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Microsoft Corporation is the largest private-sector computer software producer in the world, headquartered in Redmond, Washington (a suburb of Seattle). The company was founded in 1975 by Bill Gates and Paul Allen to develop and sell BASIC interpreters.

Microsoft is notable for a number of reasons:

  • it is the largest software company in the world
  • 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 men in the world
  • it is admired and reviled in equal measure by its supporters and opponents

Microsoft products

Software

Microsoft produces a wide range of software products.

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 United States broadcasting company NBC 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, standing for "Microsoft Certified Systems Engineer". Whilst the MCSE certifies familiarity with Microsoft products, it is not, as its name suggests, an engineering qualification. Unkind people have been known to refer to MCSE as "must consult someone experienced".

Hardware

Although Microsoft is primarily a software company, it also produces 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.

History of Microsoft

Formed in 1975, Microsoft started to sell their BASIC interpreter at a time when hobbyists, who also wrote small BASIC interpreters, freely gave away the source code of their creations. However, because they were 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, they tried (unsuccessfully) to extend their grip on the home computer market by designing the MSX home computer standard.

In 1983, leveraging a prior contract with IBM to produce the IBM PC's BASIC interpreter, Microsoft contracted with IBM to provide an operating system for that machine as well. Microsoft then bought the rights to use Tim Patterson's QDOS (Quick and Dirty Operating System) on the PC and released it via IBM as Microsoft DOS. MS-DOS was very successful.

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, at 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 their 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 guys" in the computer software market, providing an inexpensive alternative to the expensive systems provided by the major mainframe and UNIX vendors, and admired for the large amounts of money they 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 claimed deliberate incompatibilities between MS-DOS and the Lotus 1-2-3 spreadsheet, produced by rival software company Lotus Development. By the 1990s, the perception that Microsoft had become the "bad guys" had increased substantially. They were frequently accused of leveraging their market dominance in desktop computing in order to try to exploit their customers unfairly.

In recent years, Microsoft has been accused of a series of ruthless business practices, some 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 being dismissive of 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 position: 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 has beneficial effects for them. First, it raises the potential for regulatory intervention. Second, the public relations benefits of being seen as an "underdog" may yield increased sales for Microsoft's competitors.

Monopoly or not, there is no doubt that:

  • In most microcomputer prefab software markets, Microsoft is a dominant player.
  • This dominance attracts widespread resentment.
  • This resentment is not restricted to its competitors.

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), 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 in the same country (see Microsoft antitrust case for more details).

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

Some critics of Microsoft have compared its business philosophy to feudalism, because of Microsoft's assertions that it is acting in the best interests of consumers by protecting them from the consequences of free choice in a free market.

Microsoft uses "embrace, extend, and extinguish" tactics to subvert open standards and free software.

Security

Microsoft has had continued security problems.

Some of Microsoft's products, particularly Outlook (a mail reader) and Internet Information Server (an HTTP server or web server), and its operating systems, have received much criticism from computer security experts because they have been victims of so many worms, viruses and other exploits. The company has defended its products by arguing that as the largest software company, their products are subject to more attacks, which is true in some cases but certainly not in the case of IIS, since it holds only a minority share. Security experts believe the problem is due to fundamental design decisions that were made in favor of usability rather than security. Some usability experts dispute this, saying Microsoft software is weak on that front too. For a contrarian view that illustrates Microsoft's usability advantages consult www.objectwatch.com and the book "Com+ and the Battle for the Middle Tier".

Brian Valentine, senior vice-president in charge of Windows development, is quoted by Computer Weekly as saying at the Microsoft Windows Server .net developer conference in Seattle on September 5, 2002: "I'm not proud. We really haven't done everything we could to protect our customers. Our products just aren't engineered for security."

On January 24 2003 the corporation declared security to be their number one priority, just a day before the SQL slammer worm, exploiting a hole in Microsoft's SQL Server product, slowed down the internet.

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 federal 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.

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

To be written:


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.

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.

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 when software can outlive the companies that made 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).

In a 10-Q quarterly filing in 2003, Microsoft disclosed that it may be forced to reduce its prices based on open-source competition. [1]

The future

With a $40G cash pile, it is unlikely that Microsoft will lose its position as a major player in the computer market, no matter what the outcome of the antitrust suit.

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 instant messaging competitors (such as AOL) by bundling its own products with Windows.

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 practives.

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


Linux and open source software represents the greatest threat to Microsoft's domination of the computer software market. 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.

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's 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).

Microsoft .NET initiative

The .NET initiative is a major company-wide effort by Microsoft that 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).
  • Provide a more consistent development platform for all Windows applications (see Common Language Infrastructure).


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, 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 Palladium initiative

Microsoft has now launched the Palladium operating system initiative. 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.

There is speculation that Microsoft may be using .NET and Longhorn as a way of dumping the Windows operating system. Microsoft has retired its flagship operating system before, by retiring MS-DOS in favour 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.

Misc notes to be re-integrated with the article

Microsoft also owns a small portion of Apple, having invested $400 million in the company in 1997. Since then, every new Macintosh ships with Internet Explorer as the default web browser. There is the possibility of this changing with Apple Computer's new 'Safari' browser.


August 5, 2002: Microsoft has announced that it is to make some concessions towards the proposed final settlement of its antitrust case ahead of the judge's verdict. However, these "concessions" have been widely criticised as inadequate or even as a deliberately attempt to create an impression of compliance without providing useful information.


A relevant, critical novel is by Douglas Coupland, called Microserfs.

October 10, 2002: Microsoft has reacted to the sale of low-cost PCs based on the Linux operating system by stating 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.

November, 2002: Microsoft's quarterly 10-Q filing to the Securities 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. See SEC filing and news.com article

A legal action won by Timeline Inc. vs Microsoft, disproving the theory that Microsoft customers are protected against patent claims by third parties - The Register, February 20, 2003, [2]

See also

Microsoft's own sites

News reports on Microsoft

Critiques of Microsoft's business practices

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