Flawed Theory, Not Facts Cc: freematt@coil.com (Matthew Gaylor) Dear Mr. Hallam-Baker, If you knew anything about the academic debate over "path dependence" ("network externality") theory you would know that the work by our research fellows, Stan Liebowitz and Stephen Margolis, has been appearing in the leading, scholarly, peer-reviewed, economics journals for the past ten years. They have conclusively shown that "network externality" theory has absolutely no empirical evidence. And, no economists or any others have been able to show any errors in the devastating Liebowitz/Margolis analysis. Indeed, hundreds academic economists have signed our Open Letter agreeing with this analysis. As a belief system without any scientific evidence and with people such as yourself who accept this urban legend without proof, "path dependence" is a house of cards that is being used to advance the corporate welfare ambitions of various major business and government interests. In so doing, the Microsoft case has nothing to do with consumer welfare and everything to do with corporate welfare. (For your information, it was the acclaimed, New Left historian Gabriel Kolko who first showed how antitrust has been used repeatedly for corporatist purposes since its initial adoption.) So, since you have obviously not even seen the Liebowitz/Margolis book, WINNERS, LOSERS & MICROSOFT: Competition and Antitrust in High Technology, and you apparently prefer to defend the blatant campaign for corporate welfare (antitrust protectionism), who indeed is the crank and right-winger here? Incidentally, so you do not continue to embarrass yourself, I would suggest you first learn the difference between the terms, "network effects" and "network externalities." Reading the book, WINNERS, LOSERS & MICROSOFT, would make an excellent way to do so. David J. Theroux Founder and President The Independent Institute 100 Swan Way Oakland, CA 94621-1428 510-632-1366 Phone 510-568-6040 Fax DTheroux@independent.org http://www.independent.org

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Microsoft won because of superior reviews? Come on, how stupid do you think we are? So if a company pays for glowing reviews that would be okay?

Matthew's argument is that 'network effects' do not exist, based on a tendentious piece of propaganda pushed by a right wing crank tank. The crank tank is attempting to proove that the free market is perfect, unsullied by the possibility of monopoly that obviously ignorant writers such as Adam Smith wrote at great length about.

Hence the anecdotes such as QWERTY, Betamax are attacked as if they were the best evidence, the sole evidence even for network effects. This is historical revisionism in the service of dogmatic ideology.

Positive feedback exists, get over it.

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Obviously they have never tried to sell a product. It's very dificult to get consideration such that you could prove the technical merits when there is a large existing supplier.

That is only a weak network effect. People buy from Amazon because they have a well known brand name, have established a customer reputation etc. But there is no intrinsic advantage buying from a large online bookseller than a medium sized one.

There is a big advantage having a VHS video over Betamax however. If you have VHS you can rent movies from stores, you can send tapes to friends who have equipment to play it. The fact that a modern day VHS recorder is technicaly superior to any Betamax machine made is irrelevant. At the time the standard was set Sony and Betamax had the clearly superior technology.

A network effect exists when there is an intrinsic advantage to join the bigger network. Operating systems have been understood to have strong network effects since the 1950s. My company only supports one version of UNIX for certain products because the cost of QA on each O/S variant is significant. If we were choosing the technically best O/S platform we would probably look at of the stripped down, hardened BSD variants, but we choose the platform that most of our customers are already familliar with - Solaris.

When I wrote video-games for a living I wrote for the Sinclair ZX Spectrum with a market of several million users, not the vastly more sophisticated BBC computer - even though the spectrums would die after about 100 hours use and need replacement. I would typically replace a spectrum three or four times within the guarantee period. Writing a game for the bigger market gave bigger returns. Customers bought the machines supported by the most games.

Network effects are the alpha and the omega of Internet business strategy.

Ironically despite paying for the tendentious propaganda Microsoft appears to be benefitting from the argument that network effects and 'tipping' explain the emergence of a single operating system.

I don't know if the DoJ should interpret recent events in Seatle as a divine attempt to breakup Microsoft. If so it is really time for the DoJ to give up since it evidently failed.

Phill

-- David J. Theroux Founder and President The Independent Institute 100 Swan Way Oakland, CA 94621-1428 510-632-1366 Phone 510-568-6040 Fax DTheroux@independent.org http://www.independent.org ************************************************************************** Subscribe to Freematt's Alerts: Pro-Individual Rights Issues Send a blank message to: freematt@coil.com with the words subscribe FA on the subject line. List is private and moderated (7-30 messages per month) Matthew Gaylor, 2175 Bayfield Drive, Columbus, OH 43229 (614) 313-5722 ICQ: 106212065 Archived at http://groups.yahoo.com/group/fa/ **************************************************************************