Microsoft Shows Tech 'Monopolies' Don't Last - InformationWeek

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7/18/2014
09:35 AM
Rob Preston
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Microsoft Shows Tech 'Monopolies' Don't Last

As nature abhors a vacuum, innovators abhor a monopoly, especially in the fast-paced IT industry.

In handing down his landmark antitrust decision against Microsoft in 2000, US District Judge Thomas Penfield Jackson wrote: "There are currently no products -- and there are not likely to be any in the near future -- that a significant percentage of computer users worldwide could substitute for Intel-compatible PC operating systems without incurring substantial costs." At the time, Windows commanded about 90% of the desktop operating system market. The competition? Mostly Unix and MacOS and a handful of thin clients.

Today, Windows' share of the market for operating systems on all computing devices -- PCs, smartphones, tablets, and all manner of hybrids -- stands at about 14%, according to a new Gartner report. Who’d have thunk it back in 2000? And Microsoft's loosening grip over the years has had absolutely nothing to do with the government's antitrust proceedings more than a decade ago. Microsoft's announcement Thursday that it's cutting 18,000 jobs from its payroll, the largest such reduction in company history, shows just how vulnerable the world's biggest software company has become as competitors from Apple to Google to Amazon.com have eaten its lunch in mobile and other core businesses.

If nature abhors a vacuum, innovators abhor a monopoly, especially in the fast-paced IT industry.

[More challenges ahead for Windows Phone. Read Apple-IBM Deal: Trouble For Google, Microsoft.]

We've seen the free market knock down dominant tech providers before. The government's 13-year antitrust probe of IBM (yes, 13 years!) petered out in 1982, as the mainframe era ushered in the client-server era, and a wave of PC clone and then minicomputer makers flooded into the market to challenge Big Blue. Governments in the US, Europe, and Asia brought antitrust charges against Intel in the 1990s and 2000s, just as No. 2 microprocessor rival AMD was getting its second wind, and then the likes of ARM, Nvidia, Qualcomm, and even Samsung beat Intel to the mobile device revolution. 

(Source: Crispin Semmens)
(Source: Crispin Semmens)

EMC once dominated storage hardware, until lots of new players piled into the market hawking cheaper, less proprietary alternatives. Today, EMC is still the storage market leader, with a 30%-plus share of key sectors. And storage products and services still account for about 70% of EMC's revenue. But the company, which long ago saw the commoditization writing on the wall, was smart enough to start distinguishing its products based on software features while diversifying into the content management, security, virtualization, and big-data software sectors via its Documentum, RSA, VMware, Greenplum (and many other) acquisitions. The announcement on July 15 that cloud competitor Box is now giving its business customers unlimited storage as part of its base content management offering provides further evidence that raw storage capacity is going the way of voice communications.

Cisco once dominated the networking systems market -- heck, it still does, with close to 60% of the Ethernet switch market and 70% of the enterprise router market. But commoditization is coming in networking as well, as virtualization and software-defined systems promise to make it easier for customers to deploy cheaper white-box alternatives to Cisco's high-end products. Meantime, the Facebook-led Open Compute Project will share designs for low-cost network hardware that any number of third-party manufacturers can bring to market. No wonder that Cisco's market cap, which reflects future earnings potential more than current levels, is about a fourth of what it was at its tremendous peak ($540 billion) in 2000, despite the fact that Cisco's 60% gross profit margins are still the envy of enterprise IT.

Likewise, emerging competition has cut into HP's one-time dominance in printers, Oracle's in databases, VMware's in virtualization, Apple's in tablets. No IT "monopoly" can last for very long.

The Microsoft, IBM, Intel, and other examples are far different from what economists call "natural" monopolies, which occur in the telecom, railroad, electric utility, and other industries whose extensive infrastructure costs and real estate demands deter market entry. There, government intervention and regulation often are necessary to promote competition (sharing of infrastructure with competitors) and/or to keep prices in check.

Otherwise, the free market has a way of sorting things out -- faster than ever in this day and age. Government trustbusters work at a methodical, measured pace. While they're no longer taking 13 years to make a move, as was the case with IBM a few decades ago, they aren't always keeping up with or anticipating the dramatic fits and starts of the modern technology industry. Market shares can rise and fall in a heartbeat as product cycles shorten, the cloud makes it ever-easier for customers to switch providers, and rapid innovation dictates new winners and losers. Free enterprise is far from a perfect system, but in high-tech it's producing wonders.

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Rob Preston currently serves as VP and editor in chief of InformationWeek, where he oversees the editorial content and direction of its various website, digital magazine, Webcast, live and virtual event, and other products. Rob has 25 years of experience in high-tech ... View Full Bio
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RobPreston
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RobPreston,
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7/25/2014 | 1:41:01 PM
Re: I see Microsoft's evolution
Andrew, let me clarify: I'm not saying that Microsoft's desktop monopoloy came apart because of competition; I'm saying that other companies have innovated around it. Tablets and smartphones and hybrid devices make Microsoft's Windows dominance much less relevant. Taking the argument to an extreme just for argument's sake, no one quite broke Western Union's telegraph monopoly, but innovations elsewhere made it increasingly irrelevant over time. 
Andrew Binstock
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Andrew Binstock,
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7/23/2014 | 3:23:35 PM
I see Microsoft's evolution
Rob:

While I concur in part with your analysis, I view your main point rather differently. Microsoft had a monopoly on the desktop. It still does. The numbers you quote add in phones and tablets where the company never had market share. So analyzing their desktop monopoly as falling apart b/c of non desktop devices doesn't work for me.

My larger take is this: Microsoft maintains a strong monopoly on the desktop. But the company correctly viewed the desktop as a shrinking market several years ago and began three key initiatives to offset the anticipated decline: cloud, tablets, and reinvestment in its phone business. It's clear the first initiative, Windows Azure, is paying off well. 

It's too early to tell whether the Surface will ultimately be an important player or not. And the Nokia acq, having only just been completed, is another long-term unknown.

So, unlike the usual story of a company with a monopoly that was unable to adapt to the new world, I see Microsoft as doing that adaptation uniquely well. Far better than other IT vendors, such as IBM, Dell, etc. have been able to do. I think the company's excellent financial results over the last two years strongly support this view. 

Cheers!
RobPreston
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RobPreston,
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7/23/2014 | 10:39:34 AM
Re: Yes and no
I just don't see dominant tech providers able to hold onto their dominance like they used to--the "natural" monopolies with their huge barriers to entry excepted. Pundits worried about iPhone and iPad dominance--there were even calls for government intervention. Then came Android. And Microsoft didn't go away either. There's just too much vibrant innovation, out of startups and established players alike, to let any single big tech provider sit fat and happy and control a market for long anymore. Certainly not for as long as they used to.
Michael Endler
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Michael Endler,
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7/22/2014 | 2:43:17 PM
Re: Monopolies incur "protected," not competitive, thinking inside
Well put, Charlie. Nadella's trying to break down some reinforced cultural walls right now, in an attempt to make Microsoft move more like the Silicon Valley start-ups who've begun to encroach on Redmond's turf. I think Nadella is saying all the right things, at least in the abstract, but there's still a lot of work to be done. I run into a lot of people around the Bay Area who reflexively dismiss Microsoft. "I haven't paid much attention to Azure because I assumed it sucks," a guy running IT at for a non-profit website told me. "Does anyone write apps for Windows anymore?" asked the web-inclined CTO of a promising start-up when I asked if he'd ever used Visual Studio. You can criticize these people I'm anonymously quoting for failing to pay attention to Microsoft's recent momentum, of course. But it still shows that Microsoft has a cultural and PR challenges, in addition to tech ones.

I think all the viewpoints here touch on the reasons why Microsoft is now, as Nadella puts it, an "underdog"; as a protectionist market leader, Microsoft succumbed to market forces, but as Tom cogently explained, those market forces were better-positioned thanks to the courts.
Michael Endler
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Michael Endler,
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7/22/2014 | 2:31:03 PM
Re: staying ahead
Good point about VCs, which shouldn't be neglected from the conversation. At least during the current tech renaissance, they've certainly forced the issue.
Charlie Babcock
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Charlie Babcock,
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7/18/2014 | 4:59:38 PM
Monopolies incur "protected," not competitive, thinking inside
Getting an early monopoly in a technology market may be a guarantee of a great run for 15-20 years, then sure decline afterward. Monopolies induce favored-positiion thinking, not compete with the best in the marketplace thinking. Satya Nadella is trying to turn that around at Microsoft and it's a Herculean task. Microsoft simply isn't geared to compete in the mobile market. The cloud market may yet slip away from it if Linux and open source in the cloud gain further ground on Windows.
Shane M. O'Neill
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Shane M. O'Neill,
User Rank: Author
7/18/2014 | 4:48:05 PM
Re: Absolutely nothing?
Tom, reading this I see that the anti-trust ruling left Microsoft more bruised and battered than I thought, and that companies were freer to innovate without Microsoft strong-arming them. Thanks for the perspective and good examples.
RobPreston
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RobPreston,
User Rank: Author
7/18/2014 | 1:58:05 PM
Re: Absolutely nothing?
Tom, well argued, young man!
Thomas Claburn
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Thomas Claburn,
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7/18/2014 | 1:37:46 PM
Re: Absolutely nothing?
I think it's hard to separate antitrust enforcement from that happened to Microsoft. Technology changed but Microsoft's ability and preparedness to react to that change was weighed down by antitrust compliance burdens. If you go back to the judge's finding of facts (http://www.justice.gov/atr/cases/f3800/msjudgex.htm), it's clear there's more to the case than Netscape Navigator. Microsoft was also trying to kill Java. Had Microsoft been left to do as it wished, the technology world would be very different today.

Some consequences of the ruling: Microsoft was not allowed to acquire Intuit; Microsoft propped  Apple up by investing in the company when it was almost broke and by not withholding Office (which it could have done without trustbuster attention); browsers became a special class of protected software; open-source got an interface (the Web).

VInt Cerf argues that even though Microsoft was not broken up, open source saved competition and innovation. As I see it, open source, the Web, and Java are intertwined. Open source mattered to companies as a way to be free of platform-locking and vendor meddling. But it began mattering to consumers when it became the free interface for the Web.

Much of Microsoft's troubles have to do with it still relying on the same revenue sources now as it did two decades ago. It got too complacent. But competitors would have had a harder time without the leg up provided by government oversight. For example, when Google was offering desktop search software, Microsoft tried to hobble it. Google complained to the government and got Microsoft to back down. That might not have happened as easily if Microsoft had not been an acknowledged abuser of monopoly power.
Shane M. O'Neill
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Shane M. O'Neill,
User Rank: Author
7/18/2014 | 12:56:54 PM
Re: Absolutely nothing?
I feel like the reasons for Microsoft's undoing (rise of smartphones and tablets, decline in PC sales, SaaS) started to happen seven or eight years after the 2000 anti-trust ruling. So it's hard to blame anti-trust on Microsoft losing its way in the mobile era, unless perhaps the anti-trust battles made Microsoft weary and tentative to go after new markets. But I don't buy that argument. I think it was just poor leadership and lack of foresight by Ballmer, who was allowed to run the show for too long.
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