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June 6, 2000

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Subject:  MS; A Monopoly by Default
Author:  TonyHan

I've owned shares in MSFT for a while and have enjoyed a "good" ride. I'm also a user of many of its products, and I also make a living developing software that run on them. Naturally, I admit to having a generally positive view of the company and its products.

It saddens me greatly to see the course of events that have brought us to seriously entertain the prospect of breaking up this great American corporation. I have read many of the postings on this board, and I see that the two camps have a fundamentally incompatible view of this situation.

I've got an insight about this that I'd like to share. In my opinion, MSFT does have a monopoly position in a narrow sense. There is simply no point in trying to deny this. In addition, I also concede that MSFT have tried some "heavy-handed" tactics in the past toward other companies. Based on these two "findings", it is very natural for some to conclude that MSFT is an out of control monopolist that harms consumers, and therefore must be broken up into two pieces.

Having conceded that MSFT is a monopoly that misbehaved towards other companies, I still do not agree that a break up is justified. I think that a remedy must result in improving the situation for consumers. My thesis here is that a break up would not help consumers because MSFT is a monopoly by default, and its break up would only increase costs for consumers and create chaos in the market place. To see the reasons for this requires a review of how the computer marketplace became this way.

Until the 1980's all business computer companies were vertically integrated. They made the chips, many of the hardware components, the operating system software, and many of the application software. They put all of these together into an integrated system of proprietary inter-dependent products, and sold them for very high margins. IBM, Honeywell, Unisys, HP, and Digital are all good examples of this model.

In the early 1980's MSFT represented a new business model that radically lowered the cost basis by commoditizing the hardware. MSFT specialized in software, Intel supplied the chips, and PC compatible hardware companies specialized in the hardware. Since computers running on MSFT OS were largely software compatible with each other, the PC hardware companies lost much of their ability to create a proprietary software architecture and this forced them to be highly cost efficient.

Responding to these events, the traditional business computer companies ceded this "low-end" market to the PC companies. Their less efficient cost structure simply did not allow them to compete adequately in the desktop market. In addition, the PC hardware was not yet competitive in the traditional business computer market that companies such as IBM, Honeywell, and Digital were selling into.

I would like to note here that at any time, these companies could have transformed themselves to compete head-on with the challenge posed by MSFT and its allies. The reason for the failure of these computer companies to take on MSFT was that their business model was fundamentally incompatible with the low margin, high volume businesses MSFT's hardware allies had become.

Even IBM could not force the marketplace to follow its aborted attempt at re-establishing a more proprietary high margin/high cost computer marketplace for itself. I'm referring to the PS/2 line of computers of the late '80 with their proprietary MicroChannel bus. I hope this brings back some interesting memories -- because it was MSFT that forced IBM to back down and the result was a continuation of cost reduction at a massive scale in the PC marketplace.

Along the time when MSFT got going, two new computer companies emerged: Sun and Apple. In many ways, Sun and Apple are newer but the same as IBM and Digital. They are both vertically integrated, high margin, and high cost. As long as they offered superior technology, they could afford to stay above the fray. But even with them, they essentially ceded the "low-end" desktop market to MSFT and its hardware allies. They refused to adapt their cost structure to be as efficient as the PC hardware companies, and so they never made a serious attempt to attack this market.

Compared to Sun, Apple offered the least amount of technological advantage over the PC. So when the gap finally narrowed with the introduction of Windows 3.0, Apple started to suffer massive problems. The result has been that Apple remains only as a marginal niche player in the desktop market.

Now it is Sun's turn. I know many of you scoff at the thought that MSFT/Intel/Compaq/Dell products could challenge Sun in its home turf - the corporate data center, but that day is here.

Since about April of this year, for the first time in the history of "PC architecture", a MSFT/Intel/Compaq based system holds the Transaction Processing Council "TPC-C" Performance Benchmark title in both absolute numbers and in transactions per dollar numbers. The MSFT/Intel/Compaq based system performed 50% more transactions than the next best system at about 60% of the cost -- resulting in a ludicrously cheap dollar per transaction figure. Sun's best numbers come in at 5th place running Oracle and Solaris on a Sun Enterprise 6500 Cluster with 96 CPUs.

So what was this incredible Compaq box? It was a Compaq Proliant 8500 cluster with 96 CPUs running Windows 2000 and SQL Server 2000. This certainly isn't your father's "PC"! This solution was less expensive than all other none Compaq entries among the next 9 best performers -- all running some flavor of UNIX and Oracle, with all but one running on non-Intel CPUs.

I know some of you will say TPC-C can be distorted and doesn't reflect real-world performance etc. etc., but both Sun and Oracle have been using them to berate MSFT/Intel based computers as inadequate for the corporate data center. So, it would be rather ironic for the proponents of these systems to suddenly distance themselves from these same performance tests. By the way there were no Linux based system in the top 10. They are simply not scalable, because Linux doesn't properly leverage multiple CPU's at the Kernel level YET.

I mention all of this to point out that when MSFT/Intel based systems could not threaten high end products made by IBM and Sun, we never heard much complaint about a MSFT monopoly. But when Sun and Scott McNealy finally saw the inevitability of the disappearance of the performance gap between their over-priced systems and those based on MSFT/Intel architecture a few years ago, they began to get very desperate.

Now that MSFT/Intel based Compaq's and Dell's are finally getting a foothold in the corporate data center, we're seeing the massive counter-action from the entrenched players. If the government succeeds in breaking up MSFT, rather than benefiting the consumer, it will only serve to protect and preserve the highly inefficient, high cost business models of the likes of IBM and Sun. That is the big picture and what is really at stake.

According to this analysis, MSFT got its monopoly position by default, because the better established players refused to compete with MSFT head-on; by becoming more efficient, by lowering their inflated prices, and by competing at both the high and the low end of the business computer marketplace.

When this all started, MSFT was the underdog, and it was collapsing prices as MSFT/Intel based systems reached new performance heights and entered previously "high end" market segments. The first to go were the minicomputer makers. What? You don't remember them? Honeywell, Unisys, and Digital? As makers of proprietary minicomputers, they are gone! They could not withstand the efficiencies created by MSFT, and we became the greatest beneficiaries of this revolution.

This process hasn't ended. Now it is the turn of the "enterprise" class computer makers. It's time for us to get the performance of a Sun Ultra 10000 for 10% of its price! But wait! The U.S. government, in its wisdom has decided that this will irreparably harm the public.

Many of you dislike MSFT for its "heavy-handed" tactics, and for its dominant market position. The ultimate irony is that you are attacking the wrong oppressor. The real oppressors are the Suns and IBMs of this world that sell ludicrously expensive systems and pass on their bloated cost structure to the rest of us. It is MSFT that is the upstart and the catalyst of a revolution that brought powerful computers to the rest of us. That is what I find so ironic and tragic in all of this.

Perhaps, a court of higher authority will see the same irony and put a stop to this foolishness.

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