c


c
 
I think this is the first question we should ask about Microsoft. This is an important question
because monopolies are not natural. Usually, when a company becomes big and
monopolistic, it also becomes inefficient. Then, the market throws up competitors who see
the overpriced products of Big Inc. as an opportunity. Understand, bigness and inefficiency
go together. The larger a firm, the more likely it is to suffer from friction (when people and
processes run into each other and jam); to suffer from destructive politics and conspiracies,
and to lose creative focus. So, for a monopoly to develop, there have to be other issues
involved, for example, political connections, the need to raise huge amounts of capital, or
fundamental technological necessity. So, when a company goes from nothing, to monopoly,
in only twenty years, there has to be a reason that goes beyond the market. In the case of
Microsoft, I think there are two reasons. First, whenever you have a communication or data
system there have to be standards. That means that there has to be so me one to create
standards, and someone to enforce the standards. Second, new technology. I½ll start with
technology.

Ô



Whenever a new technology opens up and goes into a dynamic growth mode, the first players
gain huge advantages because they are the first to gain the experience, the invested capital,
and the people. So, when competitors come into the market, they have to catch up (with a
firm that is probably a moving target) before they can compete. Microsoft is a good example
of this; back in 1981 (after creating Applesoft Basic for Apple Computer) they entered the
OS market with MS DOS 1.0 (the first Macs didn ½t appear until 1984). Within a few years
Microsoft had over 90% percent of the OS market. The Microsoft monopoly was possible, in
part, because of the incredible advantages of being first. And, the monopoly made Bill Gates
the wealthiest man in the United States. Understand, there is nothing new about this, let me
give you a little history. Between 1850 and 1890, several technologies (steam power,
metallurgy, and electricity) went dynamic almost simultaneously. Naturally, the first people
in on the technology had enormous opportunities, and many became incredibly wealthy as
their firms became monopolies. There were, for example, railroad barons, steel tycoons, and
shipping magnates. It was being involved with the new technologies at the beginning that
gave these men (and a few women) the chance to become awesomely wealthy. Of course,
there were excesses. These men gained an inordinate amount of power, and were probably
very arrogant to begin with (it½s arrogant belief that I¶m right, and the world is wrong that
makes someone abandon a perfectly good job to work in a garage on some blue sky project,
say, a personal computer). What if you owned all the railroads going into say, Boston,
Massachusetts, back in 1880? Today that would be like owning the airports, the freeways,
and the railroads going into that town. And you could make everyone would have to pay your
rates. Eventually, Congress responded with various Antitrust statutes. The first targets of the
Justice Department under the new laws were the railroad trusts, and the Standard Oil
Monopoly (imagine what it would be like to have just one brand of gasoline, motor oil, and
heating oil?). More recently, in the late 1970s, digital microelectronics technology went
dynamic, and the monopoly creation cycle started again. As a result, today we have
Microsoft. Understand, Microsoft is a traditional technology generated monopoly, and Bill
Gates is a traditional tycoon (and he is behaving like a traditional tycoon). So, the federal
courts are once again being asked to bust a trust.
 




 
  
Before I go on with Microsoft, there is something I should explain. Communications systems
have their own unique economic rules. So, there is a telecommunications sector of the
economy because of these rules. (I know! I know! Economic rules are supposed to be made
in Washington by Newt Gingrich, and we shouldnt say anything unholynomic). The basic
economic rule is this: A communication system is only valuable in terms of the number of
people who can participate. The more participants in the system, the greater the value to
individual users, and the greater the profits to the promoters of the system. For example,
when we speak, or write, we use a language standard to ensure understanding. The language
standard we use (in this case English) is enforced by the public schools, where most of us
learned to read, write, and spell. The fact that we (mostly) use the same language standard
has enormous benefits; it makes our public life go more smoothly, it makes our businesses
more profitable, and it improves the quality of our lives. Another case is the telephone system
in the United States. In the early years of this century the telephone system grew enormously,
dominated by the AT&T monopoly. After the Bell patents expired, many new companies
entered the telephone business; but AT&T was able to maintain its monopoly in spite of the
pressure. Here again, the value of the telephone system to individual users (and profitability
to its promoters) depended on the total number of users. So, to maximize the value of the
telephone system to AT&Ts stock holders, the value to individual users had to be maximized.
To maximize the value of the telephone system, every telephone had to be able to connect to
every other telephone in the world. So, there had to be common standards. Having twenty (or
a hundred, or a thousand) little standards would have destroyed the value of the phone system
for its users and its promoters (and AT&Ts stock holders). So, someone had to create
common standards for all phones, and someone had to enforce these standards. Standards for
everything from the voltages and amperages used by each phone, to the dialing systems, to
common phone rates, and so on. Without these standards, the phone system could not be very
valuable to anyone. AT&T remained a monopoly because of its ability to create and enforce
standards. Of course, the government came in and regulated the AT&T monopoly. And this
made the Bell System monopoly work even better because it cut off the traditional roads to
monopoly profits (overcharging, gauging, etc.). Understand, the monopoly worked because
the value of AT&T to its stockholders was directly related to the of value of telephone service
to each individual user. The more the phone system was used, the greater the profits to the
stockholders. The higher the quality of service, the more the system was used, and the greater
the profits. So, AT&T had to maintain consistently high standards of service (rare for a
monopoly) to maintain its profits in a regulated environment.

   
Fifteen years ago, the federal courts broke up the AT&T monopoly in the name of free trade.
Unfortunately, the breakup of the monopoly has caused many problems, that no one (at least
in Washington) seems to notice. First, the collapse of the monopoly left no one in a place to
create and enforce technical standards (but AT&T left a legacy of old standards that are
becoming obsolete). Second, the collapse of pricing standards. Since the breakup of the Bell
System; the cost of telephone service for individual users has increased by as much 500
percent, while business users have been able to use their market heft to negotiate incredibly
low rates for themselves. This has lowered the value of the telephone system for everyone by
limiting participation (a communications system is valuable only in terms of the number of
participants). The only response from government to this situation (in spite of things like
cutting people off from 911 service) has been nebulous talk about how deregulation is good
for you. What no one realized at the time of the breakup was that the government had to
replace AT&T as the creator of universal standards. The conservatives were oblivious to this,
and the liberals said nebulous things about consumer protection. Actually, I think we can talk
about the government as an enforcer of standards till we turn blue. Congress and the
bureaucracy are usually so mired in politics that they are ineffective. Deregulation is often a
code word for politically non-feasible. Understand, government only works if there is a
political coalition behind it ås actions. The AT&T monopoly created a political coalition in
favor of regulation because it was, at least, a potential threat to everyone. With the AT&T
breakup; the political coalition evaporated. So, there was no strong reason for the federal
government to become more involved. In the end, the AT&T breakup decreased the value of
the phone system to individual users, to the nation, and to the corporations that run the
system. And, as an economic reaction, we are seeing increasing consolidation of the phone
system, and warnings of another monopoly. A new monopoly that may be inevitable because
the value of the phone system is dependent on total number of participants.

c 
  
I think the government was right to break up the AT&T monopoly, but they should have
stopped with five little bell monopolies. Instead, the government tried to create a phone
system based on an idealized free market according to holynomic dogma. But, a åfree
marketå telephone system is impossible because of technological and economic reality.
Why? Because, a telephone system is based on a huge, and very expensive, infrastructure (the
lines, the switches, the microwave towers, the satellites, etc.). Because, a telephone system is
highly integrated (everything has to work together). Because, to be a player in the telephone
business, you have to start with a huge capital investment in infrastructure (how long will it
take to repay the loans). And, because a communication system valuable only in terms of
participation. So, the regulators had to compromise. The Bell breakup left us with five
regional monopolies limited to local service only because an economically correct phone
system would have cut off service to unprofitable rural areas and to poor people. And, a few
federally protected long distance companies. Protected because they could not have survived
competition with the regional companies. Understand, the long distance companies had their
start before the Bell breakup, because the federal regulations required that AT&T use high
long distance rates to subsidize service to rural areas. So, the regulations gave the long
distance companies an advantage. After the breakup, they had to be protected. Interestingly,
for those of us who believe in free markets, the breakup left the federal government in the
permanent position of deciding who could compete in telephony, and how, and where.
Finally, the breakup destroyed domestic telephone manufacturing, and increased the nations
trade deficit. All in all, I think the Bell breakup is a good example of what happens when
activists (this happened during Reagan administration) try to create economic reality based on
dogma. What the proponents of the various forms of åholynomics å (socialist or capitalist
variety, it doesnåt matter) do not understand is that some things have to be the way they
have to be. Either, we can have a big regulated telephone monopoly (with the same problems
as the old Bell System), a collection of regional regulated monopolies (the best compromise, I
think), or a government owned telephone system. Either we can accept the economic
paradigms behind the phone system, or we can accept the holynomics of the activists and the
delusion that the government exists to implement economic reality (for more thoughts on
åholynomics å see, An Un-economic Interlude).


     c


Microsoft became a monopoly because they were able to create and enforce universal data
interaction standards for personal computers. Microsoft did this by creating a series of
operating systems (DOS, then Windows), and by defining the kind of machine that could run
their OSs. Microsoft was successful at this because, unlike Apple and Commodore it set
about creating nonexclusive standards that allowed anyone to get into the computer hardware
business, and fill every market niche. So, Microsoft products were able to be in every market
niche. The strategy that made Microsoft a monopoly worked because a communication/data
system is valuable only in terms of the number potential users and the number of possible
interactions. Microsoft became a monopoly because they created the most universally useful
standard for desktop computers. And, the most universally useful standard is the one most
valuable to computer users. The problem is that in an unregulated market, the Microsoft no
longer has an economic reason to produce a quality product because of itås monopoly.

 
 
There is a danger in the government ås antitrust case. First, if Microsoft is broken up, who
will create and enforce the standards that make personal computers so useful? The federal
government could create a situation where there are twenty little exclusive standards; each
pushed by twenty competing corporations. Remember, the value of a desktop computer is
dependent on the number other computers it can work with, and the size of the software pool
it can use. So, having fifty little noninteracting standards can only hurt consumers. Also,
businesses would be hurt by having to buy a piece of each of those little standards in order to
do business in cyberspace. However, because of the economics of the communications sector,
there will inevitably be consolidations and mergers, leaving some users with now valueless,
but expensive, pieces of newly obsolete standards. To a certain extent, emulation can get
around the difficulties of incompatible standards. But still, the government may create an
expensive problem. On the other hand, breaking up the software giant may simply lead to the
creation of another software monopoly, or two or three little monopolies. The economics of
communications (and the implementations of holynomics) may make a new monopoly
inevitable. It may be that there has to be a software giant, or several smaller giants, to
implement the standards that make the personal computer so valuable to users. Somewhere
along the way (perhaps too late), the people who are prosecuting Microsoft may realize this.
But then, what will do they do? Holynomics cannot provide the answer to that question.

c 

Whatever happens to Microsoft, I think Windows and MS DOS should be made open source,
or free software under the terms of the Free Software Foundationås General Public License.
My reasons for proposing this are simple. First, dividing Microsoft into an OS company and
an operating system company has a problem because the OS company will have all the
awesome economic advantages that Microsoft currently has. So, if there is a change in the
politics in Washington, the OS firm will be well positioned to create another monopoly. The
alternative is perpetual federal regulation of the åbaby bill,å but this may let someone else
create a dominant OS and be positioned to start a new monopoly. So, the federal government
may end up dictating who can compete in the OS market, how, and where. Second, consider
some of the other remedies that have been proposed. For example, Windows could be
auctioned off to the highest bidder. But, this would only set the stage for another monopoly,
because the economic factors that made Microsoft a monopoly will still be at work. Another
possibility is selling Windows to several players, or breaking up Microsoft into several
åBaby Bills. å While this would delay the creation of another monopoly, it would also set
the stage for a nightmare of competing mutually incompatible standards. Understand, once a
firm owns a piece of software, it will be made as exclusive as possible to maximize profits.
So, if Windows is sold to several players, a destructive competition is likely until one firm
wins and establishes a monopoly. In the end, all of these solutions simply perpetuate the
problem. On the other hand, computers are valuable in terms of their ability to interact with
other computers. So, there is a profit to be made by preserving interactivity, if the temptations
of extreme profits through exclusive standards can be avoided. By making Windows an open
source OS, you eliminate the possibility of profits through exclusive standards, but the profits
from interactivity will still be there. And, Microsoft will be able to maintain it ås position in
the mark by good business practices, and because of itås expertise. So, a unified Windows
OS will still be possible (consider Unix). I think by making Windows an open source OS; the
Justice Department can maintain the value of Windows for itås users all around the world,
and avoid the inherent snags of the other remedies.



Software monopolies can be big (as in the case of Microsoft) or small (as in the case of a
single audio standard). Whether big, or small, the drive to monopoly has the same cause, the
conflict between intellectual property law and the economics of communications and
software. Understand, communications standards must be common to work, but copyrights
are exclusive. Only a monopoly can propagate a common standard that is also an exclusive
standard. The natural results of this conflict are destructive monopolies. Further, our basic
legal concept of intellectual property might have been made obsolete by technology. It may
be that Intellectual property is a legal fiction based on the economic realities of the 1890ås.
Back then, to replicate information enmass you had to invest in a printing plant, so copyright
holders had serious assets to go after if you violated their rights. Today, anyone can violate
the copyright laws with an office zerox, or a tape recorder, or a PC. On the OS side, consider
the success of Unix and itås open source variants (like Linux). These OSås have made
steady progress in spite of fierce competition from Microsoft. This may, in part, be because
the makers were not hobbled by exclusive copyrights, and so were free to follow the
economics of software; because they did not have to choose between monopoly profits and
economic reality. Note, an OS is so complicated that only a few firms can be in the market
anyway, so OS companies have a certain amount of protection. Also, Microsoft might have
been lulled by itås monopoly into lowering quality standards and software control policies.
However, the successes of the free OSås are very important to consider. It may be that the
legal remedies against Microsoft are unnecessary because the firm is doomed by the
copyright system. Microsoft may ultimately reach the place where it will not be able to
compete against the free OSås. Simply because the copyright system is so out of step with
economic reality.