posted by Evan Coyne Maloney on Thu 23rd Jan 2003 07:04 UTC
IconNow that the Justice Department and Judge Colleen Kollar-Kotelly are content with the wrist-slapping meted out to Microsoft, few expect any abatement in the company's abuse of its monopoly power. Although many argue that, eventually, the markets themselves will bring about more balanced competition, the markets that Microsoft dominates operate on different economic principles than most others. The last twenty years brought such dramatic technological change that it'll be much harder for competitors to dislodge Microsoft from its perch atop the industry than it was for Microsoft to dethrone IBM a generation ago.

Editorial notice: All opinions are those of the author and not necessarily those of

When IBM dominated the industry, computers were used primarily for performing calculations and automated tasks. But as Microsoft rose to prominence, computers were becoming used more and more to communicate. Although such a change might seem insignificant, it caused a radical shift in the economic dynamics of the industry. Instead of operating under the traditional rules of supply-and-demand, where scarcity increases value, the industry began to operate according to the principles of network economics, where ubiquity increases value.

Networking Made Simple

Network economics governs any technology where the ubiquity of the technology directly affects its utility. This is typically the case with communication technology; as the technology becomes more widely deployed, more options for communication are created, thereby increasing the usefulness of the technology. The market for fax machines follows this principle: the utility of a fax machine is proportional to the number of other fax machines with which it can communicate.

The very first fax machine sold was essentially useless, because it couldn't communicate with anything. The sale of the second fax machine actually increased the utility of the first by creating a potential communication channel that didn't exist previously. Whenever a new fax machine is put into use, it increases the potential of every other fax machine to communicate. Therefore, each fax machine sold increases the utility of fax machines in general.

Obviously, this is quite different from the traditional economic dynamics that govern most products. For example, if you buy a jacket, whether or not anyone else already owns that type of jacket does not change the jacket's usefulness to you. Fashion considerations aside, whether you're the only one who owns the jacket or you're one of a million who own it, the jacket will still function exactly the same and keep you just as warm.

A Very Brief History of Modern Computing

During the decades that IBM reigned over the computer industry, most computers were huge machines in complex data centers at universities, large corporations, and government agencies. Computer networking was in its infancy, so the most common way to share data was by physically transporting cumbersome storage media. Very rarely was data shared across the bounds of an organization. Most computers were islands unto themselves.

But by the mid-1980s--coincidentally when IBM began to surrender its position to Microsoft--this began to change. The computing universe no longer consisted of a few installations in large organizations; most businesses now owned personal computers. Nor were computers any longer the exclusive domain of technical specialists. Many, many more people were creating data, and that data frequently needed to be shared. At first, people exchanged files on disks, which by then could fit in a pocket. Small on-line services called bulletin board systems sprang up, bridging distance by allowing people with modems to form communities. And when the Internet came into widespread use in the early 1990s, the masses discovered that sharing files could be as easily as sending e-mail.

The explosive rise in the volume of data being shared meant that computers were becoming increasingly used as tools for communication. As a result, the industry's market dynamics began to resemble those of fax machines. Computer technology was now subject to network economics.

Table of contents
  1. "Repeal the Microsoft Tax, Part I"
  2. "Repeal the Microsoft Tax, Part II"
  3. "Repeal the Microsoft Tax, Part III"
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