Threats to Bill Gates and the internet

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Can Microsoft maintain its dominance of the world computer market? Is there a long term future for the Internet unless it falls into the hands of a small group of firms?

As Bill Gates tries to come to terms with the Internet, we see one of the most unusual confrontations in business history. A standard that is owned by a single company meets a network that is owned by nobody at all.

Networks and standards are common across many businesses, especially those related to communications. The National Grid, sold this week to private investors, was a visionary product of the 1930’s which enabled any electricity user in England and Wales to be supplied from any power station in the same territory. BT’s network allows any caller in Britain to be connected to any other, and a link between its network and that of France Telecom allows any caller in Britain to be connected to anyone in France. So we have road networks, rail networks, networks of gas and oil pipelines.

Networks rarely thrive, or even come into existence, if they have more than a small number of owners. Networks depend on co-ordination, and on agreed network protocols – protocols which are based both on agreed technical specifications and on accepted codes of behaviour. As the number of participants increases, the problems of holding all of them together multiply rapidly, and the apparent opportunities to gain competitive advantage by drifting away from the crowd becomes irresistible.

So there is no coach network to speak; there are just too many operators. There is an airline network of sorts, but it works most effectively with, ‘hub and spoke’ forms of operation, when a single airline controls most of the flights to or from one destination. And the still unresolved problem of rail privatisation is how to reconcile the advantages of network co-ordination under single ownership with the competitive benefits of allowing anyone who wants to run trains. The fewer the owners, the more effective is the network.

And this is not only true of technical networks. Social networks generally have the same characteristics. Without a tight central organisation to impose a common culture, they tend to fall apart.

Standards are different. Standards typically exist where one product must interact with another. A train needs a track. A broadcaster signal requires a broadcast receiver. An individual who holds a credit card needs to meet a merchant who accepts it. Because both networks and standards require co-ordination, many networks have standards built into them. Most railways operate on a 4’81/2″ gauge. We drive on the right (or left) hand side of the road. Air traffic controllers everywhere talk English (of a kind) to each other.

These examples illustrate a key commercial difference between a network and a standard. Networks which become dominant are owned by a small number of people: standards which become dominant are not owned by anybody at all. Standards become dominant through wide adoption and an important reason why they are widely adopted is that they are freely available. If Henry Ford had been able to patent driving on the right-hand side of the road, or if users of English had to pay a licence fee to the authors of the King James Bible, it is likely that we would all drive on the left and speak French.

So even those standards that are proprietary are widely used because the proprietor does not restrict or charge for their use. Take Philips’ compact cassette, for example. Or notice how Visa has now outstripped American Express because any card issuer can buy in cheaply to the Visa club. The classic battle between open and closed standards was fought in the video cassette market. JVC’s open licensing policy for its VHS standard meant that there were soon many more users of VHS than of Sony’s proprietary Betamax. So there was far more software for VHS. VHS increased its lead still further, and ultimately the Betamax standard died.

Which brings us to the two exceptions from which we began. Microsoft dominates operating systems for personal computers, through MS-DOS and Windows. This is almost the only example, and certainly by far the most profitable example of a standard which is controlled by an individual company. (The next most successful one is Nintendo’s control of games). Imagine owning exclusive rights to English, or to calculus, or being able to charge everyone who followed your advice to drive on the left-hand side of the road. You would be rich beyond the dreams of avarice. And Bill Gates is.

It was a curious chapter of accidents that brought this about. IBM established a standard in the personal computer market, as JVC had done for video recorders. And as for JVC, it happened because the standard was an open one, and probably would not have happened had the standard not been an open one. After all, despite Apple’s outstanding innovations, their insistence on keeping their systems to themselves has restricted their products to enthusiasts. But royalties on the IBM operating system accrued to Microsoft. It was as though the British government and its army and navy had promoted the use of English around the world, but negligently left a monopoly of English dictionaries in the hands of Oxford University Press.

And the Internet is almost the only example, and by far the most successful example, of a network which no one owns and controls. There was a different chapter of accidents here. The US government and its agencies created the basis for the network, and then simply abdicated control. It was as though BT had built a national telephone system, and then vanished from the scene.

So have the rules of the game changed? Can Microsoft maintain its dominance of the world computer market? Is there a long term future for the Internet unless it falls into the hands of a small group of firms? The answer to both questions is probably not. The development of new information technologies is changing much of our lives. But it does not change the basic laws of business and economics.

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