Creative Insecurity

The complicated truth behind the rise of Microsoft

Virginia Postrel from the January 1998 issue

(Page 2 of 3)

Microsoft, of course, doesn't sell computers. It's in the software business. You can get its operating system (and run its applications) on all sorts of different machines, whose manufacturers compete intensely. That competition drives down consumer costs, even as machine features get better all the time.

Apple didn't want that sort of competition. It not only kept its own prices high but refused to license its software to any other computer maker. That meant even fewer people used its operating system, which further dampened its momentum. Apple, in fact, acted like the ultimate "tie-in" monopolist. You not only couldn't buy parts of its software separately; you couldn't buy them at all without forking over thousands for an Apple-made machine. And Apple has never been particularly good at manufacturing.

After the company tepidly began licensing a couple of years ago, Mac clone makers did what Apple had feared: They cut into its revenue. But they also expanded the market, and they made the fastest computers ever to carry the Mac operating system. They gave Apple money for its software, even as they bore the costs of manufacturing and distributing their machines. And they gave consumers more choice, more alternatives to Windows. If I were an antitrust regulator looking for conspiracies, I'd be wondering just how coincidental it was that Microsoft invested $150 million in Apple just about the time Steve Jobs announced that the company was ending the clone program.

Such explanations aren't necessary, however. Apple screwed Mac lovers all by itself. Far from the marketing whizzes of 1983 conventional wisdom, its executives were enamored with the cult of the machine, too hung up on the beauty of their product to understand that consumers actually cared about many other things: price, plenty of software, and compatibility with other systems. Quality is not one-dimensional.

Apple's arrogance left computer users with less choice than they might have had--or, perhaps, with more. After all, if Apple had slashed prices early on and taken the business market seriously from the start, it could well have ended up in a Microsoft-like position, but without having to share its market with clones. Microsoft would then have been mostly an applications company, selling Excel and Word to Mac users, and we'd be hearing about the evil, anticompetitive actions of Steve Jobs.

That seems unlikely, however, and the reason is revealing. Apple's all-in-one-box strategy was inherently brittle. It offered too many margins of error and too few margins of adjustment.

The same company wrote the software and made the machines. So if the computers caught on fire, as they sometimes did, or the manufacturing plants couldn't keep up with Christmas demand, there was no alternative outlet for the Mac operating system. Software sales dropped too. No competitive sales force could go after business users while Jobs and company were chasing public schools. All new ideas had to come from within the same closed system. (For a discussion of related issues, see my Forbes ASAP article "Resilience vs. Anticipation". While Apple is based in Silicon Valley, its self-sufficiency strategy more closely resembles those of the minicomputer companies based around Boston.)

Microsoft's partner-dependent system proved far more resilient as the industry changed. The company didn't have to do everything itself, and it could reap the benefits of innovations by others, whether in manufacturing, assembly, distribution, or applications software. Instead of the best minds of a single company, it enlisted the best minds of hundreds. And while Microsoft depended on its partners to build the market, in time they came to depend on Microsoft. The irony is that by making alliances and competing furiously--by not acting like a monopolist--Microsoft wound up reaping the benefits of a near-monopoly on its operating system.

It is emphatically not true that "when you buy a computer, you already are without any choice as to the operating system," as Microsoft critic Audrie Krause said on Crossfire. Both REASON's production department and I personally will be buying new Macs in the next few months. Translation software makes it relatively easy to go from one operating system to another. Nowadays, it's possible to function reasonably well with an operating system that controls only 5 percent of the new-computer market.

The great fear of Microsoft's critics is that the company will wind up controlling everything, foisting mediocre-to-poor products on an unwilling public at ever-higher prices. It's impossible to disprove that hypothetical scenario. But history, and Microsoft's own intense paranoia, cast doubt on it. Just when its quasi-monopoly looks secure, something new--Netscape's Web browsers, Sun Microsystems' Java programming language--pops up and makes Microsoft scramble to maintain its position. So far its resilience has served it well, but the critics' scary scenario relies on more than successful scrambling. It requires absolute security, no future challengers. And that looks unlikely.

Consider the smoking gun memo cited by Assistant Attorney General Joel Klein at the press conference announcing the Justice Department suit. An internal Microsoft document, it told marketing managers to "Worry about the browser share as much as Bill Gates does, because we will lose the Internet platform battle if we do not have a significant user-installed base. The industry would simply ignore our standards. At your level, that is at the manager level, if you let customers deploy Netscape Navigator, you lose the leadership on the desktop."

I will leave it to the attorneys to divine what it means not to "let customers deploy Netscape Navigator," but one thing is clear: This is not a company that thinks like a monopoly. It is always running scared. There's always the possibility that something new could come along and destroy its franchise.

Microsoft didn't get where it is by creating perfect products. It benefited as much from its competitors' mistakes as from its own considerable acumen. And it isn't shy about leaning on suppliers and intermediate customers, such as computer makers, to get its way. In the eyes of its critics, its success is therefore proof that something is amiss in the marketplace.

But the market doesn't promise perfection, only a trial-and-error process of discovery and improvement. The fallible human beings who create products make mistakes. They let their egos and preconceptions blind them to what people really want. Or they just don't know enough, or adjust fast enough, to produce the right goods at the right time. That some of Microsoft's strongest current competitors--Sun and Oracle--are gripped by an anti-PC ideology, when customers love the independence and flexibility of personal computers, does not bode well for them.

What is striking about the story of Microsoft is how adaptable the company has been. Gates's original vision of "a computer on every desk and in every home, running Microsoft software" didn't specify what sort of software or who would make the computers. It was an open-ended, flexible idea that built a resilient company.