Why is Microsoft a Monopoly?

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 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.

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.

Back to Business Page

Back to Front Page

Dynamic Technology

A technology is created when someone turns a mix of scientific theory, curiosities (the first recorded steam turbine was made in AD 75 Hero of Alexandria), toys, and daydreams into something useful, a practical technology (so never discount daydreams). A technology goes becomes practical when it reaches the place where it can fulfill a need. For steam engines, this happened in 1698 when Thomas Savory, in England, invented a steam pump for coal mines. A decade later, Thomas Newcomen, developed an “atmospheric engine” using low pressure steam and vacuum to pump out mines. Note, as English forest were depleted (and laws were passed to save what remained), coal replaced wood as the predominant domestic and industrial fuel. The demand for coal created an incentive for deeper mines, and more powerful water pumps to keep them dry. Later, a technology may reach the place where it can fulfill many needs and create new needs as well; that is when it goes dynamic. For steam engines, this happened in the 1760’s when James Watt (yes, the Watt was named after him), invented his “condensing engine,” an improvement on Newcomen’s engine. The steam engines soon moved beyond the coal mines to power mills, factories, and waterworks. And, of course, James Watt, and his partner Matthew Boulton, briefly became monopolists. In the next century (1800’s), the steam engine redefined ocean travel (the steam ship), and allowed the creation of a revolutionary new form of transportation, the railroad. Note, electronics technology has followed this pattern, but has gone dynamic at least three times. First, in the 1880’s with the work of Thomas Edison, Nikola Tesla, and Alexander Graham Bell. Again, in the first quarter to this century after the development of the vacuum tube. And, more recently, after the invention of the integrated circuit chip. <return>

Bill Gates

Bill Gates became the wealthiest man in the United State because he knew software technology, was a good manager, was a good strategist, was a good leader, and because he was one of the first to play in the desktop software market. Because of these qualities, he was able to avoid the blunders and mistakes of his competitors (remember Apple had to go through the Apple 3 and Lisa on the way to Macintosh). That is why MS DOS and Windows became computer standards while other OSs languished. <return>

OS Niches

It may be that there are only a few OS niches available in the market. Remember Amiga, it’s still around, but now it is a German/American OS. The problem was that Commodore had to compete with Microsoft and Apple to sell Amiga. And, while Amiga was a very good OS, it had no solid niche. Understand, Microsoft’s OS strategy concentrated on the business market. That is, the computers that the bosses ordered for the receptionists. Consider, Microsoft’s OSs were never very fixable because secretaries were not supposed to be messing with the system (if a computer breaks call a service rep.). Meanwhile, Apple concentrated on the professional market. That is, the computers Graphic Artists, or Architects might buy for their own use. And, Macintosh computers tended to be very fixable, because users wanted to try fixing it themselves (the creative personality at work, or for economic reasons). Macintosh computers found business niches in paper and electronic publishing because of the professional focus (books and magazines come from the professional work of writers and graphic artists). Also, Apple broke into the education market in a big way. However, I think the education market should have gone to Microsoft, because the school systems are large institutions doing low end computing tasks; but two things prevented this. First, teachers are professionals, and so may tend to want a computer built for their needs. Second, the schools get their funding by legislative appropriation, and politics decides priorities. So, the schools might not have had lots of money for service reps. Finally, the home market was dominated by the kinds of computers parents used at work. So, Amiga was left without a secure market niche.

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>


I am indebted to the following sources for inspiration and some of the material that appears in this article.

The Mac Bathroom Reader, by Owen W. Linzmayer, Published by Sybex in 1994

November 29, 1999 - May 30, 2000

Copyright © 2000 by George A. Fisher