Creative Insecurity
The complicated truth behind the rise of Microsoft
By Virginia I. Postrel
Back in 1983, Forbes ran an article called "If they're so smart,
why aren't they rich?" It was about how inventors rarely reap
big financial rewards from their creations, and it started like
this:
"Here are some names you are not likely ever to see in The
Forbes Four Hundred [list of the richest Americans]: Franklin
Lim. Gary Kildall. Bill Gates...."
Oops.
The world's richest man wasn't always so. During the last
round of high-tech excitement--the personal-computer boom of
the early 1980s (which was followed by a traumatic
shakeout)--Gates looked like a smart programming geek whose
business savvy was dwarfed by the marketing whizzes at
Apple: "Their Apple Corp.," wrote the anonymous Forbes
author, "has been among the most successful at packaging a
product that sells and then selling it at an attractive price."
Therein lies a tale. As the Justice Department and a half-dozen
state attorneys general push forward antitrust actions against
Microsoft, it's worth considering how the company got where it
is and what that suggests about the strengths and limitations of
markets.
There are two main fables told about Microsoft: It has become
the dominant, standard-setting software company, and made
Gates a multibillionaire, because a) it makes wonderful
products and expresses all that is good about a capitalist
system or b) it cheats. Both fables turn up especially strongly in
statements by people who lack deep knowledge of the
industry, and each serves the interests of an industry faction.
The truth, however, is more complicated. Considered without
regard to price, ubiquity, or compatibility with inexpensive
hardware, many Microsoft products are mediocre at best. I am
happily writing this article using an obsolete Macintosh
operating system and WordPerfect, both of which I find
superior to even the latest versions of Windows and Word.
Great products did not make Microsoft number one.
Good-enough products did.
That uncomfortable truth offends moralists on both sides of the
Microsoft debate. The company's fans (and its spin doctors)
want to tell a simple tale about virtue triumphant--with virtue
defined, Atlas Shrugged-style, not only as astute business
decision making and fierce competition but also as engineering
excellence. Its critics use the same definition. If the products are
less than great, they suggest, the only way to explain the
company's success is through some sort of sleaze. Or,
alternatively, through the innate flaws of the market.
So what really happened? How did Microsoft end up ruling PC
operating systems and, through them, software in general?
At the risk of simplifying a complex story (if only by reducing
it to two players), the bottom line is this: Apple acted--and
continues to act--like a smug, self-righteous monopolist.
Microsoft acted--and continues to act--like a scrambling,
sometimes vicious competitor.
That pattern shows up most clearly in pricing strategies.
Microsoft's approach, throughout its history, has been to charge
low prices and sell an enormous amount of software. True to
form, the company is currently in trouble with the Justice
Department for charging too little--nothing--for its Internet
Explorer, by including it in Windows. (The technical legal
dispute is over whether Explorer is a "feature" of Windows, as
Microsoft maintains, or a separate product that is an illegal
"tie-in" and thus violates a consent decree Microsoft signed in
1995.)
The low-price strategy makes sense on two levels: First, it
approximates marginal-cost pricing, since software, once
written, costs very little for each additional copy. Anything
above that incremental cost, however small, is profit. Second,
and more significantly in this case, lower prices mean more
customers. And the more people who use a particular kind of
software, the more desirable it is for others to use it too.
Although translators help, switching formats is messy and
inconvenient. This "network externality" is particularly
important for operating systems and Internet browser formats,
since software developers and Web site designers have to pick
a standard for which to optimize their products.
As Gates toldWall Street Journal reporter Jim Carlton in an
interview for Carlton's new book Apple: The Inside Story of
Intrigue, Egomania, and Business Blunders, "Momentum
creates momentum. If you have volume, then people write
apps. If people write apps, you have momentum."
But if you think you already have a monopoly, you don't
worry about momentum. While Apple executives theoretically
knew they had competition, they acted as though they didn't.
Back in 1983 Apple may have been "selling [its computers] at
an attractive price." But the coming of the IBM clones made
Apple's prices look downright hideous. In the face of
ever-stronger competition, the company insisted on pricing the
Macintosh to maintain at least 50 percent profit margins; its
"50-50-50 rule" told managers to keep margins up to maintain
the stock price.
Customers who paid their own personal money for Macs might
be able to justify the high price simply because the computers
were fun and easy to use. But business managers who paid
Apple prices for any but the most specialized applications,
notably graphics-intensive work, were either fiscally
irresponsible or just plain dumb. Apple's pricing strategy
handed the vast business market to computers running
Microsoft operating systems, first DOS, then Windows.
Microsoft, of course, doesn't sell computers. It's in the software
business. You can get its operating system (and run its
applications) on all sorts of different machines, whose
manufacturers compete intensely. That competition drives
down consumer costs, even as machine features get better all
the time.
Apple didn't want that sort of competition. It not only kept its
own prices high but refused to license its software to any other
computer maker. That meant even fewer people used its
operating system, which further dampened its momentum.
Apple, in fact, acted like the ultimate "tie-in" monopolist. You
not only couldn't buy parts of its software separately; you
couldn't buy them at all without forking over thousands for an
Apple-made machine. And Apple has never been particularly
good at manufacturing.
After the company tepidly began licensing a couple of years
ago, Mac clone makers did what Apple had feared: They cut
into its revenue. But they also expanded the market, and they
made the fastest computers ever to carry the Mac operating
system. They gave Apple money for its software, even as they
bore the costs of manufacturing and distributing their
machines. And they gave consumers more choice, more
alternatives to Windows. If I were an antitrust regulator
looking for conspiracies, I'd be wondering just how
coincidental it was that Microsoft invested $150 million in
Apple just about the time Steve Jobs announced that the
company was ending the clone program.
Such explanations aren't necessary, however. Apple screwed
Mac lovers all by itself. Far from the marketing whizzes of 1983
conventional wisdom, its executives were enamored with the
cult of the machine, too hung up on the beauty of their product
to understand that consumers actually cared about many other
things: price, plenty of software, and compatibility with other
systems. Quality is not one-dimensional.
Apple's arrogance left computer users with less choice than
they might have had--or, perhaps, with more. After all, if Apple
had slashed prices early on and taken the business market
seriously from the start, it could well have ended up in a
Microsoft-like position, but without having to share its market
with clones. Microsoft would then have been mostly an
applications company, selling Excel and Word to Mac users,
and we'd be hearing about the evil, anticompetitive actions of
Steve Jobs.
That seems unlikely, however, and the reason is revealing.
Apple's all-in-one-box strategy was inherently brittle. It offered
too many margins of error and too few margins of adjustment.
The same company wrote the software and made the machines.
So if the computers caught on fire, as they sometimes did, or
the manufacturing plants couldn't keep up with Christmas
demand, there was no alternative outlet for the Mac operating
system. Software sales dropped too. No competitive sales force
could go after business users while Jobs and company were
chasing public schools. All new ideas had to come from within
the same closed system. (For a discussion of related issues, see
my Forbes ASAP article "Resilience vs. Anticipation". While
Apple is based in Silicon Valley, its self-sufficiency strategy
more closely resembles those of the minicomputer companies
based around Boston.)
Microsoft's partner-dependent system proved far more resilient
as the industry changed. The company didn't have to do
everything itself, and it could reap the benefits of innovations
by others, whether in manufacturing, assembly, distribution, or
applications software. Instead of the best minds of a single
company, it enlisted the best minds of hundreds. And while
Microsoft depended on its partners to build the market, in time
they came to depend on Microsoft. The irony is that by making
alliances and competing furiously--by not acting like a
monopolist--Microsoft wound up reaping the benefits of a
near-monopoly on its operating system.
It is emphatically not true that "when you buy a computer, you
already are without any choice as to the operating system," as
Microsoft critic Audrie Krause said on Crossfire. Both
REASON's production department and I personally will be
buying new Macs in the next few months. Translation software
makes it relatively easy to go from one operating system to
another. Nowadays, it's possible to function reasonably well
with an operating system that controls only 5 percent of the
new-computer market.
The great fear of Microsoft's critics is that the company will
wind up controlling everything, foisting mediocre-to-poor
products on an unwilling public at ever-higher prices. It's
impossible to disprove that hypothetical scenario. But history,
and Microsoft's own intense paranoia, cast doubt on it. Just
when its quasi-monopoly looks secure, something
new--Netscape's Web browsers, Sun Microsystems' Java
programming language--pops up and makes Microsoft
scramble to maintain its position. So far its resilience has
served it well, but the critics' scary scenario relies on more than
successful scrambling. It requires absolute security, no future
challengers. And that looks unlikely.
Consider the smoking gun memo cited by Assistant Attorney
General Joel Klein at the press conference announcing the
Justice Department suit. An internal Microsoft document, it
told marketing managers to "Worry about the browser share as
much as Bill Gates does, because we will lose the Internet
platform battle if we do not have a significant user-installed
base. The industry would simply ignore our standards. At
your level, that is at the manager level, if you let customers
deploy Netscape Navigator, you lose the leadership on the
desktop."
I will leave it to the attorneys to divine what it means not to "let
customers deploy Netscape Navigator," but one thing is clear:
This is not a company that thinks like a monopoly. It is always
running scared. There's always the possibility that something
new could come along and destroy its franchise.
Microsoft didn't get where it is by creating perfect products. It
benefited as much from its competitors' mistakes as from its
own considerable acumen. And it isn't shy about leaning on
suppliers and intermediate customers, such as computer
makers, to get its way. In the eyes of its critics, its success is
therefore proof that something is amiss in the marketplace.
But the market doesn't promise perfection, only a
trial-and-error process of discovery and improvement. The
fallible human beings who create products make mistakes.
They let their egos and preconceptions blind them to what
people really want. Or they just don't know enough, or adjust
fast enough, to produce the right goods at the right time. That
some of Microsoft's strongest current competitors--Sun and
Oracle--are gripped by an anti-PC ideology, when customers
love the independence and flexibility of personal computers,
does not bode well for them.
What is striking about the story of Microsoft is how adaptable
the company has been. Gates's original vision of "a computer
on every desk and in every home, running Microsoft software"
didn't specify what sort of software or who would make the
computers. It was an open-ended, flexible idea that built a
resilient company.
What Microsoft has delivered is pretty much what most people
want: a way to use computers easily, for many different
purposes. Its software isn't always elegant, but that's the
criterion of programming elites, not everyday users. And
though Microsoft is clearly the big kid on the block, it has
enabled, and encouraged, lots of other software developers.
Microsoft accounts for a mere 4 percent of industry revenue. As
Eamonn Sullivan of PC Week notes, "A lot of companies are
making a lot of money on the ubiquity of Windows, providing
users with a lot of choice where they want it--on their desktops.
That isn't the expected result of a monopoly."
From 1969 to 1982, the Justice Department carried on a similar
trust-busting crusade against IBM, which had behaved in many
ways just like Microsoft. (An earlier antitrust action against
IBM had been settled by a consent decree in 1956.) Millions of
dollars were transferred from the taxpayers and stockholders to
lawyers and expert witnesses. Enormous amounts of brain
power were dissipated. Having to monitor every action for
possible legal ramifications further constipated IBM's
already-centralized culture.
The suit was a complete waste. Whatever quasi-monopoly IBM
had was broken not by government enforcers but by obscure
innovators, working on computer visions neither IBM nor the
Justice Department's legions of lawyers had imagined. Big Blue
is still big, though it's smaller than it once was. But nobody
thinks it could control the world. The world, it seems, is
beyond that sort of control.
