Microsoft Isa Nice Monopoly

From EveryoneButMicrosoftConsortium

And so we come to an impasse. In the present, monopolies are good for consumers, because they cut down on overhead, but, once a monopoly figures out it is one, they begin to exploit that position, raising prices and lowering quality. In addition, they slow progress, because they lack the incentive to create new products that cost money to research and may or may not pay out. -- BethanyAndresBeck

I'm going to go out on a limb and say for the most part, MicrosoftIsaNiceMonopoly. This fear of prices being raised is not supported by the data, mostly because even when they are on top, Microsoft is PlayingToWin.

http://wwwpub.utdallas.edu/~liebowit/netwext/cei%20op-ed/cei.html

On the other hand, I'm not saying that I'm completely satisfied with what Microsoft produces. -- JasonYip

Prices may not be being raised, but they aren't coming down. In an era where most software companies have fairly tight margins, MS has incredibly huge profit/revenue ratios.

That's because they have incredibly smart people and they generate a very high profit/head ratio. Also, I disagree. The price has come down by a lot! If you factor in all the things that have been added into the OS and the price stable or lower, it costs me much less now.

It's the "get it right" part that bothers me. Since nobody can do that to everyone's satisfaction, the presence of competition is a must for the consumers. It drives each to be better. No competition, no drive to be better... where else could the consumer go anyway?

I know there's those that think MS does have competition... I say MS has potential competition. The reason there's no real competition is that the vast majority have Sam's attitude and just buy MS. If you choose MS that means I have to also assure easy interoperability with you, thanks to MS's "embrace and extend" strategy. -- DavidHooker

If you draw the circle tightly enough, then yes, you can accurately state "MS has no competition". If you state it as Judge Jackson did - "the market for operating systems running on Intel-based microprocessors, etc., etc." (I forget all the special restrictions) - then yes, MS is clearly a monopoly without serious competition, currently. Potential competitors, yes.

Analogy: Firestone Wilderness ATX tires were shipped on 90% of Ford Explorers built over the past 7 years. So, the market for tires for Ford Explorers was monopolized.

But then if you get a bit more practical, not much, just a bit, you quickly realize that Mac is a nice alternative. And maybe Linux - I can get a RedHat shrinkwrap package in Egghead now. And of course that's still limiting our discussion to a market we might call "operating systems for personal computers". The market share of these other competitors is not huge, but it is growing. Now our analogy might be "tires for sport-utility vehicles".

Now let's say we further expand our view of the market, realizing that the trend is strongly toward a world in which everything will be intelligent and connected. An explosion in the number of nodes networked over the internet. So let's say we expand the market to operating systems for any connected device: PC's, yes, but also Phones, BigFatHonkingServers?, automobiles, game consoles, televisions, radios, electronic newspapers. Does Micro$oft have some sort of pre-existing advantage in any/all of those device categories? No. Sure, they have cash, but other than that, they are just another player. In fact, the more heterogeneity there is in the nodes, the less Microsoft's traditional strategy (everything is Windows) can succeed. The Windows business actually hinders Microsoft here. Nimbleness suffers (Ever read InnovatorsDilemma, by ClaytonChristiansen? ?). Now the analogy might be "tires for all vehicles."

Let's also say we expand the discussion to consider applications that run on those connected devices. Database applications, web servers, office productivity programs, music swapping programs, publishing programs. The world of software. Conservatively, that market is hundreds of billions of USD per year. But Microsoft has only a tiny fraction of it. IBM's share of that market is just slightly smaller than Microsoft's, in terms of revenue. Now the analogy might be "automobile parts and components".

So I don't understand the statement "Microsoft has no competition." You are artificially limiting the discussion to only those markets in which Microsoft has succeeded.

As a comparison, let's look at MainframeComputers. How's that for a fairly closed market? Do you think there is a monopoly there? I'll bet the market share numbers are pretty strongly in favor of IbmCorporation! What about the market for Solaris-based Servers and Workstations? I'll bet SunMicrosystems has a pretty strong share of that hardware - probably 95%+! That market is over 13 billion USD per year! Bigger than Microsoft's OS business! Zowie! that's a serious monopoly!! Somebody should look into an anti-trust action!

But don't you see that these markets are also artificially drawn and distinguished, just as is the market for "operating systems for intel-based personal computers"?? It's arbitrary.

Microsoft's one huge problem - and it may yet be insurmountable - is that they have more customers and more direct users than any of those other companies. MS gets fewer $ per customer and fewer $ per user than Sun or IBM or Oracle or... In some cases, the ratio is 1/100. So MS gets much more exposure than these other companies, and suffers for it.

So is Microsoft is a Monopoly? Yes, but so is every large successful company in the IT business, if you gerrymander the market. And "potential competitors"? Come on, competition is everywhere.

-- DinoChiesa, 31 May 2001

Thanks! I have been trying to make these points for years here. -- sg

All the points above are valid. However, the key proof that MS has monopolistic power is in their profit-to-earnings ratio. A company that makes $9.42 billion dollars of income on only $22.96 billion of revenue has a massive PtoE ratio (figures for fiscal year ending June 2000, from the MS website). By contrast, Sun had net income of $1.854 billion from revenue of $15.721 billion. IBM had income of $8.1 billion on revenues of $88.4 billion. Going out of the computer field, General Electric had net income of $12.7 billion from $129.9 billion. That massively high profit/earnings ratio is sustained by the fact that Microsoft has no serious competition in their chosen marketplace, which is the practical and legal definition of a monopoly (if not the technical one). With serious competition, they would lower prices further, and have lower profit-to-earning ratios.

Let's put this in context: if MS had similar profit-to-earning ratios, they would have had revenue of about $14 billion for earnings of about $1.4. So they managed to rake in an extra $8 billion from their monopolistic position.

Anyone care to name any other companies that bring in over $1 billion in income that has similar profit-to-earnings (roughly a 5:2 ratio, while the other companies mentioned are fairly consistent at close to 10:1).

Widening the marketplace is a deceptive practice, BTW; you can have monopolstic power in small market segments, not just in huge general categories. In some market segments that Microsoft plays in, they _aren't_ a monopoly, and they don't have such huge profit margins (MS's web site doesn't break down income vs earnings by product line. Their stockholder report might). However, this just throws into stark contrast the areas where they do, and where they exploit it. Going on this, their biggest market segment monopoly is in office productivity software; Word and Excel, not Windows. They also actively work to maintain this by keeping the saved format of their documents tight to their chest, changing them in incompatible ways, and generally making it hard for other vendors to transparently support their formats. -- RobertWatkins

You are correct, Sir. MS posts profit margins which are much higher than the other companies you mentioned. However, you say this advantage proves monopoly, and I think that is jumping too far.

Each of the companies you mention (IBM, Sun, GE) is NOT in the software business. The software business alone is the one that favors high margins. IBM sells $40B in hardware per year- but they have to buy silicon and pay for fabrication and assembly. They have to manage inventory and spare parts. Likewise Sun - they make proprietary hardware. They have no software business to speak of. GE makes aircraft engines; a product that obviously requires great expense to build, assemble, ship, and deliver.

Microsoft, and other pure software plays, have none of that overhead, thus the characteristic margins are higher in software. Comparatively higher margins alone do not prove monopoly. In this case they reflect basic differences in the business.

On the other hand, I won't disagree that MS holds a dominant position in office productivity software. Just as I maintain that Sun and IBM dominate their respective sweet spots.

-- DinoChiesa

Umm... do you want to cite some figures? Pick a "pure software company" of your choice, and list the numbers. They should have over 1 billion dollars of net income, as per the challenge above. Annual figures please... quarterly figures are often misleading.

Oracle, fiscal 2001: $10.1 Billion revenues, $6.3 Billion income (after tax), including $6.3 billion of investment income. M$'s income as reported above (also after tax) includes $3.3Billion of investment income. Looking at operating income (both pre-tax), Oracle reported $3.1 Billion on $10.1 billion of sales, M$ $11 billion on $23 billion of sales. Oracle can't quite match M$, but it's in the same ballpark, and much more than your other industries quoted. -- PaulHudson

'They bought Oracle, they did not CREATE it. Someone else did. They used their ill gotten gain to aquire it- using capitalist free market means- to aquire a cash cow and further build a wall against independent devlopment. -Delib

Oracle most certainly did create their own database; see any RDBMS history. You must mean that Microsoft bought rather than created their database (which is true of something like 90% of M$ products).

Couple of problems with your points. (By the way, it was fiscal 2000, not 2001.) During the past 5 years, Oracle only had significant investment income in the one year you chose to mention. In the other 4 years, they were far less profitable. The 2nd point I'd like to make is that Oracle's high profitability doesn't prove that Microsoft isn't a monopoly - it may instead prove, or at least provide evidence, that Oracle is a monopoly. I think it may very well be one, in the market for massively scalable multi-platform enterprise databases. There really is very little competition in that market - Oracle owns it, and its customer pay accordingly.

Now, there's nothing inherently wrong with being a monopoly -

''(REALLY? I take it you own my freedom to dispense with it as you please? I also write software, and you just handed them my right to do so. BY WHAT RIGHT do you DARE to infringe on my personal freedom? How did you aquire it? Evidence please? -DeliberatusFreeman?)''

it's when you abuse your monopoly power that you have to worry about the anti-trust laws. If you people want to debate whether Microsoft abused its monopoly power, go right ahead, but I won't responsd. A very business-friendly appellate court has already upheld almost all of Judge Jackson's findings. -- BobKelzer?

I'll point out, as well, that no competitive industry favours high margins. In a truly competitive industry, margins are forced down to the lowest sustainable level, unless some sort of industry consortium gives rise to price fixing (at which point the industry is no longer truly competitive). -- RobertWatkins.

RW - irrelevant. If you want to talk about "truly competitive markets" or "theoretically perfect competition" - it doesn't exist. How about impeorfect but 'mostly' free markets, such as often manage to endure the meddling of socialists in The Real World(tm)???-Delib As for "no competitive industry favours high margins" - every mature, stable software player has high margins. IBM has 82% margins in its software business (See their annual report). So shall we conclude that there is no such thing as a competitive market in software - any software? If so, then this discussion is much less interesting, isn't it? We can only conclude that No software vendors have competition. I believe that conclusion is irresponsible and incorrect. -- DC

Very few real world industries are truely competitive under that definition, and it's a bit more complex that that. Price fixing via industry consortuim is not required, and high margins are not necessarily a sign of monopoly or industry cartels.

One example is Pokemon cards and similar "fashionable" toys - competing products just aren't as attractive to the customers. There's no incentive for a firm to produce Pokemon-like cards at a lower price, since price isn't the determining factor in customer choice. So margins tend to be huge for successful products, and unsuccessful ones make losses. There's not likely to be any companies surviving on low margins.

There's a huge amount of study of in the business literature, as you might expect; a classic framework being Porter's 5 Forces for industry attractiveness. See http://www.quickmba.com/strategy/porter.shtml for a good summary.

-- PaulHudson

Pardon, but Pokemon is copyrighted. If I go displaying the logo and images and name on cards I design for the game, I will get sued silly. -Delib

I said "Pokemon-like". You would need to avoid enfringing copyrights etc, but that doesn't mean you can't product something like it. See the range of "tamagochi-like" toys that sprang up just after the original.

By the way, the (obscenely?) high margins in software seem to be the direct antecedent of the "Free Software" movement. Some people believe that the price of reproducing and shipping the disk or CD should determine the cost of the software product. In this case, the price of Oracle's Enterprise Database would be the same as the price of IBM's zOS latest release, == price(MS Office 2000) == price(WebLogic Server) == price(Perl5).

They could all ship on DVDs that cost $3 to reproduce in volume.

You are allowed to recover sunk development costs, you know...

This is entirely impractical without a free market. One cannot simply forecast the unit sales (N), and then charge C/N where C is cost of development. Who knows how many copies of OS/2 v5 people will want?

Don't you mean it's only practical when there isn't a free market? If the central planners tell me they will take 100,000 tractors, it's easy to forecast my sales and so charge C/N

And in practice, forecasting (a reasonably likely minimum number of) unit sales and charging C/N is more or less what is done, entirely impractical or not.

I won't make any comment but I would like to bring a quote from the 2003 book by Martin Campbell-Kelly, "From airline reservations to Sonic the Hedgehog - a history of the software industry": Microsoft is often perceived as a latter-day IBM, completely dominant of the software industry. This is simply not true. IBM, at its peak, in the 1960s, had a three-fourths share of the worldwide computer industry - hardware, software, and services. Microsoft has never even had a 10 percent share of the software market. (Page 232) - CM