Economists define monopoly as the ability to exact greater profits by raising price. But the price of Windows, on a comparable features basis, has plummeted. Many features now a standard part of Windows — modem support, fax utilities, CD-ROM drivers — originally cost more than all of Windows costs today.
Indeed, National Economic Research Associates reports that Windows 98 users will pay less than 20% of what they paid in 1989 for software with fewer features. So if price increases are the mark of a monopoly, Microsoft doesn’t qualify.
What about Microsoft’s purported 85-90 percent share of the PC operating system market? Doesn’t that, by itself, signify monopoly power? The answer, unequivocally, is no. First, roughly 1 customer in 8 doesn’t use Microsoft. Alternatives are avail — MacOS, Unix, OS/2 and Linux to name a few. Apple alone, with 13 million users, has reported substantial recent gains in market share.
Second, it’s not just existing but potential competition that matters. Network computing, digital TVs and other consumer electronics devices may radically alter the scope, nature and function of the operating system. The Netscape / America On-Line deal by itself changed the competitive landscape overnight.
Third, Microsoft must compete against itself. Even if the company were to get out of the business this afternoon, all of its installed systems would continue to function indefinitely. So in order to sell a new product like Windows 98, Microsoft must convince its customers to pay more money, learn a new system and run the risk that other software applications will be incompatible. That imposes a powerful discipline on Microsoft’s behavior. It is utterly inconceivable that the company would alienate its 300 million existing consumers.
In short, the major competition for Windows 98 is Windows 95, which itself captured only one-third of the market share. Two-thirds of PC users still run DOS or older versions of Windows or non-Microsoft products.
If Microsoft had such enormous market power, how come it could “coerce” only 33% of its users to upgrade to its flagship product?
This article originally appeared in USA Today on January 14, 1999.