- Cafe Hayek - https://cafehayek.com -

Washington Times Op-ed: “Microsoft’s great business secret”

Tweet [1]

As part of my attempt to catalog here at Cafe Hayek as many as possible of my past writings, here’s the first op-ed of mine to appear in the Washington Times [2] (the link is gated); it ran on page A21 of the March 3rd, 1995, edition.  It’s below the fold.

Microsoft’s great business secret
Donald J. Boudreaux

Microsoft founder Bill Gates is the richest man in American because his company manufactures great products at cheap prices. Predictably, his less-successful rivals persuaded the government to badger Microsoft with a four-year-long antitrust investigation. Why is the Clinton administration, a big promoter of the “information superhighway,” helping to lynch one of America’s most successful and entrepreneurial information-age companies?

After wasting countless hours kowtowing to Washington dandies, Microsoft executives last summer agreed to amend some of its business practices. Judge Stanley Sporkin’s recent rejection of the consent decree reopened the door to continued heckling of Microsoft. Amazingly, Judge Sporkin insists the decree doesn’t hamper Microsoft enough. This insane persecution of a great American success story bolsters an opinion held by many economists: Antitrust law is a menance to consumers as well as to firms who prefer to compete in the marketplace rather than in the courtroom.

As with all true competitiors, Microsoft’s practices are aggressive yet healthy for consumers. Consider “vaporware” – so scorned by Judge Sporkin. Microsoft “pre-announces” today the software it plans to market tomorrow. Such pre-announcements, of course, help computer users better plan for the future. Nevertheless, some of Microsoft’s rivals argue that these announcements unfairly dissuade computer users from purchasing software produced by Microsoft’s competitors.

Nonsense. Nothing stops other software producers from pre-announcing their wares – indeed, most do. It’s difficult to see how pre-announcements by Microsoft give it an unfair advantage when its rivals regularly pre-announce. If Microsoft has an advantage, this edge comes from Microsoft’s reputation for producing and delivering excellent software. Other firms producing software of comparable value and timeliness will be at no competitive disadvantge in the face of pre-announcements by Microsoft.

Don’t think Microsoft has incentives to pre-announce when it takes a bite out of a firm’s reputation and future sales, which in turn is reflected in lower share prices. In short, markets punish firms for being excessively optimistic or for otherwise misleading customers.

High-tech firms are not immune to market discipline. Microsoft pre-announced its Windows 95’s arrival would be delayed until August 1995. This delay caused its share prices to fall by nearly 4.5 percent. In dollar terms, Microsoft lost $72 million as a result of its ill-considered pre-announcement. You can bet Microsoft will be more careful in the future; illegitimate vaporware vaporizes profits.

It’s true that Microsoft’s MS-DOS now runs the operating systems in nearly 80 percent of the nation’s computers. But no one compels computer makers to install MS-DOS. In fact, computer makers (which include some pretty savvy firms) have incentives to install operating systems that make their computers as great a value as possible to consumers. If and when MS-DOS stops delivering the goods, computer makers will flock to other, better operating-system software. In truth, Microsoft’s currently large market share testifies only to that company’s exceptional products and competitive pricing.

Of course, Microsoft’s rivals refuse to admit that Microsoft earns its large market share through superior performance. Microsoft is accused of unfairly cornering the market by offering discounts to customers who buy packages of Microsoft products. But again, nothing prohibits other software firms from offering similar packaging or discounts. Also attacked are Microsoft’s contracts with computer manufacturers under which Microsoft agrees to accept lower royalty rates if manufacturers license a copy of MS-DOS for every personal computer shipped, even if some computers are shipped without actually being loaded with MS-DOS. But this is a harmless business tactic: Buyers of computers licensed to use MS-DOS are more likely to install it than any other operating software. Therefore, Microsoft can better spread its fixed costs of developing software over a larger sales volume.

Stripped bare, the accusations against Microsoft reflect nothing more than the whines of rivals who are unwilling or unable to meet Microsoft’s low prices and high quality standards. Should government handicap successful firms such as Microsoft – and in the process penalize consumers – merely to mollify disgruntled competitors?

Bill Gates’ company is indeed an industry giant. But the industry Microsoft “dominates” is perhaps the most dynamic on Earth. Microsoft will maintain its elite rank only by serving future consumer needs with the same vigor and value that have marked its performance thus far. Market forces, if undisturbed by antitrust bureaucrats, will ensure that the computer industry remains a paragon of competitive excellence.

Donald J.  Boudreaux is an associate professor of law and economics at Clemson Univeristy, South Carolina and a scholar at the Competitive Enterprise Institute.

Comments