The aim of this research essay is to examine how Microsoft possesses the monopoly power over operating system. It demonstrates how Bill Gates has formed the Microsoft, what all operating systems launched and their features. The essay also addresses the strategy adopted by Microsoft to eliminate the potential market competitors and to leverage its monopoly position into other software markets.
Microsoft was formed by Bill Gates who is a Harvard college dropout. He was born on 28th Oct 1955 to a family that was successful in business, living a healthy upper middle class life in Washington. Very early in his primary school days, Bill Gates consistently out-scoring his peers in most of the subjects, especially maths and science. Soon his parents had enrolled him in Lakeside Prep School, which proved to be historic, as he was introduced to computers (Manes, 1994).
At that time, computers were very expensive and large for any school to buy one of its own. After few months, school signs agreement with various corporations to grant students to use their computers. Bill and Paul used to skip classes and stay at the computer room to write programs, read computer books and find out exactly how these machines worked. Their dedication soon led them become the expert of computer. They can able to hack the computer system, modify and crashed the important or valuable files until they were banned from using the computer by the corporation. However, still Bill and Paul were hired by the computer company to find bugs and explore weaknesses in their system. The company is not paying any money to boys instead they were granted unlimited computer time. That was the time when Bill got into computers fulltime and became hardcore. Soon they were hired by information system to write a software program for payroll. This time they were paid and enjoying access to computers unlimited. They had worked for many organizations to find bugs and fix them. Each work they had completed helps them improve their skills and delve them deeper into the programming world (Manes, 1994).
In 1973, Bill Gates enrolled for Harvard University but he spends most of the time at computer centre. He was in touch with Paul Allen and they continue to plan their future projects. Allen then moves to Boston to be closer to Bill, so that they can continue to work on projects. Allen had force Bill to quit the college and work full time with him on projects. Soon the things had changed.
One day they saw the first microcomputer on the cover of a magazine and they realize the time was right to move on. The home computer business was about to explode and microprocessor needs software. Bill arranged the meeting with the Altair manufacturers and promised them to write a program for them to make their machine work smoothly. The software works perfectly fine and everyone was impressed by their work. Within a year Bill was dropped out of Harvard and started a company called Microsoft.
Microsoft was commissioned by IBM to develop an operating system which was named as PC-DOS. DOS version 1 was very basic as compared to the modern version of DOS. The IBM PC took the world by storm, and its success leads to the success of Microsoft. Microsoft continued writing software's for businesses and individuals. In 1986 Microsoft went public and Bill became billionaire. Microsoft has developed their own proprietary operating system named it MS-DOS (Microsoft disk operating system). After that Microsoft has released many versions of MS-DOS which supports a UNIX style hierarchical sub-directory structure, larger hard disks, High Density (1.2 MB) floppy disks and foreign character sets. In October 1985, Microsoft windows was launched which was not that successful. It provides GUI similar to that of Macintosh; in fact it is so similar that Apple had raised the court case against Microsoft for copying the 'look and feel' of their operating system. And the court case was not dropped till Aug 1997 (Stephen, 2005).
In July 1993, Windows NT 3.1 was released by Microsoft. NT contains the all new 'kernel' at the core of the operating system. It was 16 bit operating system. It was designed to be platform independent and targeted for Intel i860 processor but it was ported to MIPS and then to Intel 80386 processor. In the mid of 1995, Windows NT 3.51 was introduced which also supports IBM power PC processors.
In Aug 1995, Microsoft & Bill Gates had launched Windows 95. Unlike the previous OS, it was the complete operating system which supports 32 bit processing, multitasking and provide Win32 API's for programmers. Millions of copies were sold at that time and it became the most popular operating system of that time. After the success of Windows 95, Microsoft had launched their new advanced operating system Windows 98 which provide support for USB and FAT32 (Stephen, 2005). Some united state attorneys tried to block this OS release since the new OS closely interfaces with other proprietary programs like IE (Microsoft Internet Explorer) and so effectively closes the market of such software to other companies. Bill Gate fought back by sending a letter to the White House suggesting that 26 of its industry allies said that a delay in the release of the new operating system could damage the U.S. economy. Microsoft was focussing on the main selling points of Windows '98, which were its support for USB and disk partitions of ~2.1GB. Below is the table showing different Microsoft windows releases:
YEAREVENTNov 10, 1983Microsoft has introduced their new product Windows.Nov 20, 1985Microsoft Windows 1.0 was released and it was sold for $100.00.Dec 9, 1987Microsoft Windows 2.0 was introduced and was initially sold for $100.00.May 22, 1990Microsoft Windows 3.0 was released and was sold at $149.95. It also had the upgrade version which was priced $79.95.Oct 11, 1991Microsoft Windows 3.0 was released with multimedia.Sep 21, 1994Microsoft Windows NT 3.5 was introduced.Aug 24, 1995Microsoft has introduced Windows 95 and within 4 days millions of copies were sold. Oct 12, 1998In 1998, Microsoft had announced that future releases of Windows NT will be names as Windows 2000.May 5, 1999In 1999, Microsoft had released Windows 98 SE (Second Edition).Feb 17, 2000Microsoft had introduced their new version of OS called Windows 2000.June 19, 2000Another version of operating system was introduced by Microsoft which is called Windows ME (Millennium).Oct 25, 2001Most popular operating system, windows XP was introduced by Microsoft. This was most popular and used operating system till now.Mar 28, 2003Microsoft Windows Server 2003 is introduced. This was the server edition.Nov 30, 2006Microsoft releases Microsoft Windows Vista to corporations.Oct 22, 2009Windows 7 is released by Microsoft.
After the success of Window '98 which has most numbers of users till 2000, Microsoft has introduced their new version of Windows (Stephen, 2005). This time also Microsoft has taken world into storm by introducing their new OS Windows XP which is the most popular operating system till now. Kernel was the same as used in NT system; Windows XP was the combination of both NT/2000 series and the Windows 95/98/ME series into one product. This version of Window was very secure and reliable as compared to the previous version of windows. Service pack 1 and 2 was introduced, which provide significant improvements and encouragement among both home and business users for adoption of Windows XP operating system. Windows XP is still available with a number of versions like Home Edition, Professional, Media centre, Tablet PC Edition, Starter Edition and professional x64 bit Edition.
It is stated that Microsoft possesses monopoly power over operating systems. A traditional structural analysis of market shows that Microsoft possesses a dominant share protected by immense barriers to entry, confirms that Microsoft has monopoly power. There is a "sustained absence of realistic commercial alternatives" to Microsoft's operating system, which is the direct evidence that Microsoft has monopoly power in operating systems. Principal customers and OEMs (computer manufacturer) lacks the alternative to windows hence computer manufacturers are the direct customers of Microsoft (Warren, 1998).
Dr. Warren-Boulton, who is the great economist testified and state that the "majority of OS installed on personal computers are installed on new machines by computer manufacturers." It was also notify that in 1997, 87.5% copies of Windows 95 were installed by OEMs with the computer which includes microprocessor and operating system (Wasserman, 1998). The maintenance of the monopoly is of course the difficult task and Microsoft still enjoying this monopoly. Once the market is defined, next step is to determine whether the firm itself possesses monopoly power to raise the market price above the competitive level to exclude competition. Some of the reason to believe that Microsoft has the capability to possess the monopoly power in personal computer operating system market (Warren, 1998).
First, market share of Microsoft's has been veryÂ high since early 1990s and it is expected to remain high. The monopoly power of any firm can be determine by the level and stability of its share in the market. According to the Microsoft figures, approx 81% of 209 million personal computers shipped worldwide since July 1995 has Microsoft operating system. And PC's shifting without any OS are 32 million units. Hence, 95.1% of total personal computer shipped till 1995 with an operating system are of Microsoft. This level of market share is remarkable stable from long time. Microsoft is dominating the market since early 90's with their new range of products which are very popular such as Word, Excel, Power-point, visual studio, Outlook and Internet Explorer (Kathleen, 2001).
Second, barrier of entering into the world of operating system market is very high, and other OS cannot easily increase their market shares because the applications writtenÂ for Windows 95/98 will not run on those systems. The development cost of an operating system would be immense if you're competing with Microsoft'sÂ operating system. Take an instance of IBM, an experienced company which develop competitive software, was reported to spend a staggeringÂ amount on the OS/2 project through 1996. These costs in economic termsÂ are called "sunk" because only a small portion of initial fixed development costs could be recovered if the entrant were to exit the market. And also competition between two big suppliers like Microsoft and IBM, each with fixed costs and lowÂ marginal costs, would result in a decrease in prices, which further reduce the profit margin. Thus competing with Microsoft would be risky, costly and time consuming. Another barrier is that users tend to become "used to" a particular operating systems (Warren, 1998).
Third, Microsoft has engaged itself in business conduct and thatÂ would not be profitable if it didn't have power of monopoly. For instance, when one computer manufacturer removed the internet explorer icon from theÂ Windows 95 desktop, than Microsoft responded to that OEM by threatening him to terminate the Windows 95 license. Thus the OEM capitulated to the demands of Microsoft's. A Window license is very necessary for any computer manufacturer to remain competitive in the market. This capitulation of Microsoft is itself evidence of monopoly power.
Fourth, the operating system prices, Microsoft's margins, and Microsoft equity are themselves consistent with Microsoft possessing monopoly power. Although, the accurate historical information about the Microsoft's OS productÂ license fees is not readily available. AnÂ internal document of Microsoft acknowledges that the OS price is increased over the last ten years while the price of competitors OS have fall down and continue to come down. This is particularly true of CPU prices. Microsoft's net profit has increased over the time because of the monopoly power in operating systems and it is continually increasing by the time. It also has the extraordinarily high market capitalization by which the price or earnings ratio of Microsoft is more than double the S&P 500 average. The financial market has lot of optimistic expectations regarding the future growth of Microsoft's. There are lot of investors who are investing a lot of money over Microsoft because they have full faith in their market capability. Microsoft monopoly power is not impenetrable instead it is formidable, thus it possesses monopoly power in the market of desktop operating system. And also there is no reason to believe that the market, if functionÂ properly, will generate some alternatives to Microsoft's operating system that will overcome the advantage of entry barrier that is enjoyed by Microsoft.
It is stated that Microsoft possesses monopoly over Intel processors. But Microsoft intends to deny by the statement that OS for Intel-based personal computers constitute a market. Microsoft plans to broadly testify the market to include the different types of computers-which include workstations, network based computers and personal digital assistants that use different operating systems. Microsoft also argues that today the technology is changing rapidly that makes very difficult to sustain the position in market over long-term. The most likely threat to Microsoft's position is the spread of cross-platform technologies, with the introduction of browser. Microsoft's contracts with OEMs, ISPs, and Internet content providers are proved to be "exclusionary" practices (Warren, 1998).
There are some strategies used by Microsoft to leverage its monopoly position in operating systems. Today 90% of new Intel based personal computers are shipped with pre-installed version of Windows. And most importantly there are no other commercial alternative to the Microsoft operating system. In order to protect its valuable windows monopoly against market competitors and to extend its monopoly into other software markets, Microsoft has engaged themselves in a series of anticompetitive activities.
Firstly, Microsoft's had tied their software products to Microsoft's Windows operating system. Now there software products are compatible with the Microsoft OS and these software products are so much popular and are of regular use such as Microsoft Office, Visual Studio etc.
Secondly, Microsoft has signed an exclusionary agreement with the computer manufacturer companies for buying, distributing or promoting their competitors. This was done to make Microsoft OS the stand alone Windows system for personal computer. Every OEM has the agreement with Microsoft's to sell their software products. They are restricted to promote and distribute only Microsoft products otherwise their license of selling Microsoft products will be taken back (David, 2001).
Thirdly, Microsoft has restricted the computer manufacturer not to provide services or resources to Microsoft potential competitors. By doing this Microsoft has increased their market and trying to reduce the market value of its competitors. The most obvious substitute of Microsoft is Apple's Macintosh operating system. But even Apple PC cannot stand too far over the power of Microsoft OS. Even though some of the users switch to Macintosh but still they are not too much to compete Microsoft. Even Microsoft are sure that if they increase the price of operating system still it would not lead users to switch to some different vendor (Kathleen, 2001).
According to the Microsoft CEO Bill Gates, one important source of competitor might be the development of internet browser that allows personal computer to access the internet. With the help of internet browser user can locate, display and modify the contents located on World Wide Web. Mr Gates warned his executive about this serious threat and soon a new competitor was "born" which is Netscape. Netscape has introduced their new dominant internet browser with 70% usage share that allow them to determine the network extension. Netscape pursue a multi platform strategy which moves the key API (application programming interface) into the client to customize any operating system. Microsoft was afraid of the Netscape internet browser but browser is the not the replacement of the operating system, Netscape browser stills needs an OS such as Windows 95 or Windows 98 running underneath it but still navigator is very powerful application that can run on any network centric platform. Netscape is develop to run to multiple platforms and most importantly independent of Microsoft operating system (Warren, 1998).
Microsoft has responded to this competitive threat posed by Netscape's browser by introducing their new Internet browser, named "Internet Explorer" or "IE." One of the executive has described this campaign as a "jihad" to win the "browser war".
Initially, Microsoft has attempted to eliminate the competition by seeking an agreement if 'not to compete'. In the mid of May 1995, executives from Microsoft met with the Netscape personnel to induce Netscape not to compete with Microsoft and to divide the market of browser. Microsoft offer Netscape to become the sole supplier of browsers other than Windows 95 and successor and Microsoft to become the sole supplier of browser with Windows 95. Netscape refused to participate in Microsoft's illegal scheme. Having failed to stop the competition with the help of agreement, Microsoft has set the agreement with OEM's, not to distribute, promote and sold the product other than Microsoft products (Warren, 1998). According to the OEM's, if Microsoft stop their license then it would be a big lose for their business as for every PC getting sold, Microsoft OS was installed on it. As also there are no other alternative for the Windows to which these OEM's can switch. Microsoft knows that computer manufacturer has no choice but to install their operating system, indeed they are "the only game in town". Both OEMs and ISVs (application developers) are dependent on the products of Microsoft and fear that they might use their monopoly power to harm them if they are going to favour the rivals of Microsoft.
Microsoft was formed by Harvard university dropout, Bill Gates. Microsoft has introduced several revolutionary popular windows operating system which are used by 8 out of 10 users. There is a "sustained absence of realistic commercial alternatives" to Microsoft's operating system, which is the direct evidence that Microsoft has monopoly power in operating systems. Microsoft has engaged themselves in a series of anticompetitive activities by which they eliminate their potential competitors from the software market.