I’ve been mystefied that so little attention has been given to the idea of imposing an access regime on Microsoft – surgically targeted to ‘natural monopoly’ bottlenecks in their software. The strongest case for doing something is in the area of the standards that their file protocols – like .doc and .xls have created. However if I’d had more space I’d add that, providing they independently wrote their software, competitors should also be given any necessary immunity from IP protection to imitate the ‘look and feel’ of Microsoft products as Microsoft was able to do with Apple’s graphical user interface. This would minimise the fixed costs we all face in learning new routines when we switch between competing software products.
On the other hand if the same thing can be done with less coercion that’s a bonus as it minimises the scope for unintended and perverse consequences.
Anyway, here’s the column and I’d be interested in readers’ views.
Open Access
As the Bee Gee’s say, I feel I’m going back to Massachusetts. Let me explain.
Back when we led the world in economic reform we deregulated everything in sight. But we actually increased regulation where firms enjoyed ‘natural monopolies’.
An example is Telstra’s ‘local loop’ – those copper wires to your house. Telstra enjoys a natural monopoly there because, owning the wires, it can always connect houses to the network at less cost than competitors. So firms can’t compete with Telstra elsewhere for instance in internet telephony without access to those wires. So ‘National Competition Policy’ requires Telstra to grant competitors access at reasonable prices.
Funny thing is, the most monopolistic of all businesses escaped our gaze. It still does. Consider this. Microsoft’s Windows operating system and its Office suite (comprising Word, Excel and other programs) enjoy higher market shares in their niches and vastly higher profit margins than Telstra in telecommunications.
Microsoft is a new kind of natural monopoly. Software competes on things like features, reliability and, since Apple brought us the graphical user interface, ease of use. But we need something else that bears little direct relation to product quality.
Enter ‘network effects’.
Developers need confidence that an operating system they write for provides a good market for the programs they write. That creates a spiral; virtuous from Microsoft’s perspective, vicious for everyone else.
Once Microsoft was able to combine its dominance of operating systems with the essential elements of Apple’s user-friendly graphical user interface (which Apple itself bought and developed from Xerox), it became unstoppable at least until Massachusetts stepped in that is.
Now almost everyone buys Windows because almost all programs are written for it, and almost all programs are written for it because almost everyone has it.
Whilst this ‘network effect’ occurs at the level of software development, another one arises when people use software to collaborate or communicate. You know how much use it is getting a file that won’t open properly because it’s in an incompatible standard?
So on the logic of the National Competition Policy we should impose an access regime on Microsoft. As with utilities, it should only apply to the natural monopoly aspects of the business. With programs like Word, that’s mainly the ‘standards’ in which files are written like .DOC in Word and .XLS in Excel.
Now while programmers have been sufficiently ingenious to produce programs that read and write .DOC and .XLS files, they remain ‘closed’ or ‘proprietary standards’. That means that competitors don’t have full access to Microsoft’s programming or the ‘source code’ that defines the standard. So competing programs produce small glitches which preserve Microsoft’s advantage.
Microsoft could ‘open’ its proprietary standard by releasing the programming or ‘source code’ that specifies it. But that would undermine its monopoly. Then you could download word processing programs that compete with Microsoft safe in the knowledge that if someone e-mailed you a Word file you could read, modify, save and return it rather than fight your way through compatibility bugs or even the blue screen of death.
‘Open source’ programs offer a remarkable alternative that’s giving Microsoft the willies. Their source code is available to users enabling them to continually improved the programs.
The leading open source office suite is ‘OpenOffice.org’ and it’s your regular nightmare for Microsoft. It’s backed by software giant Sun Microsystems and it’s free!
I’m amazed that no country has imposed an ‘access regime’ on Microsoft requiring it to open its file standards. But maybe no-one needs to now . The US State of Massachusetts has just determined that open standards are an “overriding imperative” of democracy itself.
Refusing to have its public documents subject to proprietary restrictions on access and “locked up . . . perhaps unreadable in the future”, it will now save all public documents in ‘open standards’ such as the newly created open standard ‘OpenDocument’ (ODF).
And guess which Office Suite supports ODF? OpenOffice.org, in a major upgrade it’s just released. See why Bill Gates has recently been seen on long walks dolefully humming those old Bee Gees lines “The lights all went out in Massachusetts”?
If Microsoft Word supports the new open standard, reading and writing ODF files, then ODF could quickly replace .DOC as the most widely used format dramatically reducing the ‘network effect’ and with it much of Microsoft’s monopoly.
But if Microsoft keeps refusing to support ODF, Massachusetts will use competing software that does. European governments like Norway’s have announced similar policies. Each one is no great loss for Microsoft in itself. But as the internet showed, once open standards gain ‘critical mass’ what user in their right mind would want to be locked into a closed standard unable to interact with others?
Australia’s and State Governments should jump on the bandwagon. So should schools and businesses wanting to do their little bit to make the world a better place. They could well do themselves a favour in the process. They’d certainly save on software purchases. And they could hasten the day when we wax nostalgic “Remember the old days when you had to pay for word processing software”.
But whether they do or not, I’m steering clear of Microsoft as an investment.
It’s a great column. No doubt there are quite a few technophobes/luddites among the Courier Mail’s readership but, as you say, this column is written in a jaunty style that just about anyone can easily follow.
As for prescriptively requiring Microsoft to open its source code by legislation, I don’t think so. Far better for governments progressively to require open standards for all software they buy. As you suggest, the end result should be the same, it might just take a little longer. But it avoids overbearing coercive action against private property rights, an extreme exercise of public power that should always IMO be avoided unless there is no practical alternative.
Now I’m going to see about downloading and installing OpenOffice.org .
Remember the access regime is very carefullly targeted – just to requiring the release of sorce code of standards they generate. I don’t think there’s anything too onerous about that. But let’s hope the lighter touch works as well in the long run.
Nicholas,
Your analogy comparing Microsoft to the natural monopoly of Telstra’s local loop is all too apt, I’m afraid.
For many years, Telstra managed to extort considerable advantage from being the owner of the local loop despite being forced to lease it to others at a reasonable price. Consumers looked at the options of “go with Telstra” or “choose another company and pay Telstra line rental anyway” and figured, why not just stick with the original owner? Telstra would be the ones doing maintenance if there was a network fault anyway!
Other reasons for staying:
* Telstra were the “safest” option since they were the “experts”;
* Telstra offered bundles of services (eg. MessageBank, Internet) that were convenient;
* Telstra might be less than diligent in fixing faults when it was aiding a competitor.
Even if a complete file specification for DOC and XLS was released into the public domain and an “Office clone” was produced, I would bet that 95% of businesses (which make up the bulk of Microsoft’s profits for Office) would still stay with Microsoft for very similar reasons:
* Microsoft are the experts;
* Microsoft integrates with everything else we use; and
* If the “clone” implementation has bugs, consumers would be on their own.
In both these cases, the natural monopoly is now breaking down because of disruptive innovations — in the case of Telstra, the mobile telephone network, wireless broadband and VoIP; in the case of Microsoft, the rise of the Internet generally and XML specifically.
Business requirements for open and transparent data formats such as XML are now impossibile to ignore. Microsoft Office 2003 now has (open) versions of the DOC and XLS formats which are completely documented and in the next version of Office, these will become the default format for newly-created documents.
Don’t think that Microsoft is suddenly playing nice, though. Microsoft is now building so many dependencies *between* their products that it is still hard to run anything but Microsoft technologies.
For example, to take advantage of collaboration techniques available in Office 2003, businesses need the following:
Windows 2000/XP
Internet Explorer 6
Office 2003
Windows Server 2003
Sharepoint Portal/Windows Sharepoint Services
Microsoft SQL Server 2000
Except for the Windows XP, Windows 2003 and Office 2003, all of these packages are either free or have a free basic version.
This covers most business requirements — document creation and collaboration, email, Internet, databases and file/print serving. Why would you even *look* at anything else?
It’s a diabolically clever strategy. Well, maybe not diabolical. But certainly making the aggressive use of their existing market share to capture new markets.
Part of the problem is this continual reinforcement in the press that *everyone* uses Microsoft products. This is less and less so, at least in certain contexts, and in the interest of accelerating what market forces do actually effect microsoft, it should be publicised.
Example. In an article a couple of months ago now, Paul Graham wrote:
“Lately companies have been paying more attention to open source. Ten years ago there seemed a real danger Microsoft would extend its monopoly to servers. It seems safe to say now that open source has prevented that. A recent survey found 52% of companies are replacing Windows servers with Linux servers.
More significant, I think, is which 52% they are. At this point, anyone proposing to run Windows on servers should be prepared to explain what they know about servers that Google, Yahoo, and Amazon don’t.”
I had a go at this topic a while back
http://www.uq.edu.au/economics/johnquiggin/news/Microsoft9911.html
which I think got a pro-MS response from the IPA.
“Once Microsoft was able to combine its dominance of operating systems with the essential elements of Apple’s user-friendly graphical user interface (which Apple itself bought and developed from Xerox)
IIRC the history is a little different… Xerox PARC labs developed the GUI then invited both MS & Apple to take a look, both pinched it. As PARC were a non-profit org they didn’t really care.
And then there’s the (possibly apocryphal) story of how Cro-Magnon Glug accidentally developed the GUI.
Anyway, it’s a minor point and probably not worth fussing over.
Most Systems Engineers I know are amongst the world biggest priates of MS software, most justify it to themselves as payback for MS ripping them off over renewal and/or upgrade costs for licensing.
I love it… but then again I hate Microsoft so very very much.
In fact I wrote my entire masters thesis using open office and have just downloaded OO2 which seems to be a significant improvement.
I’ve been playing withOO2 last night. It looks very impressive. I did however find that it fairly seriously buggers up the formatting of existing WP documents in MS Word (.doc) format. That’s a pretty major disdvantage for me given that most of my existing documents are in MS Word. Corel Word Perfect does a much better job of faithfully rendering the formatting of MS Word documents, and I reckon OO2 will win many more converts if they concentrate on that area and offer MS Word users a smoother transition path.
Good article. Appeals to the tech heads among us.
You didn’t mention that MS has produced it’s own ‘open’ XML document format. ‘Open’ except for the licence terms which exclude use on open source products, and the binary part that holds a lot of formatting data.
MS will fight to preserve its monopoly. I wonder if there’s enough critical mass to make them change.
“Then you could download word processing programs that compete with Microsoft safe in the knowledge that if someone e-mailed you a Word file you could read, modify, save and return it rather than fight your way through compatibility bugs or even the blue screen of death.”
This is already reality. I use 602 suite (http://www.download.com/602PC-Suite/3000-2064_4-10317185.html?tag=lst-0-1) as my main wordprocessor, it has no problems reading or editing Word or Excel files.
Microsoft’s “monopoly” is a myth. It doesn’t have a monopoly on anything at all, just a dominant market share.
These “look ma, no Microsoft!” comments are all well and good, but they do rather miss the point.
Jim: Nicholas’ article is about *Office*, not Windows. The success of Linux in the marketplace is well-documented, but it fills an entirely different business niche to your average white-collar employee’s workstation.
Yobbo: You shouldn’t confuse home use with business use either. Home use doesn’t require integration with other business systems. Home users also don’t have to consider the productivity decline, training costs and legacy conversion costs faced by business who switch away from Office.
(Example: For many small businesses I know, Excel spreadsheet are the bread and butter of their accounting and workflow. These are generally held together using spit, baling wire and Visual Basic macros — another point of Microsoft lock-in.)
tony: The Office XML Doc format is actually compatible with open source — just not the GPL (see http://blogs.msdn.com/brian_jones/archive/2005/09/22/472826.aspx for discussion on this point).
More generally, I would suggest that this Massachusetts deal isn’t settled by any means yet. I’ve seen many press releases touting a “move away from Microsoft” which are subsequently quietly buried once Microsoft offers a discount rate for Office AND the full implications of conversion are realised by senior management.
Look, I think paying close to $1000 per user for this kind of software is an outrage and I hope that the diversity of the Office software market continues to increase. OpenOffice.org is an important part of this since Microsoft now has to justify their price tag against a free alternative.
But I’m just being realistic — most businesses have already made the investment in Office and it’s difficult to justify a switch on some kind of ideological line rather than on hard financial analysis.
Yobbo, It isnt a myth, the Department of Justice in the US adjudged them an illegal monopoly.
http://www.usdoj.gov/atr/cases/f4400/4469.htm
“the Court concludes that Microsoft maintained its monopoly power by anticompetitive means and attempted to monopolize the Web browser market, both in violation of
The department of Justice can define monopoly any way they like, but I’ve been a computer user since I was 6 years old, and there has always been an alternative to the Microsoft product in that time period.
Dominant market share and monopoly are not the same things.
“This barrier ensures that no Intel-compatible PC operating system other than Windows can attract significant consumer demand”
They haven’t heard of Linux? Just because it’s number 2 doesn’t mean it doesn’t exist.
“Together, the proof of dominant market share and the existence of a substantial barrier to effective entry create the presumption that Microsoft enjoys monopoly power.””
I’d like to know how they define barrier to entry here. The only barrier to entry for software developers is their own skills. The fact that they can’t take market share off Microsoft is not a barrier to entry, it’s what commonly known as “tough titties”.
Yobbo,
The two decades of anti-competitive bullying behaviour of Microsoft are well documented. The US Department of Justice document referenced by Cameron Riley is just one of many tales of illegal bullying.
Hence your attempt to portray the issue as a freemarket choice is not just a little wrong, but totally wrong. You were quick to dismiss the relevance of the DoJ document, but could it be that you are afraid of the facts!
“Hence your attempt to portray the issue as a freemarket choice is not just a little wrong, but totally wrong.”
Actually I’m not wrong at all. A free market doesn’t have anti-competition laws.
Just because Microsoft actions are deemed illegal under US competition law does not mean that Microsoft has a monopoly. It is quite plain to see that they don’t.
You used the word “bullying” twice. Did Bill Gates threaten to beat up any kids who didn’t buy MS Office?
Yobbo,
One of the most important ways for an operating system to gain acceptance among users is for it to come pre-bundled with the computer system. The principle is that users are more likely to use what is there than to seek out an alternative.
One of the key reasons for a finding of monopolistic behavior against Microsoft is that MS used very aggressive tactics to prevent Intel-based computer vendors from even *offering* alternatives to clients.
Typically, this took the “carrot and stick” approach. Microsoft offered significant discounts to all retailers who only offered MS products on the computerss they sold. Since margins in the retail computer business are razor-thin, stores pretty much had to agree to the MS conditions or get outbid on price by their competitors.
End result: users could only buy PCs with Microsoft pre-loaded, which in turn placed Microsoft in a unique position to exploit the same “easiest to use what’s there” attitude to become dominant in other areas — particularly Internet Explorer and Windows Media Player.
Yes Stephen, I understand the reasons behind the finding.
However, the fact remains that despite the bundling and the attitudes of consumers, Windows and its applications never attained anything close to a complete monopoly.
Dominant market share and monopoly are not the same thing.
There are still alternatives available if Microsoft decided to try to abuse their market position, which is simply not true of true monopolies.
If the state electricity supplier suddenly decided to triple the cost of their electricity, then you have no option but to pay it if you still want lights in your house.
If Microsoft suddenly decided to charge $2000 for MS Office, you could switch to one of the dozens of other available office suites.
If they charged $2000 for Windows, you could switch to Linux.
There is no monopoly.
Yobbo,
How many monopolies fit on the head of a pin?
These are all questions of degree. One can substitute away from mains supplied electricity too. (With gas lamps, kero fridges and a Honda generator out the back). It’s all a matter of degree.
You can code your own operating system too, but I didn’t include that in my list of options for good reason.
Besides, hooking up a petrol-powered generator to your house mains is illegal in most Australian states.
I don’t really see how anyone can claim either windows or office is a monopoly. It is only a monopoly in the sense that nobody else sells either MS windows or MS Office. Under that definition, Coca Cola and McDonalds are also monopolies, because only Coca Cola can sell Coke ™ and only McDonalds can sell Big Macs ™.
Yobbo, I think you’re right.
One of the benefits of IP protection measures (such as trademarks, copyrights and particularly patents) is to impose an artificial monopoly on the supply and sale of a product.
In this regard, Coke and McDonalds hold monopolies on their products just as surely as Microsoft does on Windows.
The big difference is in migration costs. Imagine a cafe that wants to switch from Coke to Pepsi. Admittedly, they may be locked into preferential supply deals and other contracts, but once these deals expire, they can simply “rip and replace”. There is no re-education of staff required to allow vending of Pepsi to customers, nor for customers to re-learn how to drink from a Pepsi can. In this sense, soft drink is a commodity product in a way that Operating Systems and Office suites are not.
Migration away from a Windows & Office system would cost $100,000s or millions of dollars for even a moderate size company. It’s *not* a trivial task.
In any case, I think Microsoft’s behavior which successfully made Netscape a non-entity in the Internet browser marker fits the legal definitions of monopolies quite nicely:
http://www.answers.com/main/ntquery?tname=monopoly-1&method=6&sbid=lc01b#Legal_Dictionary
I disagree on how much education would be required to switch from one office suite to another. All the basic concepts are the same, you might have to learn some new keyboard shortcuts but the majority of office workers would use the pulldown menus anyway.
Wordperfect was once the default wordprocessor used by business, even long after the advent of Windows. I doubt millions of dollars were spent reeducating people how to use Word rather than Wordperfect. Most of the education is aimed at people who have never used any kind of office suite before.
Nevertheless, the same costs would be occurred in shifting if Microsoft and Wordperfect held equal 20% shares of the market, so I don’t see how this is relevant to whether or not Microsoft holds a monopoly, which it clearly doesn’t.
To use an equivalent software analogy, there would also be significant training costs involved in teaching your graphic artist employees to use Paint Shop Pro instead of Photoshop, but I don’t see anyone claiming that Adobe has a monopoly on Graphics software, even though Photoshop enjoys significant market dominance.
*A free market doesn’t have anti-competition laws. *
Sam – that’s not a very well thought out position. All the great free market theorists from Adam Smith on have recognised that you can’t have free markets WITHOUT restraints on cartels/monopolies.
The very reason that free markets deliver benefits is the mechanism of competition … hence, if you are to retain the freedom to compete, you need to regulate monopolies and cartels that would otherwise restrict it.
I guess it comes down to whether you prefer free markets for empirical or ideological reasons. If the former, as of course most economists do, you have to acknowledge the necessity of regulating anti-competetive conduct. Your position only makes sense if your goal is simply to reduce regulation for ideological reasons and you don’t actually care whether you have functioning markets.