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To: Gerald R. Lampton who wrote (19774)	5/28/1998 11:41:00 AM
From: Thure Meyer	Read Replies (1) \| Respond to of 24154

"In his reply to your post, Regimond points out that Microsoft has created software to facilitate switching from the Novell/Lotus/Word Perfect networks to its own products. As this shows, competing companies can reduce the switching costs and, essentially, monetize them in the cost of their products." Its clear that neither you nor Reginald have ever had to do this on a large scale or you wouldn't blithely refer to The Mind of Reg(TM). Changing a core package like the spreadsheet tool drags with it a rat-tail of costs ranging from dealing with archived files, training and support, integrating the product on the desktop, changing the currently active spreadsheets, making sure your customers have the same release as you so that you can convert them, ensuring that people who work at home are upgraded, etc. Time and the risk of error is more important than money in this case. Reginald has no idea of what he is talking about. Try to convert back to Lotus 123 and use it along with your PowerPoint and Word (not to speak of your e-mail, databases, and so on). Then imagine 1000's of people having to do the same thing. Just because Reginald says something doesn't make it so. "This supports the view that path dependency and network effects are really manifestations of efficiency. Once it becomes sufficiently cost-effective, i.e., efficient, for consumers to switch to a new network or path, they will. In Bork World, these types of "barriers" are not a legitimate concern of antitrust enforcement." I think we need to step back and talk about efficiency. Path dependence and then lock-in through network externalities are feedback mechanisms that may or may not converge to an efficient setup. At least not in the sense of the most efficient or best. I don't think path dependence refers necessarily to a company and certainly does not imply "natural" monopoly in the sense of "sheer efficiency". In my mind the problem occurs with the concept of efficiency. In a world of well defined static products, e.g. the stock market. Its pretty easy to discuss price discovery and efficient markets (although even there some quibbles exist). In other realms it is simply too loose. Take the Microsoft case, where software, chip manufacturing, communications and media industry are intertwined. Here, we would first have to figure out the utility value of the products before we can understand if the market for them is efficient. We would also have to quantize the idea of new product development, standardization effects and so on. What does that lead up to? 1 - Network externalities and path dependence are not a kind of efficiency, they are the mechanisms that lead to a lock-in condition. This lock-in has allowed MS to be some kind of monopoly on the desktop. 2 - However, true efficiency of the marketplace in which Microsoft competes is not determinable because the marketplace itself is under discussion. Therefore there is no straight ahead way of determining if MS is a "natural" monopoly. I suggest we leave the question of efficiency behind us and address the more concrete issue of whether or not artificial barriers exist. Then propose the converse; since artificial barriers were created, MS is a garden variety monopoly. How can this be done? We need to show the existence of barriers. Barriers can only exist at boundaries, so the DOJ will have to spend some time delineating them. 1 - Part of the discussion will be about the difference between an OS and application. I.e., a semantical argument which deals with defining the market place or "industry". This means being able to defining the individual products and services. With software that can be difficult since there is no physical boundary, and any partitioning of the product set can be argued in principle. 2 - A second argument has to be about distribution channels and the barriers to entry on the Windows screen (icons) as well as pressure on the distributors themselves. This will delineate Pepsi in a Coke 6-pack question. Once this structure is in place we can return to the issue of efficiency. If Windows is defined as different from an Internet browser then clearly Netscape was "more efficient" initially because MS had no product. At that point MS started erecting "artificial" barriers to entry, which leads to the conclusion that MS is not a natural monopoly. After all if MS were a natural monopoly they wouldn't have to choke off any air supply. Naturally Microsoft wants to compete in the largest possible market and will resist any attempt at defining this space. Having achieved a lock on the PC desktop with Windows they would like to define all new Microsoft products as part of Windows, with which they hope to extend that lock-in to other sectors like the Internet. The DOJ has to insist industry standard vocabulary which exists already (OS, application, etc). They cannot let Microsoft escape this issue by muddying the waters and applying their own non-standard language (a typical MS approach). To summarize: - Path dependence -> Network externalities -> Lock-in -> MS is a monopoly on the desktop - Boundary delineation -> artificial barriers -> MS is not a natural monopoly If you accept that, then you will accept that we don't have an efficient software industry. Thure

To: Gerald R. Lampton who wrote (19774)	5/28/1998 12:29:00 PM
From: Reginald Middleton	Read Replies (2) \| Respond to of 24154

<Its clear that neither you nor Reginald have ever had to do this on a large scale or you wouldn't blithely refer to The Mind of Reg(TM). Changing a core package like the spreadsheet tool drags with it a rat-tail of costs ranging from dealing with archived files, training and support, integrating the product on the desktop, changing the currently active spreadsheets, making sure your customers have the same release as you so that you can convert them, ensuring that people who work at home are upgraded, etc. Time and the risk of error is more important than money in this case.> I would like to participate in the market efficiencies discussion, but before I do, let's get some facts straight. Thure implies that the switching cost of productivity apps are overwhelming while I explicitly state that it is not necessarily so if the company with the minority market share takes care to minimize risk and costs of conversion. I gave examples on several platforms, and historical instances where Microsoft succeeded in going from o% share to 93% in short amount of time. Whose point appears more valid here? Just three years ago, WordPerfect was the world's best-selling word processor, with more than half the market. Lotus 1-2-3, the venerable spreadsheet program, had a similar market share. Dataquest, a market research firm, said that Microsoft Office now has 93 percent of the world market for the collections of business software known as suites. The other 7 percent is divided between two other suites built around former industry heavyweights. Lotus SmartSuite has 4 percent of the market, and Corel WordPerfect Suite has 3 percent. The problem with the theory behind the DOJ's case, as well as Thure's comments is just that - they are theory, and totally ignore the reality of the situation. Here are several explicit cases of where an underdog in productivy apps captured majority share by mitigating the risks of conversion via technical utilities and lower prices. These examples do not include majority market shareholder Harvard Graphics ignomious defeat by PowerPoint, Defacto standard Ashton-Tate's dbase by Access, among others. Now, as apps become more complex (a tactical measure on the part of MSFT to not only offer more productivity but to also make it more difficult to offer conversion utilities and lower costs) such as the intorduction of Visual Basic for Applications custom coding, switching costs become higher. Thus, the price of a higher level of technology. It is the higher level of sophistication that MSFT has introduced to the suite that makes it more difficult to switch back to Lotus after swithcing to Excel, for instance the 10,000 ines of code and formula in my app would be a nightmare to recode in Lotus script, assuming it could be done. Despite this fact, it is still quite possible for another vendor to market a competing app on from a technical perspective. VBA is freely licensed to third parties who are actually encouraged to integrate it into thier apps, thereby eliinating the need to recode much of MSFT's end users proprietary technology. Excel and Word files are read and written accurately by many third party applcations. Specialty add-in libraries are available for several products. <Reginald has no idea of what he is talking about. Try to convert back to Lotus 123 and use it along with your PowerPoint and Word (not to speak of your e-mail, databases, and so on). Then imagine 1000's of people having to do the same thing. Just because Reginald says something doesn't make it so.> I have no problem converting files to Lotus. Logic dictates that if you were to convert your spreadsheet to Lotus, you would convert your entire suite to Lotus, hence the PowerPoint and Word example is unrealistic.