http://www.fool.com/portfolios/rulemaker/1999/rulemaker991123.htm >GAITHERSBURG, MD (Nov. 23, 1999) -- When IBM (NYSE: >IBM) outsourced the operating system for its original PC to a tiny >company called Microsoft (Nasdaq: MSFT), thereby granting Microsoft >the monopoly it has continually and lucratively leveraged ever since, IBM >had no idea of the value it was giving away. This is in part because it didn't >view the PC as a disruptive technology that would replace mainframes and >minicomputers, and in part because IBM didn't understand network >effects. > >Network effects occur when a product becomes more valuable as it is >used more widely. Telephones are a classic example, where a single phone >is useless but every phone added to the network can call every other >phone and the number of possible conversations increases exponentially as >phones are added. The larger the network grows, the more valuable it >becomes. > >The thing about network effects is that they create a winner takes all >proposition. A larger network is exponentially more valuable than a smaller >network, and even a modest difference in size can lead to a great >difference in value. Customers buy the computer that has the most >software, yet developers write software for the platform that has the most >potential customers. An early lead can quickly become insurmountable, >and an early monopoly can only be overcome in one of two ways. > >The first way is to tap into and share the existing network. This is what >Digital Research tried to do in the 1980s with DR-DOS: they created their >own version of DOS that could run the same programs as Microsoft's >DOS. Microsoft responded by tying its most popular applications, >including Windows, to its own version of DOS so they would detect and >refuse to run under Digital's version. The current owner of DR-DOS >(Caldera) is suing Microsoft for anticompetitive practices because even >Windows 95 can be made to run under DR-DOS instead of MS-DOS >once Microsoft's "which version is this" tests are disabled. > >Unfortunately, challenging a ruthless monopoly with unlimited funds and >outright enthusiasm for playing dirty is not an easy way to go. (Although >now that Microsoft has officially been declared a monopoly by the federal >government, Caldera's own antitrust lawsuit becomes almost trivial.) > >Preventing any of their competition from sharing their market is why >Microsoft has gone to such trouble to tie its applications so closely to >Windows. It got rid of DR-DOS when the field of battle changed from >DOS to Windows. It fought dirty and it got lucky, but it still had a fight on >its hands. Now it tries to prevent anyone from cloning Windows with >applications that use as much unpublished, inside knowledge about the >workings of Windows as possible. Microsoft's drive to leverage its way >into new markets is in part about providing revenue growth, but the other >half of its drive is to protect its core monopoly by destroying any software >products that can easily be ported to other platforms and replacing them >with products that will not run on anything but Microsoft's specific >implementation of Windows. > >Microsoft is very good at leveraging an existing monopoly to muscle its >way into a new market. Its monopoly revenue stream provides virtually >unlimited funds with which it can pay for all the development it wants. It >can then wait forever to recoup those costs, selling its new products at less >than the competition could possibly afford to (or that Microsoft could >afford to if it didn't have other sources of income) until that competition has >gone into debt and out of business. (In antitrust terms, this is called >predatory pricing.) > >Microsoft also has the money to buy other companies in a business it >wants to be in, which can give it new products to sell when it can't >successfully develop them in-house. Purchasing competitors and potential >competitors is also an easy way to eliminate competition, and several of the >companies and products Microsoft has purchased never see the light of >day again. (For a list of Microsoft's purchases, read The Whole Microsoft >Catalog.) > >Finally, Microsoft has the powerful psychological weapon called FUD, >Fear Uncertainty and Doubt. Invented by IBM, this marketing technique >can make success a self-fulfilling prophecy by convincing customers that a >competitor's product will become obsolete in the future, so customers >should abandon it today to avoid finding themselves dependent on a >dead-end technology later. > >Microsoft often uses this approach to compensate for the fact that it's often >late to market. Windows 95 and 98 each shipped two to three years after >their originally announced ship date, and Windows 2000 is still in >development almost three years after customers were first told to expect it. >Its other products have a similarly dismal track record of shipping on time, >but it doesn't matter because even though the competitor is shipping >something that works just fine today, as soon as the Microsoft version >comes out it will obviously take over, right? As long as nothing disrupts >Microsoft's track record, it's really hard to disrupt Microsoft's track >record. > >The problem with all this is that it prevents Microsoft from diversifying >away from its original monopoly. They haven't even gotten rid of DOS yet; >Windows 98 still runs under it, as does their proposed "Millennium" >product (the consumer version of Windows 2000). Since every new >territory it conquers is bent back to protect the whole, everything they do >is firmly tied to their core monopoly. Despite the multi-billion dollar size of >the company, their future still rests on the success or failure of new versions >of Windows. > >Microsoft has almost completely immunized itself against the first way of >overcoming a network effect: monopoly. It has prevented anyone else from >sharing its market, and vigorously guards against the slightest intrusion on >that front. But in doing so, it has made itself extremely vulnerable, almost >brittle, to the second way of taking on such a monopoly. More about that >tomorrow. > >- Oak -- [EMAIL PROTECTED] [EMAIL PROTECTED] ** The US has the best government money can buy **
