standards for all phones, and someone
had to enforce these standards. Standards for everything from the voltages
and amperages used by each phone, to the dialing systems, to common phone
rates, and so on. Without these standards, the phone system could not be
very valuable to anyone. AT&T remained a monopoly because of it’s ability
to create and enforce standards. Of course, the government came in and
regulated the AT&T monopoly. And this made the Bell System monopoly
work even better because it cut off the traditional roads to monopoly profits
(overcharging, gauging, etc.). Understand, the monopoly worked because
the value of AT&T to it’s stockholders was directly related to the
of value of telephone service to each individual user. The more the phone
system was used, the greater the profits to the stockholders. The higher
the quality of service, the more the system was used, and the greater the
profits. So, AT&T had to maintain consistently high standards of service
(rare for a monopoly) to maintain it’s profits in a regulated environment.
The Bell Break Up
Fifteen years ago, the federal courts broke up the AT&T monopoly
in the name of “free trade.” Unfortunately, the breakup of the monopoly
has caused many problems, that no one (at least in Washington) seems to
notice. First, the collapse of the monopoly left no one in a place to create
and enforce technical standards (but AT&T left a legacy of old standards
that are becoming obsolete). Second, the collapse of pricing standards.
Since the breakup of the Bell System; the cost of telephone service for
individual users has increased by as much 500 percent, while business users
have been able to use their market heft to negotiate incredibly low rates
for themselves. This has lowered the value of the telephone system for
everyone by limiting participation (a communications system is valuable
only in terms of the number of participants). The only response from government
to this situation (in spite of things like cutting people off from 911
service) has been nebulous talk about how “deregulation” is good for you.
What no one realized at the time of the breakup was that the government
had to replace AT&T as the creator of universal standards. The conservatives
were oblivious to this, and the liberals said nebulous things about “consumer
protection.” Actually, I think we can talk about the government as an enforcer
of standards till we turn blue. Congress and the bureaucracy are usually
so mired in politics that they are ineffective. Deregulation is often a
code word for politically non-feasible. Understand, government only works
if there is a political coalition behind it’s actions. The AT&T monopoly
created a political coalition in favor of regulation because it was, at
least, a potential threat to everyone. With the AT&T breakup; the political
coalition evaporated. So, there was no strong reason for the federal government
to become more involved. In the end, the AT&T breakup decreased the
value of the phone system to individual users, to the nation, and to the
corporations that run the system. And, as an economic reaction, we are
seeing increasing consolidation of the phone system, and warnings of another
monopoly. A new monopoly that may be inevitable because the value of the
phone system is dependent on total number of participants.
My View of the Breakup
I think the government was right to break up the AT&T monopoly,
but they should have stopped with five little bell monopolies. Instead,
the government tried to create a phone system based on an idealized free
market according to holynomic dogma. But, a “free market” telephone system
is impossible because of technological and economic reality. Why? Because,
a telephone system is based on a huge, and very expensive, infrastructure
(the lines, the switches, the microwave towers, the satellites, etc.).
Because, a telephone system is highly integrated (everything has to work
together). Because, to be a player in the telephone business, you have
to start with a huge capital investment in infrastructure (how long will
it take to repay the loans). And, because a communication system valuable
only in terms of participation. So, the regulators had to compromise. The
Bell breakup left us with five regional monopolies limited to local service
only because an economically correct phone system would have cut off service
to unprofitable rural areas and to poor people. And, a few federally protected
long distance companies. Protected because they could not have survived
competition with the regional companies. Understand, the long distance
companies had their start before the Bell breakup, because the federal
regulations required that AT&T use high long distance rates to subsidize
service to rural areas. So, the regulations gave the long distance companies
an advantage. After the breakup, they had to be protected. Interestingly,
for those of us who believe in free markets, the breakup left the federal
government in the permanent position of deciding who could compete in telephony,
and how, and where. Finally, the breakup destroyed domestic telephone manufacturing,
and increased the nations trade deficit. All in all, I think the Bell breakup
is a good example of what happens when activists (this happened during
Reagan administration) try to create economic reality based on dogma. What
the proponents of the various forms of “holynomics” (socialist or capitalist
variety, it doesn’t matter) do not understand is that some things have
to be the way they have to be. Either, we can have a big regulated telephone
monopoly (with the same problems as the old Bell System), a collection
of regional regulated monopolies (the best compromise, I think), or a government
owned telephone system. Either we can accept the economic paradigms behind
the phone system, or we can accept the holynomics of the activists and
the delusion that the government exists to implement economic reality (for
more thoughts on “holynomics” see, An Un-economic
Interlude).
So, how does this relate to Microsoft?
Microsoft became a monopoly because they were able to create and enforce
universal data interaction standards for personal computers. Microsoft
did this by creating a series of operating systems (DOS, then Windows),
and by defining the kind of machine that could run their OSs. Microsoft
was successful at this because, unlike Apple and Commodore it set about
creating nonexclusive standards that allowed anyone to get into the computer
hardware business, and fill every market niche. So, Microsoft products
were able to be in every market niche. The strategy that made Microsoft
a monopoly worked because a communication/data system is valuable only
in terms of the number potential users and the number of possible interactions.
Microsoft became a monopoly because they created the most universally useful
standard for desktop computers. And, the most universally useful standard
is the one most valuable to computer users. The problem is that in an unregulated
market, the Microsoft no longer has an economic reason to produce a quality
product because of it’s monopoly.
The Danger
There is a danger in the government’s antitrust case. First, if Microsoft
is broken up, who will create and enforce the standards that make personal
computers so useful? The federal government could create a situation where
there are twenty little exclusive standards; each pushed by twenty competing
corporations. Remember, the value of a desktop computer is dependent on
the number other computers it can work with, and the size of the software
pool it can use. So, having fifty little noninteracting standards can only
hurt consumers. Also, businesses would be hurt by having to buy a piece
of each of those little standards in order to do business in cyberspace.
However, because of the economics of the communications sector, there will
inevitably be consolidations and mergers, leaving some users with now valueless,
but expensive, pieces of newly obsolete standards.
To a certain extent, emulation can get around the difficulties of incompatible
standards. But still, the government may create an expensive problem. On
the other hand, breaking up the software giant may simply lead to the creation
of another software monopoly, or two or three little monopolies. The economics
of communications (and the implementations of holynomics) may make a new
monopoly inevitable. It may be that there has to be a software giant, or
several smaller giants, to implement the standards that make the personal
computer so valuable to users. Somewhere along the way (perhaps too late),
the people who are prosecuting Microsoft may realize this. But then, what
will do they do? Holynomics cannot provide the answer to that question.
My View
Whatever happens to Microsoft, I think Windows and MS DOS should be
made open source, or free software under the terms of the Free
Software Foundation’s General Public License. My reasons
for proposing this are simple. First, dividing Microsoft into an OS company
and an operating system company has a problem because the OS company will
have all the awesome economic advantages that Microsoft currently has.
So, if there is a change in the politics in Washington, the OS firm will
be well positioned to create another monopoly. The alternative is perpetual
federal regulation of the “baby bill,” but this may let someone else create
a dominant OS and be positioned to start a new monopoly. So, the federal
government may end up dictating who can compete in the OS market, how,
and where. Second, consider some of the other remedies that have been proposed.
For example, Windows could be auctioned off to the highest bidder. But,
this would only set the stage for another monopoly, because the economic
factors that made Microsoft a monopoly will still be at work. Another possibility
is selling Windows to several players, or breaking up Microsoft into several
“Baby Bills.” While this would delay the creation of another monopoly,
it would also set the stage for a nightmare of competing mutually incompatible
standards. Understand, once a firm owns a piece of software, it will be
made as exclusive as possible to maximize profits. So, if Windows is sold
to several players, a destructive competition is likely until one firm
wins and establishes a monopoly. In the end, all of these solutions simply
perpetuate the problem. On the other hand, computers are valuable in terms
of their ability to interact with other computers. So, there is a profit
to be made by preserving interactivity, if the temptations of extreme profits
through exclusive standards can be avoided. By making Windows an open source
OS, you eliminate the possibility of profits through exclusive standards,
but the profits from interactivity will still be there. And, Microsoft
will be able to maintain it’s position in the mark by good business practices,
and because of it’s expertise. So, a unified Windows OS will still be possible
(consider Unix). I think by making Windows an open source OS; the Justice
Department can maintain the value of Windows for it’s users all around
the world, and avoid the inherent snags of the other remedies.
Finally
Software monopolies can be big (as in the case of Microsoft) or small
(as in the case of a single audio standard). Whether big, or small, the
drive to monopoly has the same cause, the conflict between intellectual
property law and the economics of communications and software. Understand,
communications standards must be common to work, but copyrights are exclusive.
Only a monopoly can propagate a common standard that is also an exclusive
standard. The natural results of this conflict are destructive monopolies.
Further, our basic legal concept of intellectual property might have been
made obsolete by technology. It may be that Intellectual property is a
legal fiction based on the economic realities of the 1890’s. Back then,
to replicate information enmass you had to invest in a printing plant,
so copyright holders had serious assets to go after if you violated their
rights. Today, anyone can violate the copyright laws with an office zerox,
or a tape recorder, or a PC. On the OS side, consider the success of Unix
and it’s open source variants (like Linux). These OS’s have made steady
progress in spite of fierce competition from Microsoft. This may, in part,
be because the makers were not hobbled by exclusive copyrights, and so
were free to follow the economics of software; because they did not have
to choose between monopoly profits and economic reality. Note, an OS is
so complicated that only a few firms can be in the market anyway, so OS
companies have a certain amount of protection. Also, Microsoft might have
been lulled by it’s monopoly into lowering quality standards and software
control policies. However, the successes of the free OS’s are very important
to consider. It may be that the legal remedies against Microsoft are unnecessary
because the firm is doomed by the copyright system. Microsoft may ultimately
reach the place where it will not be able to compete against the free OS’s.
Simply because the copyright system is so out of step with economic reality.
I hope you enjoyed reading this.
When Commodore went under, in 1994, Amega OS did not die. Instead, it
was sold to a German firm called, Escom AG, and continued on. The OS was
still valuable because of it’s user base. Later, in 1996, Escom ran into
difficulties and sold Amega OS (now Amega Technologies Gmbh) to Gateway.
Since then, not much has happened because Gateway, like Apple Computer,
is caught in paradigm conflicts. Remember, the best ways to make money
with hardware will kill software; the best ways to make money with software
cannot work with hardware. And, an OS is the software bridge between hardware
and software, and so comes loaded with conflicts. Also, Gateway, like Apple,
is a hardware company, so the focus can be wrong to begin with. Given the
way the OS market is saturated, I don’t think Amega can have much of an
impact, except with the Hobbyists. So, I think Gateway’s best strategy
would be to make the OS a limited sort of open copyright. That is, give
the OS a copyright that mostly evaporates after, say, six months. Afterwards,
anyone can modify the source code and sell it, but only under the original
copyright restrictions, from the original copyright date. Then, Gateway
should sell the OS for a little bit over cost to anyone and make money
by offering services and upgrades. That way, there can be many Amega players,
with Gateway serving as the OS standardizer by creating new software, and
by buying the better works of the players. Finally, Amega survived because
the loyalty of it’s users gave it a market niche, so there is hope. Remember,
markets are defined in terms of both the economic and emotional needs of
consumers. <return>
Books
The Mac Bathroom Reader, by Owen W. Linzmayer, Published by Sybex in
1994
November 29, 1999 - May 30, 2000