Today's Opinions, Tomorrow's Reality 

Your Friend the Monopolist

By David G. Young 

WASHINGTON, DC, March 10, 1998 --  

B ill Gates' smile looked remarkably warm on Sunday, as he peddled his favorite golf club on a nationally televised commercial. It was a sad episode for America's wealthiest entrepreneur. He had been reduced to a public-relations-conscious pitchman by the threat of political backlash from his unparalleled success.

Gates has good reason to pursue an image makeover on television. He'd had a bad week. Not only was he dragged in front of a Senate committee investigating Microsoft's industry dominance, but the Justice Department announced its intention to probe Gates' next-generation operating system, Windows 98. After 20 years of incredible success in the marketplace -- success that has occurred without any governmental participation -- Gates has been dragged into the political fray by countless frightened politicians and business rivals.

During the Senate hearings, Microsoft's adversaries bemoaned the rise of a new and powerful monopoly. But what really frightened them had little to do with the traditional role of a monopolist company, and far more to do with the revolutionary forces unleashed upon the marketplace by the rise of the software industry. Unfortunately for James Barksdale, head of Netscape Communications, and Scott McNealy, head of Sun Microsystems, these forces have put their companies on the losing side of history.

Microsoft benefited enormously from the creation of a mass consumer market for Intel-based personal computers in the early 1990s. As the predominant producer of operating system software for a brand new mass-market, Microsoft found itself in a position of incredible advantage. By focussing on consumer-oriented high-volume, low-cost products, Gates succeeded in establishing his operating system as the industry standard-even when far superior products were available.

While Gates was busy establishing his consumer empire, McNealy was thumbing his nose at the low profit margins to be made from PCs. Instead, McNealy dug himself into the niche market of small but high-power computers for the businesses. After his market began eroding with the introduction of higher-power Pentium systems, Sun panicked. Instead of battling Microsoft head-on by entering the consumer market, Sun sidestepped the issue by trying to make the operating system irrelevant with its new Java programming language. McNealy's failure to embrace the consumer market has proven disastrous.

The same phenomenon that fuels Microsoft's consumer success serves as an anchor for Sun's niche. While new software is expensive to develop, it costs virtually nothing to produce. This makes even low-cost, mass-market products extremely profitable because there are so many customers to help cover development costs. The extremely low production price of software makes it perfectly suited as a consumer item. The more copies of a product Microsoft sells, the more it can afford to cut its price and add new features. This has led to the amazing phenomenon of customer's actually complaining about "bloat" and "feature overload."

The software economy works best when a single company provides the lion's share of the common programs we use everyday. Hence, Microsoft succeeds in selling low-cost software in an incredibly profitable consumer market. Smaller competitors, like Netscape, are squeezed out of the mass-market. Niche market competitors, like Sun, are relegated to a secondary role in a small corner of the industry. To Sun and Netscape, this is a nightmare. To consumers, it is a dream.

Unfortunately, consumer contentment is of little concern to government regulators with regressive vision and a nineteenth-century antitrust legal framework. Government action to counter the natural dominance of a single general-purpose software producer would prove counterproductive. Counterproductive, however, is what the government does best. For the sake of consumers, let's hope Bill Gates campaign to show his softer side proves successful.

Related Column:
Sherman's Grudgematch, November 4, 1997