JACKSON 1

Michael W. Jackson

A02-92-6779

Warren 11B

1 February 2000

Microsoft: Beneficial Monopoly in Harsh Competition

When Microsoft or Bill Gates is mentioned the normal response by the

computing public of the United States is one of disgust and disapproval of an industry

leader with what appears to be endless wealth. This is a common feeling shared not

only by the consumer but as well by the computing industry, which must devote many

of its resources to competing with Microsoft in hopes of besting the prominent leader

in consumer recognition. The term applied to Microsoft is a monopoly, which is

traditionally understood to be a company that controls a market and in doing so does

not allow any competition to challenge its power. The development of Microsoft's

current position in the computing industry, however, is not the result of monopolistic

sentiments comparable to that of the robber barons of the latter nineteenth century but

in fact a result of the unique dynamic of the computer industry itself. The factors that

form this dynamic are intellectual property, rapid change in product requirements, and

competition in a diverse marketplace.

The first distinct component of the computer industry dynamic is the unlimited

scope of intellectual property as a resource to product development. The message

conferred by this statement is that a monopoly such as Standard Oil had a finite

product (oil) to control whereas the scope of the human mind is limitless. The

computer industry is one in which the next great advancement is just over the horizon.
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The distinction that needs to be made between the products of the digital era and the

robber baron period are quite heterogeneous. The product of oil is something that no

matter who owns it can not vary in any great detail and to be successful with such a

commodity it is clear that a monopoly is required. Compare oil to a computer program

and the distinction is made that many companies can provide a wide variety of

programs for a computer where as oil can make only a limited number of products.

Intellectual property furthers the difference between a monopoly of today and one in

the pre-digital era. With respect to Microsoft one is able to view the necessity of an

industry leader to have a work policy of "sit and think" (Stross 17). This policy is a

necessity as it promotes the true development of ideas that seem impossible but

become a reality in a matter of years. A prime example of this is a move from a user-

unfriendly environment of DOS to the graphical user interface (Windows) to promote

the company policy of a computer in every household (Stross 195).

The second factor of the computer industry is the rapid change inherent in its

progress and the subsequent need to maintain innovation. The computer industry

was a relatively new field in the 1970's and 1980's; however, in the time between

those two decades a move from computers and operating systems to compute basic

math to a user-friendly interface progressed at lightning speed. The car industry in

comparison to achieve such goals would have had to move from the model T to a

2000 Crown Victoria in a period of ten years instead of ninety. The computer industry

and its innovations have been greatly aided by a set system of standards that have

allowed the idea of compatibility to reign as a motive force for progress. "Architectural

standards enable rapid innovation to take place without sacrificing compatibility"

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(Chang 1). The success of Microsoft can be contributed to the selection of DOS as

the operating system of the first IBM personal computers (Chang 1). The industry,

however, does not remain static as is proposed by Moore's Law. Moore's Law states

that the processing speed of chips of a given cost will double every 18 months (Egan

3). This is a direct factor on the development of software as the speed at which the

chip can process information faster and faster brings more and more of society's

information processing tasks within the feasible range of the computer (Egan 3).

Microsoft gained market share with DOS; it however did not sit back and rest on this

success, as it was clear that newer and more advanced software was necessary to

achieve success in the rapidly changing computer industry. The placement of DOS

does provide Microsoft a dominant position in the field of operating systems however

this advantage does not discourage competition in hopes of replacing an industry

standard. An example of this is IBM's decision to develop an operating system called

OS/2. This program however did not gain consumer demand and subsequently

disappeared. Microsoft's success is further supported by the presence of positive

feedback cycle (Stross 185). This cycle states that consumers will gain acceptance of

a product and in turn continue to support that product even when there may be a

product of greater value present in the market (i.e. consumer loyalty). The computer

and software industry is constantly changing and it is only through innovation that

Microsoft has maintained its market share.

The final factor of the computer industry that is responsible for Microsoft's

monopoly of and industry is competition. The idea that competition is present in a

monopoly appears to go against the commonly held opinion that in a monopoly there
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is no competition present. This would hold true in reference to the robber baron

period with such companies as Standard Oil but in a market of ever-present change it

is seen that the monopolist is truly an industry leader. Armstrong substantiates this

point when he states:

Finally, monopoly, as we have been discussing it, has been implicitly

cast in a static or comparative-static mold. In a free market it is
inevitable that changes will occur and that they will occur unevenly.
The successful innovator will, by definition, be a monopolist as judged
by point of time analysis. But can the innovating firm that is being
hotly pursued by other innovators and imitators really be considered a
monopoly (123)?

Microsoft is but the industry leader that is continually challenged to maintain its

competitive pricing, product diversity, and innovation. The competition to Microsoft

has been such companies as Netscape, Intuit, Oracle, IBM, Sun Microsystems, and

Lotus. These companies all have versions of widely accepted computer applications

such as spreadsheet, word processor, presentation software, email client, financial

assistant, and web browser. This competition resides considerably in the personal

computer domain in which Microsoft has its considerable advantage. This realm,

however, is not the full extent of this industry as it branches into servers, networks,

and mainframes in the business sector. Microsoft has a clear monopoly or industry

leader stance in personal computer operating systems and applications to some

degree but by no means controls the entire industry. The success of Microsoft is

through constant development and increased reinvestment into research and

development. These are the attributes of any successful company in a highly

competitive industry.
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Microsoft can be defined as a Monopoly in the sense that it has considerable

market share as the industry leader. Bill Gates himself expresses this sentiment more

succinctly when he states, " I really shouldn't say this, but in some ways [the way the

software business works] leads, in an individual product category, to a natural

monopoly" (Stross 185). The issue at hand is that a monopoly in this industry is a

good force to maintain challenging competition to keep producing better and better

products. In reference to the historic stance of this nation on monopolies it is

necessary to refer to the actions of President Theodore Roosevelt. Roosevelt known

as a trustbuster viewed monopolies in two regards, good and bad. Roosevelt

determined the difference between these two companies as stemming from their effect

on the consumer. When a monopoly had a beneficial effect it was deemed worthy and

was left untouched by Roosevelt however when a company was deemed harmful to

the public it was disbanded. With this insight it is clear that Microsoft's dominate

position in personal computing applications is defined as a good monopoly under

Roosevelt's standards and therefore should be left untouched. Microsoft is a

company, at the head of an industry, which is deemed to proceed unlike any other in

history and have the possibilities for exponential growth. This growth possibility of this

industry leaves clear room for a new industry juggernaut, but in the true spirit of

competition Microsoft as well as other companies will always innovate to succeed.

Monopolies in this industry are not monopolies by force but monopolies by

imagination.
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Works Cited

Armstrong, Donald. Competition Versus Monopoly. Vancover: The Fraser

Institute, 1982.

Chang, Ike Y. Jr. The Economics of Dominant Technical Architecture: The Case

of the Personal Computer Industry. Santa Monica, Rand Corporation, 1994.

Egan, Edmund A. The Era of Microsoft? Technological Innovation, Network

Externalities, and the Seattle Factor in the US Software Industry.

http://brie.berkeley.edu/~briewww/pubs/wp/wp87.html, 01/28/2000.

Stross, Randall E. The Microsoft Way. New York: Addison-Wesley Publishing

Company, Inc.,1996.