Arnold Kling writes the following and posits that Microsoft's monopoly is over-rated: (but he's wrong!)
Microsoft Divides up P&LMicrosoft released a profit report that allocated profits and losses by division. These reportedly showed a high profit margin in the divisions that sell Windows(tm) and Office(tm). But they showed losses in four other division, including MSN. Kevin Werbach asks
What to make of this? Despite all the concerns, Microsoft has failed to expand its Windows monopoly into other markets,? Or, Microsoft has succeeded in pulling everything that matters into its Windows monopoly and commoditizing all other markets?
First of all, who knows how the accounting tracks the economics? For example, the MSN "icon" on Windows is deemed by competitors to be highly valuable. How did Microsoft account for this? Did they charge the MSN division a shadow price for all the promotion it received from the Windows division? If so, did they charge too much? Too little?
My guess is that, if anything, MSN lost more than what the accounts show. To me, this shows that Microsoft's monopoly power and marketing prowess are over-rated.
As smart as Arnold Kling is, he's making a really lame argument. You see, Microsoft has a history of using losses in competitive segments to drive out innovative companies and products that threaten their monopoly position in the crucial software division. They can be profitable even while hemorrhaging losses in 4 divisions because the monopoly in windows and office can keep them in the black. Look at Netscape. MS gave away Internet Explorer because Netscape was proposing using the browser as the main operating system. It was a great move on Microsoft's part even though it was done at a considerable loss in revenue.
It's tough going in the software industry for emerging software vendors exactly because you can expect Microsoft to be willing to lose money in order to control the market. Wordperfect went away, Netscape Navigator went away all because Microsoft can lose money in those businesses to drive out the competitors. For me Microsoft's monopoly isn't over-rated, it's the weapon of mass destruction in a hegemonic software world.
As an aside:
Some might argue that the theoretically long-run outcome of monopolistic competition is proof enough that predation using monopoly power is ineffective. Don't believe the hype. There's a huge cost to switching software once you've installed it. I tried for hours the other day trying to switch to Eudora from MS Outlook to no avail. My messages wouldn't import correctly to Eudora so now I'm stuck. The thing about software is that it's not like deciding which airline to fly with, it's more like who you're gonna marry. You can switch later if you want to, but it's gonna be costly (time, energy, $8) or in the case of software (time, energy, $$$). There are network effects too. It's kind of like once you're married, you're friends with your spouse's friends, you go to your spouse's extended family's Christmas party. It's not so easy to break those bonds (depending on individual situations). Software is the same...software creates bonds between you and other users. The value of MS software goes up as more people use the same MS badged stuff. It's haaarrrddd to switch. MS Word is used by everyone because if you don't use it, other people can't read what you've typed. Anyone still remember Wordperfect? The network effect is what drives the software industry, it's why Windows is used by some absurdly large percentage of PC users, and it's why Microsoft is able to lose money in other businesses. Ok, that's enough rambling... Bottom line: monopolies are not over-rated.
Comments (2)
Hmm, so are you saying that monopolies are bad? I would think that they are, they eliminate competition and innovation. Where would we be if there was no competition to motivate people/companies to produce better products? We'd be stuck in the stone age if there was no competition. Yes, monopolies are bad, but what can you do to bring a big company like Microsoft down a bit? Since I've never really tried to change software before, I'm not sure if it's as commited as being married (I thought you'd change the analogy). I can imagine that it is difficult, but that's all I can say on that subject.
Posted by lisa | November 21, 2002 8:08 AM
Posted on November 21, 2002 08:08
Teddy, I really hope you aren't sitting here discussing monopolies when you should be writing about how amazing it feels to finally have rain after seven years of drought. YES. I AM talking about the Big Game, and our triumph. What sweetness it is - if only I could have witnessed it in person. The man with few regrets adds one to his list!
Posted by Wayne | November 23, 2002 11:41 PM
Posted on November 23, 2002 23:41