Article 47 of 60
BILL GATES IS MASTER OF THE GAME, NO MATTER WHERE HE
So Bill Gates is stepping down - or up, or sideways, or
something - from his position as CEO of Microsoft. Nobody
seems to think that this will make much difference either to
the way Microsoft is run or to the desire of the Justice
Department to break up the world's most valuable company and
humble its founder. But maybe the announcement provides a good
occasion to reflect on the achievements of this elder
statesman (44 years old!) of the New Economy.
You might say that Gates is to business strategy what Heinz
Guderian, the father of the blitzkrieg, was to military
strategy. Germany didn't invent the tank or the bomber; but
the German command understood, in a way that the British or
the French did not, how these inventions changed the nature of
war, and very nearly ended up conquering the world. Microsoft
didn't invent either the personal computer or the
point-and-click interface; but Gates understood, in a way that
other contenders for empire did not, how these inventions
changed the nature of business competition, and some think
that he has come equally close to global conquest.
You could say that each of the two other companies one
might have expected to dominate the New Economy was the victim
of a flawed philosophical premise. IBM's fallacy was that of
crude materialism: accustomed to providing software free with
its mainframes, the computer giant believed that market power
rested in the hands of manufacturers, and did not realize its
mistake until far too late. Apple, by contrast, suffered from
naive idealism: its managers believed that having the better
idea, the better product, was in itself enough to ensure
victory in the marketplace.
Only Gates seems to have realized the importance, in this
new competitive realm, of "network externalities," which is
economese for the incentive most of us have to use the same
software - or video format, or typewriter keyboard - that
everyone else uses. It's not a new concept, and around the
time Gates was starting to build his empire economists were
working out a theory of how companies should conduct
themselves when network externalities are crucial. (Perhaps
the leader among these theorists was Berkeley's Carl Shapiro;
not coincidentally, Shapiro took a leave in the mid-' 90s to
become a top official at the Justice Department's antitrust
division.) The essence of that theory is that you have to lose
money to make money: your product must initially be sold
cheaply, even given away, until enough people are using it
that the rest feel that they have no alternative.
This seems obvious now, but in the 1980s Apple thought that
simply because the Macintosh was insanely great it could be
sold at a premium price from day one. It was Gates who
understood the power of ubiquity, and used that knowledge to
build an unassailable market position. "Windows 95 is
Macintosh 89," declared the losers bitterly when the struggle
was all over. They were right, but that in itself tells you
how much better Gates played the game.
Did Microsoft overplay its hand? Judge Thomas Penfield
Jackson thinks so, and though many independent economists
think that his "findings of fact" were rather onesided -
Nicholas Economides of New York University, whose
Web site on network externalities is much admired among
aficionados, describes the judge's report as "unusually harsh"
- there is a reasonable chance that in the end Microsoft will
be broken up into an applications company and one or two
operating systems companies.
But that will not be the end of the story, because
Microsoft is unique only in the scale of its success. Monopoly
is inherent in the logic of network externalities: the normal
life cycle of new industries will be one in which an initial
field of competitors is brutally winnowed until only one major
Indeed, investors are counting on this process: since
everyone now knows that you have to lose money to make money,
and acts on that knowledge, only the eventual prospect of big
monopoly profits can justify the prices now being paid for
money-losing tech stocks.
When does the legitimate attempt to capitalize on victory
in a competitive race become an illegal abuse of market power?
So far, nobody has laid down the ground rules.
So don't cry for Bill Gates, America. The truth is, he
isn't leaving us - and even when he does, there will still be
plenty of other Bills to pay.