Microsoft & the Market Monopolyby Brad Warbiany
I got in a nice email debate today, and I’ll post below the email exchange between myself and a friend. Of all my friends, she is one of the two that I truly enjoy debating. She’s a lawyer, and did her undergrad as an in economics & poli sci (I think poli sci) dual major. She was also very close to libertarianism back in her younger days, so she understands where I’m arguing from. She’s left our fold to become a pretty strong liberal, but her knowledge of economics and general pragmatic attitude generally make our debates quite productive.
I sent out an email today to alert friends & acquantances of my email address change. I’m changing for no other reason than Microsoft’s deliberate efforts to annoy FireFox users, and as a former Hotmail user, I was feeling the brunt of those efforts. In past debates, we’ve often sparred about Microsoft’s monopoly power, and monopolies in general, so she used my email as a reason to start a sparring match. Not being one to back down, I took the bait, and I think the exchange was pretty strong on both sides. When I asked her approval to post the exchange, I offered her the ability to have the last word (and unlike Bill O’Reilly, I will stand by that offer). So I don’t plan to address her final points in my post, although if my commenters would like to have a go, I may play along.
Below is the exchange. I’ve tried to clean up some of the spelling errors and typos along the way, as this was intended as an email exchange and not proofread during the debate. If I missed anything, my apologies. My comments will be in italics, and prefaced with a “B:”. Her comments will be blockquoted, bolded, and prefaced with an “R:”. The exchange is placed below the fold, as it’s quite lengthy.
B: Due to Microsoft’s continued insistence on making life a living hell for anyone who uses a browser other than Internet Explorer, I have decided that it’s time to ditch Hotmail. Life is far too short to put up with this continued frustration. And for all of you, this should be a much easier address to remember anyway.
R: Brad, that pesky Monopoly power stinks, doesn’t it? You have monopoly or oligopoly power in one product market and use that monopoly/oligopoly power to coerce consumers into using another product (which is usually an inferior product), such as Explorer. But monopoly power doesn’t skew the proper working of the free market, no?
B: In email, I have a choice between hotmail, yahoo, gmail, and countless other free services. Years ago, I chose hotmail. Now, Microsoft’s business practices are certainly not preferred, but on my Windows system I can completely use FireFox (as my browser) and any number of those other free email services without any problems whatsoever. I’m choosing to use my own web site (which is paid hosting) so that I can have an email address ending in @warbiany.com, but that doesn’t make yahoo, gmail, and all the other clients less available or less useful.
As for an operating system, I’m running my home media PC using Linux, and considering converting my home-only laptop using Linux. I cannot do so with my work laptop, but that is only because I need access to Microsoft products on that system. Linux and the open-source movement is about 90% ready as an alternative to Microsoft, and for a techie like me, 100%. I’ll have access to free browsers, OS, office suite, and countless other products that work just as well (and sometimes better) than the Microsoft variants.
Microsoft has a lot of power in the PC market, because they made extremely smart (and sometimes shady) decisions in their business model. But the cracks are starting to surface. Microsoft is a natural monopoly, which has its downsides, but only exists to the extent that they can hold their position. They’ve been faltering lately (note the higher and higher numbers of people using FireFox because IE sucks) because their business decisions haven’t been as smart. If they turn it around, they can keep their position. Microsoft is forced to either innovate or buy competitors who innovate, because falling behind in a liquid market like software can get ugly very quickly. But you need to draw a distinction between a natural monopoly like Microsoft, which has its power because it has consistently “pleased” the highest number of customers for a number of years, and a non-natural monopoly, such as when government grant one business exclusive rights to a certain company. A non-natural monopoly is coercive, and the business granted monopoly power has no incentive to innovate, because consumers have no other choices.
Microsoft does have a significant monopoly power. But since that power is non-coercive, they’ve got a mass of snarling pitbulls snapping at their heels. Mozilla (the makers of FireFox) are taking a chunk off of them. Linux is taking a chunk. Google is taking a chunk. If Microsoft doesn’t start running faster, they’ll be in a lot of trouble.
R: Natural monoplies are a significant problem because– unlike you– most people don’t put a great deal of thought into their computer choices; and as reasonable consumers they should not. Therefore, the path of least resistance is a Microsoft operating system, with Explorer. And by default because they were really the first big comany to introduce free e-mail, Hotmail. You are assuming no coercion even though they purposefully make all their products work well together and not work well with other people’s products, because we have a choice.
Well, the market system works based on several important assumptions. Perfect competition is one of those assumptions and– as you so aptly stated– there is not even close to perfect competition in this market, because that would mean if anyone made a superior product to Microsoft’s product at the same or a lower price, then consumers would use that alternate product more than the Microsoft product. That does not happen. Therefore, there is no perfect competition; and based on the same facts, no perfect information. Those are both important assumptions to the efficient working of the market system.
People are using over-priced and under-performing products instead of the more competitive and better product. That is the problem with monopoly: inefficiency. Microsoft’s monopoly is exactly the type of monopoly that Sherman and Clayton were passed to address. I can’t wait until we have an administration that will enforce the law and ensure the proper working of our oh so important market economy.
B: Great strawman! For capitalism to be valid, we must have “perfect competition”. I’ll bet that’s what Adam Smith was talking about!
So what you’re saying is that customers would be better served if every software product they used was sold entirely separately from every other product. Microsoft should be broken up into separate companies, so that it’s a lot harder for a consumer to get a seamless, integrated system? You are underestimating the fact that Microsoft worked for years making great business decisions (as well as getting lucky in a few cases) to get to the market share they now have. And you overestimate the ability to overcome the market inertia of such a commanding market share, expecting change to be immediate.
Let’s look at another market. Let’s say I own a graphic design company. I’m doing loads and loads of business, and farming out the printing work to other companies. But I determine that if I buy a printing company, I can run the printing company at break-even levels, drop my prices to my customers, and give them a one-stop shop. They get all their printing and graphic design through me, at better prices than my competitors (design companies separate from the printing company) can possibly offer them. I suddenly start to corner the market, gaining a 90% share in my locale after a few years.
But my competitors start getting better. The design company hires talented designers in a cheaper markey (yay, outsourcing!) and can provide a superior product at lower cost. The printing company upgrades all their printing equipment, and can suddenly do it faster and cheaper than I can. But 3 months go by, and I’ve still got 88% of the market!!! What the hell happened? Other companies can do it better and cheaper, and I’m still winning!
What happened? I’ve built up a customer base that is used to dealing with me. They choose me because I’m familiar. They know me. They trust me. And I’m still a one-stop shop. But I slowly start losing market share, because price and quality are more important in the long run. I’m forced to innovate. Maybe I start outsourcing my design, and put in a capital investment into upgrading my printing equipment, so I can improve my pricing and quality. And maybe not. If I do, I might be able to hang onto high market share for a long, long time. To do so, I’ll be constantly innovating and improving. If not, however, I start losing market share. And if I don’t improve, I’ll continue losing market share.
Look at a real-world example: IBM. They were the 800-lb gorilla in computing about 15 years ago. Where are they now? Dell, Compaq, Acer, eMachines, etc have all decimated IBM, because IBM couldn’t adapt. Microsoft is currently the 800-lb gorilla in software. And they’ve got a big target on their back. Right now, they’re following right down IBM’s path of acting like a monolith that nobody can fight. And they’re slowly losing market share. It might take 5 years, it might take 10 years, but if they don’t innovate, they’ll be in trouble. They’re trying to hold their hands over their ears and scream “LALALALALALALALA” when someone mentions the idea of “open-source”. But look at history? What killed Apple as a serious computing platform? They didn’t license to other companies like the PC did. What’s killing Microsoft? They’re not innovating as quickly as the folks in the open-source movement.
Microsoft isn’t toast just yet. They’re still the 800-lb gorilla, and if they wise up, they can stay that way. But evidence of them doing so is few and far between. Right now, Linux is making serious, serious inroads. Linux is becoming a force in some of the non-computer computers like DVR’s (I’ll bet that nice DishNetwork DVR you’ve got powered by Linux, and I know the TiVo is). They’re starting to make huge strides in the server market, because they’re more secure than Microsoft. The new Macintosh OS is built on a Linux base. And geeks like me are using it, which is one of the starting points of making a more serious change, eventually penetrating the home PC market. Then, look at Google. There are serious folks out there who think that– in the future– you won’t have software on your computer any more. You’ll only have enough to get on the internet, and that things like word processing tools, etc, will all be centrally stored and you can access your data online. As an idea, it’s still in its infancy, but it’s not that far-fetched. After all, if you use Hotmail or gmail or Yahoo! Mail now, you’re already doing it. Google (and like services) may not directly compete with Microsoft, they may simply make Microsoft obsolete.
Microsoft is a natural monopoly, but I don’t consider them to be a problem. They’ve earned that monopoly position, and if they keep innovating, they will continue to hold it. They’re not innovating as much as I would like, and probably not as much as you would like, but nobody else has yet acheived the critical mass necessary to bring them down. But a few years from now, I wouldn’t be surprised to see some major changes in the computing world, as a result of Microsoft’s lackadaisical manner.
The Last Word:
R: The idea that a market economy is a better system than others is based solely on its superior ability to allocate resources to their best and most efficient use. In order to show that the market economy actually allocates the resources efficiently we look at models that assume several essential ideas. Perfect competition, perfect information, and no transaction costs are the some of the most important of these assumptions. While no real world market will have perfect competition, no consumer will have perfect information, and there will always be some transaction costs, in order for the outcomes of these markets to be efficient, there must be at least strong competition, sufficient consumer information, and low transaction costs.
Monopolies by their design as smart businesses try their best to squelch competition, reduce consumer information as to alternatives and make transaction costs as high as possible for their competitor’s products. That is the goal of business, to put competitors out of business. However, economists and anyone who studies the situation knows that once this occurs, the monopoly has no incentives to allocate resources efficiently because those important assumptions no longer exist. That is why our government passed important anti-trust and price fixing laws. We want business to do everything they can to succeed, because that is what produces efficiencies, however, once that success reaches a level that destroys those very efficiencies, the government must step in to correct the market failure.
The market system is a great system, but it does have failures (as does any system). One of those failures is monopoly. Once a monopoly is created the market does not have an efficient means of correcting the very inefficiency that it created. I am a great fan of the market system; not because it produces the morally or ethically correct result, it usually does not. What the market system does is produce the efficient result and we all benefit from those efficiencies. Those efficiencies create more for all of us. When those efficiencies are decreased a good capitalist should not argue that we should not correct the market failure because it would some how be morally wrong to take from the hard working company that created the monopoly in the first place, that is like saying that Microsoft is morally wrong for firing their hard working, but no longer needed at will employee and therefore should not be able to fire him even though it would create efficiency for the company. That may be morally wrong but is also efficient for the company. Microsoft is worried about efficiency and profit within its company. The U.S. Government is concerned about efficiency of the market as a whole. The market is not about morality, it is about efficiency. Monopoly is less efficient that a competitive market therefore it must be strictly regulated to ensure the very purpose of the free market.
If you want to argue for a moral system, lets talk about communism or socialism. You are a libertarian and you want the market, so lets call it what it is. Efficient. Lets not call it what it is not. Morally correct.
So that’s that. I’m sure there are quite a few people on both sides of the debate, so I’m definitely interested to hear what you’ve got to say in the comments.