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Breaking the Microsoft monopoly

By Nicholas Gruen - posted Monday, 31 October 2005

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.


While 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.

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First published in the Courier-Mail on October 26, 2005.

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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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