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Commentary

The Truth About Marketplace Battles


     
 Print 

In the affairs of nations, it’s the winners that get to write the history books. But in the affairs of companies, at least high-tech ones, the opposite seems to happen, and with perverse frequency. That’s the view of two economists, Stan J. Liebowitz and Stephen E. Margolis, who believe our understanding of Bill Gates and Associates. has been largely shaped by his company’s carping competitors. They set out to rectify things in Winners, Losers and Microsoft.

Messrs. Liebowitz and Margolis are best-known for debunking the oft-told tale of the “Qwerty” keyboard, the typewriter standard that’s named for the top row of letters. The story has it that Qwerty is an ergonomic disaster that persists in the face of the allegedly superior “Dvorak” alternative, which is said to have a finger-friendlier arrangement of keys. Supposedly, Qwerty enjoys a self-perpetuating popularity; it stays popular only because, as the first key arrangement, it is the one everyone is used to.

But the two economists did what no one who repeated the story seems to have ever done—i.e., a little digging. They discovered that the claims of superiority for the Dvorak keyboard originated with one August Dvorak, inventor of same. More disinterested observers consistently found not much difference in ergonomic efficiency between the two key maps.

The professors had been drawn to this controversy in the first place because, during the 1980s, the Qwerty tale had been embraced by a group of economists who used it to argue, in effect, that Adam Smith was wrong—that markets can’t be trusted. Instead, said the Qwertyists, we can, with alarming ease, get “locked in” to inferior technologies that achieve their dominance because of some long-forgotten historical accident. The policy implications of the Qwerty idea were obvious, and included a much lower bar to government intervention in the economy in the form of antitrust suits.

Qwerty was one of a triad of examples usually put forward as briefs for the “lock in” case; the others were the VHS-Beta and DOS-Macintosh sagas. Messrs. Liebowitz and Margolis took them on as well. They found that VHS beat the technically similar Beta for a very good reason: It routinely had a much longer recording time. And in the case of computers, the two agree that while the Macintosh may have been the more “elegant” bit of software, elegance is hardly the only element of marketplace success; if it were, we would all have Sub-Zero refrigerators in our kitchens. There are also such matters as price, speed, compatibility and general availability.

Not surprisingly, the work of Messrs. Liebowitz and Margolis came to the attention of a friend-bereft Microsoft, which in the past few years has hired them for a couple of consulting gigs. That shouldn’t be held against them; the pair has been working this turf since 1990—a year, by the way, when Apple made 70% more in annual profits than did Microsoft. They wrote this book not to serve a paymaster but instead to affect an important policy debate.

As the two economists see it, the Justice Department is using Son of Qwerty logic in its pursuit of Microsoft. That approach, popular in Silicon Valley, goes something like this: Microsoft takes advantage of its market power to cram crummy products down our throats, using the money it makes in the process to grow even more powerful and thereby expand its catalog of crumb. The professors checked out this story with the same technique they used in the Qwerty case: by spending a lot of time in the library. They read every software product review from the past 15 years they could find and came up with a different conclusion. Microsoft, their evidence says, wins market battles (word processors, spreadsheets, browsers) when its products are better, and loses such battles (financial software, on-line services, palm-sized computers) when they aren’t.

The two authors don’t argue with the idea that Microsoft dominates computing, but they maintain that Microsoft’s position is that of a “serial monopolist”: The dynamics of the technology industry tend to produce a single big winner at any one time. But far from being locked in, that winner is constantly defending his perch in a high-stakes game of king of the hill. Messrs. Liebowitz and Margolis have a message to Microsoft’s rivals: Stop whining and start writing code.

It should be said that though Justice Department economists have indeed advanced the Qwerty-like lock-in case, there is more to their courtroom pleadings. Regulators have charged Microsoft with behaving badly in quite untheoretical ways, notably by bullying computer makers into accepting Windows on Microsoft’s terms. Microsoft says bunk, and it’s a factual issue the courts will decide.

Still, the two authors have gone a long way toward reshaping the Microsoft debate. Henceforth, any judges, economists, pundits or journalists who discuss Microsoft or technology lock-in—much less repeat the crusty old Qwerty tale—without first dealing with the Liebowitz-Margolis critique should have their wrists soundly slapped by, let’s say, an invisible hand.


Reprinted with permission of The Wall Street Journal 1999 Dow Jones & Company, Inc. All rights reserved.






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