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Microsoft Corporation is the largest private sector computer software producer in the world. Its headquarters are in Redmond, Washington, a suburb of Seattle. The company was founded in Albuquerque, New Mexico in 1975 by Bill Gates and Paul Allen to develop and sell BASIC interpreters under the company name Micro-soft.

Microsoft is notable for a number of reasons:

  • it is one of the most dramatic examples of network externality in economics
  • it exercises a de-facto monopoly in PC operating systems and office software
  • it has made its founders among the richest people in the world
  • it has the largest market capitalization of any publicly-traded company
  • it is subject to many accusations of anti-competitive practices.

Microsoft products

Software

Microsoft produces a wide range of software products.

  • Internet Explorer is the company's web browser. It is the most widely used web browser in the world, and has been included as the default browser with all versions of Windows since Windows 95. It is also available for the Apple Macintosh. Microsoft invested $150 million in Apple in 1997, in return for which Apple dropped a patent dispute with Microsoft and made Internet Explorer the default web browser on every Apple Macintosh. In 2003, Microsoft discontinued development of IE for Mac, possibly due to competition from Apple Computer's new 'Safari' browser.
  • Microsoft develops and publishes video games for its XBox video game console. In addition, all "third party" XBox video game publishers, such as Electronic Arts and Activision, pay Microsoft a royalty for each game software disc manufactured.

Microsoft "ecosystems"

Microsoft has sought to build "ecosystems" around its products, allowing the creation of network externalities which increase the value of its brand and products.

Network Services

In the mid-1990s, Microsoft began to expand its product line into the networked computer world. It launched its online service MSN (Microsoft Network) on August 24, 1995, which was a direct competitor to AOL. MSN became an umbrella service for all of Microsoft's online services.

In 1996, Microsoft and NBC, an American broadcasting network, created MSNBC, a combined 24-hour news television channel and online news service.

At the end of 1997, Microsoft acquired Hotmail, the original and most popular webmail service. It was rebranded MSN Hotmail and was used as a platform to boost Passport, a universal login service.

MSN Messenger, an instant messaging client, was introduced in 1999 to compete with the popular AOL Instant Messenger (AIM).

Training

Microsoft has created a number of training initiatives, with the intention of creating a pool of low-cost employees with skills relating partly or exclusively to Microsoft products. The best known of these is the MCSE qualification, which stands for "Microsoft Certified Systems Engineer". While the MCSE certifies familiarity with Microsoft products, it is not, as its name suggests, an engineering qualification.

Some people have been known to pejoratively deconstruct "MCSE" as "must consult someone experienced". Even those with MCSEs often agree that the course only covers very basic elements of the systems in the MCSE syllabus, and that the experience required to properly support those systems must still be acquired in the usual manner (i.e. actually doing the job).

Hardware

Although Microsoft is primarily a software company, they also produce several computer hardware products, often to support specific software business strategies.

  • An early example is the Microsoft Mouse, which encouraged the use of the Windows operating system's graphical user interface (GUI). Using a GUI without a mouse was awkward, and hence the proliferation of mice would speed the widespread adoption of Windows. Current models sport scrolling wheels, extra buttons, LED motion detectors and other features.
  • Microsoft also sells the Sidewinder line of joysticks and gamepads.
  • When Microsoft released the XBox in late 2001, the company entered the multi-billion dollar game console market previously dominated by Sony and Nintendo.

History of Microsoft

Formed in 1975, Microsoft (an acronym for MICROcomputer SOFTware) started to sell its BASIC interpreter at a time when hobbyists, who also wrote small BASIC interpreters, freely gave away the source code of their creations. However, because its was one of the few commercial vendors of BASIC interpreters, many home computer manufacturers chose Microsoft BASIC for their systems. As the popularity of Microsoft's BASIC grew, manufacturers adopted Microsoft BASIC's syntax and other features to maintain compatibility with existing Microsoft BASIC implementations. Because of this feedback loop, Microsoft BASIC became a de facto standard, and the company cornered the market. Later, it tried (unsuccessfully) to extend their grip on the home computer market by designing the MSX home computer standard.

In late 1980, International Business Machines needed an operating system for its new home computer, the IBM PC. Microsoft licensed an existing operating system called 86-DOS, written by Tim Patterson for Seattle Computer Products' line of Intel 8086-based hobbyist computers, and contracted with IBM to provide one of three alternative operating systems for the PC. Microsoft subsequently purchased all rights to 86-DOS, renamed it MS-DOS (for Microsoft Disk Operating System), and modified the operating system for IBM's 8088-based hardware. It was released as IBM PC-DOS 1.0 with the introduction of the PC in 1981, and, because it was smaller, cheaper, and much more readily available than the other system software, quickly became the default system for the IBM PC. In contracting with IBM, however, Microsoft had retained the rights to license the software to other computer vendors as MS-DOS. The flood of IBM PC clones in the early 1980s, from companies including Texas Instruments, Compaq, and Seiko Epson, made Microsoft's operating system ubiquitous in that segment of the industry.

Software running on PC hardware was not necessarily technically better than the mainframe software that it replaced, but it had two advantages that mainframe software could not beat: it offered more freedom to the end-user. And it offered this at much lower cost. Microsoft's success rode on the PC boom.

Microsoft developed a wide variety of software products including:

Some of these products were successful, and some were not. A pattern emerged: although early revisions of Microsoft software were often seen as buggy, feature-poor, and inferior to its competitors, later revisions improved rapidly and the software grew in popularity. By the turn of the millennium, many of Microsoft's software products dominated the market in their respective categories.

Microsoft has devoted huge amounts of effort to marketing and usability engineering in developing their products, as well as to the integration of their software products with one another in an attempt to create a seamless and consistent computing environment for the user.

Microsoft has attempted to leverage the powerful Windows brand into many other markets, with products such as Windows CE for PDAs and their "Windows powered" Smartphone products.

Public perceptions

For a long time, Microsoft was widely seen as the "good guy" in the computer software market, providing an inexpensive alternative to the expensive systems provided by the major mainframe and UNIX vendors, and it was admired for the large amounts of money it made in doing so.

However, even in the early days, Microsoft was accused of following the maxim "DOS isn't done until Lotus won't run" — a reference to alleged deliberate incompatibilities between MS-DOS and the Lotus 1-2-3 spreadsheet, produced by a rival software company Lotus Development. By the 1990s, the perception that Microsoft had become the "bad guy" had increased substantially. It was frequently accused of leveraging its market dominance in desktop computing in order to try to exploit its customers unfairly.

In recent years, Microsoft has been accused of, and some courts have found that Microsoft engaged in, sharp business practices of questionable legality.

The monopoly question

Microsoft's Windows product has an effective monopoly in the desktop operating systems market. Those who make this claim point out that, among other things, almost every PC sold has a copy of Microsoft Windows pre-installed.

Some observers claim that the characterization of Microsoft as a monopoly leaves its competitors in a quandary:

  • On the one hand, competitors reject this characterisation as negating their own position. In a monopolized market, there exists only one provider of a product or service. Therefore, to competitors, calling Microsoft a monopoly is a defeatist strategy: it denies either their own existence, or their capacity to survive and to compete.
  • On the other hand, competitors favor the characterization of Microsoft as a monopoly because such a characterization benefits them. First, it raises the potential for regulatory intervention. Second, the public relations benefits of being seen as an "underdog" may increase sales.

Monopoly or not, there is no doubt that:

  • In most mass-market desktop software application markets, Microsoft is a dominant player.
  • This dominance attracts widespread resentment.
  • This resentment is not restricted to its competitors.

On 20 August 2003, China's government introduced a policy whereby all PRC government ministries must buy only Chinese-produced software at the next upgrade cycle. This policy is intended to break the dominance of Microsoft on desktop computers, by removing Microsoft's Windows operating system and Office productivity suite from hundreds of thousands of Chinese government computers.

Abuse of Microsoft's monopoly status

Critics of Microsoft have accused it of using its monopoly in desktop operating system to try to leverage market share in other sectors of the computer market, such as web browsers (Internet Explorer), server operating systems (Windows NT), office software suites (Microsoft Office), and streaming media (Windows Media).

After its bundling of the Internet Explorer web browser into its Windows operating system, Microsoft acquired an extremely large market share in the browser market. Partly as a result of this dominance, Microsoft was convicted by a USA federal court for abusing its monopoly in the desktop operating systems market (see Microsoft antitrust case for more details).

Microsoft has in all of these cases depicted its actions as its response to customer demand.

Critics also decry Microsoft's "embrace and extend" strategy of adding proprietary features to open, established standards, thereby using its market dominance to gain de facto ownership of standards "extended" in this way. Some refer to this tactic as "embrace, extend, and extinguish".

Security

By 2002, several of Microsoft's networking- and Internet-related products had become the subject of intense criticism following several high-profile security lapses. Malicious programmers increasingly exploited weaknesses in Microsoft software by creating and distributing worms, viruses, and Trojan horses designed to spread across the Internet and waste computing resources or destroy data. These exploits frequently targeted Microsoft's Outlook and Outlook Express e-mail programs, Internet Information Server (IIS) Web server, and SQL database server software. Microsoft contends that its dominant position in several Internet-related software categories naturally subjects the company's products to more attacks, because the products themselves are so widespread. Critics counter that these attacks also target Microsoft products that do not hold commanding market shares, and suggest that this is because Microsoft products in general are fundamentally less secure than those of the company's competitors.

In several cases, Microsoft's practice of designing and configuring software to make it easier to use and less intimidating to novices has facilitated the spread of these viruses and worms. For example, Windows operating systems released since 1995 hide file extensions by default, which can help malicious programmers trick unwitting e-mail recipients into opening dangerous file attachments that masquerade as harmless files with innocuous extensions. (Recent versions of Outlook and Outlook Express disable dangerous file types upon receipt, so that users cannot open them.) Critics charge that this focus on usability and automation has come at the expense of important security considerations.

In January 2002, Gates announced the Trustworthy Computing initiative, which he described as a long-term, companywide initiative to find and fix security and privacy vulnerabilities in all of Microsoft's products. The initiative prompted the company to reevaluate and redesign several of its practices and processes, and has significantly delayed the release of Windows Server 2003, the successor to the Windows 2000 Server family of operating systems. Reaction to the Trustworthy Computing initiative has been mixed, with observers lauding Microsoft's increased focus on security but charging that the company still has a lot of work to do.

Microsoft political lobbying

Microsoft has reacted to these legal threats and it negative public perception by intensive political lobbying and spending millions of dollars on political donations. According to the Center for Responsive Politics website at opensecrets.org, Microsoft has made donations to 43% of Democratic and 57% of Republican national candidates in the last federal election cycle.

Advantages of Microsoft software

Most of the advantages of Microsoft software arise from its ubiquity, allowing the user to benefit from so-called network effects. For example, the large installed base of Microsoft Office makes MS Office files the de-facto standard word-processor format, making a copy of MS Office essential for most business users.

Microsoft software is also designed to be easy to configure, allowing companies to hire lower-paid non-expert systems administrators. Microsoft supporters argue that this results in a decreased "total cost of ownership".

Microsoft software also represents a "safe" option for IT managers purchasing software systems, in that the ubiquity of Microsoft software allows them to claim that they are following accepted best practices. This is a particularly attractive option for IT managers whose technical knowledge is minimal.

Disadvantages of Microsoft software

Microsoft software makes heavy use of software re-use. Whilst this is very efficient for rapid software development, it leads to complex interdependencies between software packages. This can mean, for example, that crashing the Microsoft web browser can also crash the operating system GUI.

The same interdependencies mean that the resources of most Microsoft software can be used from most other Microsoft software. This means that most programs can run other programs, even where this should not be possible. For example, macros embedded in documents or HTML in E-mail can run programs, allowing an attacker to take over the user's computer. Microsoft has a security stance of "permitted unless forbidden", which is hard to change, as much Microsoft software relies on this policy.

This is demonstrated in the proliferation of worm and virus programs that attack Microsoft software.

As a result, the advantage mentioned above of being able to hire less highly trained, and therefore cheaper, systems administrators is offset by two factors:

  • greater unreliability means you will have to hire more of them
  • Microsoft shops are more liable to security breaches, because reducing computer insecurity requires highly trained systems administrators, regardless of the operating system in use.

Microsoft's critics describe the greater costs of running a Microsoft installation as "total costs of non-ownership" as they point out that the users of Microsoft software actually do not own the software they run: something which is crucial to Microsoft's business model.

Microsoft anticompetitive practices

Microsoft has had several lawsuits over alleged anticompetitive practices.

Microsoft earnings inflation

Factors entirely apart from technology standards could ultimately undo Microsoft's monopoly. Accounting standards, in question for some years in the United States, do not require American publicly traded corporations to declare the expected costs of stock options on their earnings bottom line. Microsoft has taken unique advantage of this, to build a solid record of earnings increases even as its stock option payouts have ballooned: The Economist reported that 1998 earnings of US$5B had been dwarfed by stock option payouts of US$23B, and that the company had actually lost US$18B — none of which appeared on its formal books or earnings reports. In July 2003, Microsoft announced the end of their stock option program, replacing it with stock grants. Options already granted will still vest, however most remaining options are underwater due to the ecconomic downturn

Accounting standards changes in the wake of the collapse of Enron stock and of Arthur Andersen may therefore have a serious impact on Microsoft's standing.

Microsoft vs. Free Software

Microsoft acknowledges that one major potential competitor is free software, as exemplified by Linux. Microsoft has targeted free software and open source software with its Embrace, extend and extinguish strategy as revealed in the Halloween documents.

In establishing its monopoly over desktop computing, Microsoft has risked losing the advantages of low cost and greater freedom that drove the PC boom and created its success. It is hard to see how Microsoft can compete with free software on purchase price alone. Many users who believe that Microsoft does not value their freedom of choice have found the prospect of free and open standards offered by free software more appealing.

Traditional Microsoft tactics of buying the competition, or of spreading FUD about the longevity of competing products, have not been effective against free software, where the product cannot be bought and controlled, and where software can outlive the companies that first created it.

Microsoft CEO Steve Ballmer has stated that Linux is a "tough competitive force... It's non-traditional, it's free and it's cheap. We have to educate people why what they pay for [our offerings] is more than offset by the value we deliver. We used to be the cheap guys. We were cheaper than Novell, cheaper than Oracle. We can't do that with this one." (Reported in CRN.com, June 17, 2002).

Ballmer addressed Fusion 2002, a Microsoft partner conference, saying: "We have prided ourselves on always being the cheapest guy on the block — we were going to be higher volume and lower priced than anybody else out there, whether it was Novell, Lotus or anybody else. One issue we have now, a unique competitor, is Linux. We haven't figured out how to be lower priced than Linux. For us as a company, we're going through a whole new world of thinking." (Reported in VARbusiness, July 15 2002).

Microsoft's initial reaction to the sale of low-cost PCs based on the Linux operating system was to declare that it will not reduce the price of its Windows operating system. Some observers have stated that this refusal to compete on price is characteristic monopoly behavior. However, in a 10-Q quarterly filing in 2003, Microsoft nonetheless disclosed that it may be forced to reduce its prices because of open-source competition. [1]

The future

With $50 billion in cash reserves, it is unlikely that Microsoft will lose its position as a major player in the computer market anytime soon.

November, 2002: Microsoft's quarterly 10-Q filing to the Securities and Exchange Commission revealed that most of its businesses were losing money, while two had enormous profit margins: almost 86% for its "client" division that sells Windows. Microsoft is likely to focus on these sectors of the market. (See theSEC filing and the news.com article)

Microsoft is working to leverage its current monopoly in desktop operating systems into new markets such as media players, server software, handheld devices, web services and video games, with varying degrees of success.

In particular, it has succeeded in displacing the Netscape web browser, and is working on displacing media player competitors (such as Real Networks and QuickTime) and attempting to do so with instant messaging competitors (such as AOL) by bundling its own products with Windows.

It is also looking to move towards a "subscription model" for licensing. Microsoft's current revenue scheme depends on users buying upgrades on a periodical basis, but this is becoming increasingly difficult, as many users fail to see the benefits of upgrades and continue to use older packages, such as Windows 95. Microsoft would like to switch to a subscription basis, whereby users pay an annual fee for software. The success of this strategy partly depends on the proliferation of broadband Internet access, as Microsoft will need build online licence verifying mechanisms into its programs.

At the same time, Microsoft is engaging in a major public relations and branding exercise to try to combat the negative PR associated with the recent accusations regarding its business practices.

Microsoft is now positioning PCs running Windows XP Media Center Edition as a home entertainment hub.

Linux and open source software represents one of the greatest threats to Microsoft's domination of the computer software market. MIcrosoft seems to deny it, their Chief Financial Officer John Connors was quoted in December 2002 as saying in a private webcast that "In terms of growing the company ... it would be difficult if Linux were to become a phenomenon on the desktop". (Reported by Reuters, December 6 2002). But recently, Microsoft has ranked Linux as its second-greatest threat, right below its own errors when creating software. However, Microsoft's bundling, licensing and marketing policies, combined with its policy of closed software and proprietary standards, currently prevent any other system from threatening its position so easily.

Based on recent Microsoft management comments, it appears that Microsoft is attempting to move up-market, positioning its products and services as high-value, rather than low-cost. Steve Ballmer was quoted as saying in 2002 "We are actually having to learn how to say, 'We may have a high price on this one, but look at the additional value and how that value actually leads to a lower cost of ownership despite the fact that our price may be higher,'" (Reported in VARbusiness, July 15 2002).

This retreat from the high-volume low-cost market represents a strategic change for Microsoft.

Microsoft .NET initiative

The .NET initiative is a major company-wide effort by Microsoft. It has several aspects including:

  • Easing the development of applications that use the Internet
  • Alleviating problems related to managing and installing multiple versions of complex software packages on the same system (see DLL-hell).
  • Providing a more consistent development platform for all Windows applications (see Common Language Infrastructure [CLI]).

It will achieve this by using a proprietary extension of XML to link several different devices together to be controlled quickly and easily by other computers. Critics view .NET as yet another Microsoft attempt to leverage its operating system monopoly into a similar monopoly on Internet applications.

Furthermore, in regard to the name of the initiative and its components, critics also point out that not only are the terms ".net" and "CLI" in use to mean other things (Microsoft used CLI to stand for Common Language Infrastructure), but that Microsoft regularly overloads generic terms (e.g. "Windows", "Word", "DNS") to refer to its proprietary technology, and then attempts to control them using trademark law and patent law.

Microsoft Next-Generation Secure Computing Base initiative

Microsoft has now launched the Next-Generation Secure Computing Base, recently renamed from Palladium operating system initiative. This effort is also called Trusted Computing. Microsoft presents this as their solution to computer insecurity. Opponents have characterised it as another exercise in entrenching and extending their monopoly, effectively allowing Microsoft to control all uses of PC technology. In particular, they have accused Microsoft of using it as a way to combat the emergence of free software.


Microsoft to dump Windows?

Microsoft has a number of new initiatives: .NET, Palladium and the "Longhorn" operating system (Longhorn is the next home Windows release).

There is speculation that Microsoft may be using .NET and Longhorn as a way of dumping the Windows operating system. Microsoft has retired a flagship operating system before, by retiring MS-DOS in favor of Windows. It is argued that doing this will allow Microsoft to avoid the consequences of any antitrust settlement, by being able to claim that its new operating system is an entirely new product, and not subject to any regulation that may be applied to its Windows operating system.

It has also been speculated that .NET is Microsoft's strategic response to Linux. The reasoning is that by creating a new higher-level cross-platform software platform, Microsoft can move its core platform higher up the software stack, enabling it to replace the old Win32 platform running on the Windows kernel with a new system which can run on Windows, Linux or any other operating system.


See also


Microsoft's own sites

News reports on Microsoft

Critiques of Microsoft's business practice

To do:

  • (To be written) Microsoft anticompetitive practices
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