The recent surprise resignation of Microsoft’s chief executive, Steve Ballmer, only made official what has long been obvious; namely, that Microsoft is in decline, and is no longer the great and dominating company it once was. Microsoft’s rapid decline may be inevitable in industries with rapid technological change, which should influence anti-trust policy in the United States and other countries concerned about monopolies.
Microsoft’s Windows has been by far the dominant operating system for personal computers during the past 3 decades, as it was installed in some years in more than 95% of all personal computers, and is still installed in over 90% of all computers worldwide. What economists call “network economies” gave Windows a major advantage over Apple’s operating system and that of potential entrants. Since computers have to communicate with each other, it has been advantageous to buy a computer with Windows when most other computers also used Windows.
Microsoft had monopoly power as measured not only by its dominant share of all computer operating systems, but also by the very large profits it continues to make year after year. These profits led to an elevated price of Microsoft’s stock- it has since fallen significantly- and to enormous wealth not only for Bill Gates, but also for many other employees of the company. Microsoft attracted topnotch employees, and was generally considered the leading company in the world.
Complaints by competitors against so-called unfair tactics by Microsoft attracted the attention of the Department of Justices. It began an anti trust case against Microsoft that accused the company of abusing its monopoly power. This resulted in an expensive and bruising battle between the company and the government, including the attorney generals of many state governments. The final settlement did not force many changes in what Microsoft did, but the case may have distracted Microsoft’s leaders from the goal of continuing to innovate in the computer industry.
We will probably never know if the lawsuit damaged Microsoft’s subsequent performance, but forces were gathering even prior to the lawsuit that greatly undermined Microsoft’s dominance. The growth of the Internet was a major force, and was itself sparked by major network economies. Gathering information from, and communicating via email through, the Internet became the primary interest of many consumers, and did not require word processing and other tools at the heart of Windows. Microsoft’s Explorer system that provided access to the Internet rapidly declined in importance.
Apple soon became the most important innovator in the high tech industry, with its iphone, iPod and IPad. Smart phones and Tablets provided easy access to the Internet, and simple communication among users through email, texting, Facebook, and Twitter without the need to own a computer, and certainly without having to rely on Microsoft. This company tried to compete with its own tablets and other Internet devices, but it could never regain the attractive products it had when first introducing Windows. Perhaps a reluctance to “cannibalize” the market for its computer software made Microsoft drag its feet in getting into new products that allowed direct access to the Internet. In any case, Ballmer and other Microsoft leaders downplayed the importance of smart phones and other such Internet devices.
Google is in turn replacing Apple as innovation leader in the industry, with its dominance of the market for gathering information from the Internet, its Android operating system for smart phones, its driverless car, and Google glasses. This process whereby new entrants erode over time the market position of dominant companies is part of “dynamic competition”, as opposed to the static competition discuss in economic textbooks. The large profits made by dominant companies encourage entry of new competitors who try to appropriate some of those profits for themselves. These new entrants may not be able to compete effectively by offering the same products and services as dominant firms do because these firms benefit from network economies and other advantages of scale. Instead, they innovate with different products that take away some of the market held by dominant firms. Unlike Microsoft, Apple did not mind, and probably enjoyed, cannibalizing Microsoft’s market.
Anti trust policy should recognize that dynamic competition is often a powerful force when static competition is weak. The big policy question then is whether it is worthwhile to bring expensive and time consuming anti trust cases against still innovating firms that have considerable profits and monopoly power, given the significant probability that new competitors will before long greatly erode this power through different products? I believe the answer to that is no, and that policy should often rely on dynamic competition, even when that allows dominant firms only temporarily to enjoy economic power.