Commentary

I just noticed this

Thoughtful summary.

2002-05-14: Freedom to Innovate?

The Permanent Link to This Will Be: here

Lurking behind the legal case that is now Unsettling States v. Microsoft has always been a whispered sotto voce claim by Microsoft that competition–in the market for PC operating systems, for office productivity suites, for browsers–is a bad thing. Technological innovation needs a single, strong, dominant, monopolistic firm to set the standard, and to tell the industry when it is time for the standard to change. Whenever I make this (possibly true, possibly false) point, I refer to UNIX-on-micros in the 1980s, when an operating system technologically superior to MS-DOS went nowhere because the lack of a dominant standard-setter prevented growth and allowed the emergence of enough small incompatibilities to fragment the market and discourage applications development (which led John Doerr to once say that I knew nothing about UNIX in the 1980s, applications development, or software markets.)

I have never been able to evaluate this argument satisfactorily. But last week something happened to one of its biggest boosters. Keith Teare, CEO of Real Names, who had favored the maintenance of Microsoft’s monopoly in web browsers as pro-consumer because “without Microsoft [to set the standard, and make sure that Real Names’s products are included in the standard set of browser capabilities] it could take years to deliver [Real Names’s] Internet Keywords globally.” With Microsoft as monopolist standard-setter that had “embraced our open standards-based architecture in March 2000 because it makes perfect sense for consumers to use Internet Keywords within MSN and Internet Explorer,” Teare was looking forward to a rapid real-time test of whether internet users would prefer Real Names’s way of finding things on the Internet to the (badly broken) URL-based way.

But while Real Names’s information technologies were impressive, and while it did seem that Real Names had a chance to catch on, it turns out that it will never get that market test. Last week Microsoft decided to remove support for Real Names’s products from its web browser, Internet Explorer. Since Real Names’s way of naming web sites requires the permission and help of the browser manufacturer to work, and since Microsoft appears to have decided that Real Names’s success would diminish Microsoft’s share of some future market in Internet searching, Real Names is now gone.

Note that if the market for web browsers were not monopolistic but competitive–if Microsoft’s share of the market were not 80% plus, but were 40%–Real Names would be in a much better position. No one would dare pull support from a promising and potentially very useful technology out of the fear that it would become “the next big thing,” and that one’s browser would lose market share because it did not support what turned out to be something browsers really wanted. But with other browser shares below 20%, the normal discipline a competitive market exercises on firms that think about pulling capabilities–making their products less useful–just does not apply.

Dan Bricklin’s proposed solution is for Microsoft to be an altruistic technology leader, doing what is right to maximize innovation and user welfare rather than what Microsoft believes will earn its shareholders the most profits: He hopes that “Microsoft will make amends for this by completely opening up an API for address resolution in a way that does not leave themselves as a bottleneck nor as a toll taker. This is fundamental to the Internet advancing. Microsoft has a duty as the leading company in the client-side world (with officially a monopoly whether they like it or not) to do things that are in the world’s maximal interest even if it’s not in their specific maximal interest.”

My–economist’s–reaction is, “When pigs fly.” That economist’s reaction is not entirely fair. After all, no matter what Microsoft’s other shareholders are in the game for, Bill Gates is in the game not to earn more money so that he can buy more things, but for some other purpose. I don’t know whether Bill Gates is playing to gain bragging rights by piling up the highest billionaire score or to be the person who shapes the future by bringing the world into the information age, but if Bill Gates is playing the second game then appeals to him to have Microsoft act in the public interest may succeed.

But my economist’s reaction is that Microsoft is much more likely to focus its energy on doing things that are in the world’s maximal interest–things that make its products as useful and valuable as possible–if it fears the market: if it thinks that failure to make its products as useful and valuable as possible will lead to its disappearance, and that success at making its products as useful and valuable as possible will lead to organizational success, organizational expansion, large bonuses, and lots of in-the-money stock options.

But how to preserve competition and create effective market discipline when all the economics–high fixed costs, effectively zero marginal costs, demand-side economies of use, network effects, upstream and downstream interdependence, the advantages held by whatever firm becomes the standard-setter–pushes for natural monopoly? If you do preserve competition, how to keep it focused on innovation rather than on the creation of small incompatibilities that segment the market and rob the economy of network effects and economies of scale? And does preserving competition mean that you rob successful firms of the profits that were their spur to innovate in the first place?

These are hard and deep questions. Two years ago Real Names’s CEO Keith Teare thought that they had simple answers: keep Microsoft in shape to keep maintaining its monopoly no matter what the violations of antitrust law that it had as a matter of fact committed: “It seems to us that the American dream of working hard and prospering is being called into question by the treatment Microsoft is receiving. I came to the United States because I believed it supports entrepreneurs and I still believe that America wants entrepreneurs to succeed. And although the government and the court seem to be sending an opposite message, I do not believe that ordinary Americans should allow one of the country’s most successful entrepreneurs to be effectively neutralized because he was ‘too successful’.”

Today Real Names’s ex-CEO Keith Teare sees things somewhat differently: his “…naming technology… is being killed at birth – before it succeeds and becomes “out of control”. A small private company is being denied an audience–not because of money–but because of [Microsoft’s] fear of losing control…. I am bitterly disappointed by the lack of vision… the defence of search and the URL against a truly global and multi-lingual naming platform with built in directory services…. Naturally I’m pretty unhappy about this. Microsoft seems to be playing the role of the referee who decides whether any innovations succeed … they’ve just brought innovation in internet naming to a grinding halt – and the internet *really* needs innovation in naming. RealNames will not be the only victim – there’s a whole ecosystem that stretches all around the world that Microsoft is turning off. CNNIC in China, Forval in Japan and other companies in Belgium, Holland, France, Finland, Sweden, Denmark and Norway. There are more than 100 registrars of Keywords and they in turn have thousands of resellers. There are more than 100,000 customers…”