Microsoft Analysis

Summary

The article "Making Microsoft Safe for Capitalism" was written in 1999 by James Glieck. This was during the concluding days of the third phase of the

Microsoft anti-trust case filed by the Justice Department. The article reviews Microsoft's business climate, its business strategies, corporate culture, and finally proposes recommendations regarding what the appropriate actions for the Justice Department would be.

Microsoft is a young, fast moving company of 18,000 employees. It is hardly an organization on the scale of previous anti-trust actions taken against AT&T, IBM, or Standard Oil. Microsoft controls monopolies of a very subtle and abstract commodity that are every bit as critical as natural resources or manufacturing. Microsoft controls the architecture and standards for the design and development of almost all software. Some of this control is obvious, but other aspectsÐ'--the more leveraging aspectsÐ'--are invisible to the average consumer. At the time of this article, nearly one-half of the world's total PC software revenue went to Microsoft. It's estimated that 80-90% of the world's personal computers run Microsoft software. The real power, however, comes from a much more cloaked sourceÐ'--the business strategy of the company and the character and ethics of its mission.

Microsoft's business monopoly exists entirely in probably the narrowest band of specialized software--the operating system. However, it has used this monopoly to leverage integration, marketing, and development of applications to its advantage. The key that sparked the interest of the Justice Department was the launch of Windows 95 and Microsoft's decision to place a little icon on the desktop that simply said "The Internet". Previously Microsoft had successfully bundled together other applications with the operating system. This practice increased consumer reliance on Microsoft's applications and didn't start or stop with just the "Internet" icon. However, this was the bell weather event that brought out other business practices employed by the company. The main complaint was not that Microsoft used this monopoly publicly and outright, but that they just made it "harder" for others to compete.

Microsoft's competitors admit that Microsoft's founder, Bill Gates, has been able to exploit the market and recover from mistakes faster than competitors. Gates has positioned Microsoft to control not only operating systems and software, but to redefine what software is considered: all media, entertainment, art, navigation, e-commerce, and any other method of communication that can be converted to electronic processing. Gates drives and leads the culture at Microsoft with a culture of what is self-described as "ruthless competitiveness and planned paranoia." In defense of this method, Gates cites the "discontinuities" in the industry where he has watched many of his competitors stumble slightly, and then fail miserably, quickly, and publicly. The accusations from those competitors are that Microsoft lies, cheats, steals, and manipulates information to gain an advantage. It then uses this advantage to pressure retailers, developers, journalists, and everyone else. Bill Gates contends that given the competitive nature of the industry, every other firm does the same. They are just not as successful as he is. The firm has gone through a number of Presidents that simply could not exist in the "thin ethics" environment of "Bill."

The argument proposed by Glieck is whether a threshold has now been passed that requires government intervention. The central point is Microsoft setting standards and using that pivot point to gain market leverage. The first recommendation is to discontinue the use of Microsoft licensing their logo and standard to hardware and software manufacturers. The second is to have the government control on-line Internet content development standards. The government should also force Microsoft to disconnect the operating system from Microsoft style Internet access. Finally, and most aggressive, Microsoft should make its code, all of it, open source and public. This would allow others to develop around the source code itself and not just to Microsoft's published standards and specifications when the company decides to release the information.

Economic Principles

As consumers, we can choose what we want to purchase. The first principle we learned is that people face tradeoffs. The Windows monopoly is, arguably, evidence that consumers actually desire and value a consistent experience between their home, office, and other casual use computers. There are very few people who use a Windows computer at work and prefer an Apple or other operating system computer at home. Even if they do, they generally use a Microsoft product, or have two operating systems on their computer. The conclusion to be drawn from this is that most people know they are paying a premium for Windows software. They just don't see that cost as prohibitive compared to the consistency or other benefits. This also manifests itself in that the cost of what they are giving up in money exceeds the value consumers realize to receive this consistency.

Microsoft is also in a unique position to understand its customers and, therefore, maximize working at the margin of the monopoly marketplace. It's a computer company. It knows exactly how many copies of its software are in use, exactly the profile of those who will upgrade, within what timeframe they will do so, and their marginal cost of production is minor. This makes it relatively easy for them to maximize profit at all phases of the marketÐ'--initial release of the software, upgrade cycle, business acceptance, etc. In fact, Microsoft shrewdly allows "beta testers" to test its software in development by both subscriber based users as well as Internet downloads. It can estimate the market demand curve very accurately based on these data points. One could argue that this is their real market power. Since they can estimate this so accurately, they run a low risk of charging enough that they encourage competition and therefore they can keep high barriers to entry for competitors.

One area where they have possibly made errors recently is in the Office Suite. Microsoft Office is so expensive now that there are viable alternatives that are slowly being accepted by businesses and consumers. Still, there are market forces that keep Microsoft from charging thousands of dollars. No one would purchase their software or there would be such high profit margin that the market would be open to competition. Office Suites