Domination dies hard in technology markets

Are the digital oligopolists becoming New-Age monopolists? The question is receiving more attention as the likes of Google, Amazon and Facebook grow by leaps and bounds.

Digital utopians have a ready answer, though: technology is brutally competitive. Unimagined innovations sweep the chess pieces off the board with regularity. So the market will quickly take care of any company that tries to use its dominance to stifle innovation or harm consumers.

Regulators — all dopey 20th century types, of course — should stick to things they understand.

Exhibit one in the utopians’ argument is Microsoft. The US government victory in the 1999 antitrust case against the company did little to reduce Microsoft’s dominant position in personal computer software, on this view. What changed things is the rise of mobile computing, for which Microsoft was strategically and technologically ill suited. The most important computer operating systems today? Not Microsoft’s Windows but Google’s Android and Apple’s iOS.

There is truth in this sunny picture. It is certainly true that Microsoft’s efforts to get into mobile were abysmal. The value-destructive $7bn acquisition of Nokia was the sad final chapter. It followed an attempt to use its PC revenue model for mobile, charging phone manufacturers for its mobile operating system at a time when Google was giving Android away.

Technology is brutally competitive and unimagined innovations sweep the chess pieces off the board with regularity

One should not forget, however, what an immensely strong competitive position Microsoft has retained, despite the defeat in court and its mishandling of mobile. In the latest fiscal year, revenue from Windows software grew slightly and totalled about $18bn. This is a fifth higher than a decade ago. Since the 1999 ruling, sales at the company as a whole have quadrupled.

The threat that Microsoft posed, it must be said, was not that Windows would remain the dominant PC operating system. It was that dominance would be exported to other markets, killing competition there.

For example, one wonders if, had Microsoft been allowed to continue packaging Windows exclusively with its own products, it would have crushed Google’s development in internet search.

Armed with its Windows monopoly, Microsoft was able to establish strong positions in two adjacent markets, productivity software on PCs (with Office) and data centres.

Under Satya Nadella, it is now well on the way to taking the next step. It is shifting Office to the cloud, putting paid to the idea that Google docs would outflank it, and building Azure, a service for customers who would rather buy a cloud service as an alternative to expanding their data centres. The server and Azure units together have generated $27bn in sales this year, 28 per cent of the company’s total.

It is not, of course, easy to tell how much of Microsoft’s success in Office and the cloud were possible because of the launching platform provided by dominance in PCs. And it is impossible to tell what businesses and ideas would have flourished if Microsoft had not been able to shift into these areas so decisively. Microsoft certainly is not dominant in cloud computing.

The point is simply that, even when antitrust regulators act decisively and dominant companies make serious strategic errors, technology markets are very kind indeed to big incumbents.

The lesson of Microsoft is not that technological innovation makes anti-competitive behaviour self-defeating. It is that regulators must keep their eyes wide open.

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