Why Microsoft Wins
Also published in Investors Business Daily
Build a better mousetrap and the world will beat a path to your door. Thats as true today as in the age of horse and buggies. So what about Microsoft?
The Justice Department says the company did it by, in part, not playing fair in the markets it dominates.
But a new book says Microsoft earned its success the old-fashioned way: It built better products. And that holds lessons for capitalism in the information age.
The book is, "Winners, Losers & Microsoft." The authors are economists Stan J. Liebowitz and Stephen E. Margolis.
They challenge some widely held beliefs.
For instance, they say Microsofts dominance of certain software markets isnt proof of an illegal monopoly. They say Microsoft dominates only when it has the better product. (Microsofts opponents note that the books publisher has received some funding from the company.)
How do Liebowitz and Margolis determine if a Microsoft product is better? Simple, they looked at software reviews in computer magazines.
Take the market for spreadsheets.
The first spreadsheet program was VisiCalc in the early 1980s. Despite being there first, VisiCalc didnt last long. It was quickly displaced by Lotus 1-2-3. Why? Lotus was better, Liebowitz and Margolis found.
Lotus dominated the spreadsheet market for almost a decade, but its dominance didnt last.
It was eventually displaced by Microsofts Excel.
Again, Margolis and Liebowitz found that Microsoft, eventually, had the better product.
Over a 10-year period starting in 1984, Excel won 28 reviews or user polls as best spreadsheet. Lotus 1-2-3 had a single win. And in that time Excels share of the market surged 80 percentage points.
The same thing happened with word process.
WorldPerfect was on the market earlier, and it gained a dominant position because of its quality. But it failed to keep that edge.
In a seven-year period, Microsofts Word for Windows won 16 product reviews to WordPerfects 2. And in that time, Word for Windows share of the market jumped 65 points.
What about the product that made Microsoft, the DOS operating system? Wasnt it inferior to the Macintosh system?
No, the authors say.
Macs graphic interface needs more power to run than the text-based DOS. That means Mac users had to pay more for their computers -- a lot more back in the 1980s, when computing power wasnt as cheap. And it took more time for programs to run.
Mac users could see italics and boldface on screen, unlike DOS users. But they couldnt print those things unless they bought printers that cost $1,000, or more than standard laser printers.
Sure, the graphic interface made it easier to learn many programs more easily. But most office computers are used for just one or two functions.
When computers became powerful enough, Microsoft put its own graphic operating system on the market. Windows quickly displaced DOS. If Apple had licensed the Mac system to other manufacturers or if someone else had put out a graphic system, it might be the industry standard today, not Windows.
The fact is, the authors write, where Microsoft doesnt have the best product, it doesnt dominate. Look at the Microsoft Network or Microsoft Money.
And Microsoft has kept cutting prices, even after achieving dominance. From 1988 to 1995, the firm had products in 10 of the 15 big consumer software categories. In the five where it didnt have a product, prices fell by 15%. In the 10 where it did, prices fell 55%.
The idea that customers can get locked in to inferior technology is wrong, the authors say. When a product is best, it will dominate.
But if some firm puts out a better one, people can and will switch. The history of Microsoft proves that.
Microsoft is on top, Margolis and Liebowitz assert, because its earned it. And itll stay on top only if it keeps hustling.