Is Microsoft a monopoly in the operating system market? In the textbook definition, no. Does Microsoft have market power in this market? Most certainly, yes. From a recent Wall Street Journal article comes an article about the challenges facing Microsoft as it faces increasingly stiff competition.
The news got even worse: Longhorn was irredeemable because Microsoft engineers were building it just as they had always built software. Throughout its history, Microsoft had let thousands of programmers each produce their own piece of computer code, then stitched it together into one sprawling program. Now, Mr. Allchin argued, the jig was up. Microsoft needed to start over.
Mr. Gates resisted at first, pushing for Mr. Allchin's group to take more time until everything worked. Over the next few months, Mr. Allchin and his deputies would also face protests from programmers who complained he was trying to impose bureaucracy and rob Microsoft of its creativity.
Ultimately, Mr. Allchin's warning proved cathartic and led to what he and others call a transformation in Microsoft's most important product. A key reason: the growing threat from rivals such as Google Inc., Apple Computer Inc. and makers of the free Linux operating system. In recent years these companies have been dashing out some software innovations faster than Microsoft. Google has grown particularly effective at introducing new programs such as email and instant messaging over the Internet, watching how they perform and regularly replacing them with improved versions.
Microsoft's Windows can't entirely replicate that approach, since the software is by its nature a massive program overseeing all of a computer's functions. But Microsoft is now racing to move in that direction: developing a solid core for Windows onto which new features can be added one by one over time.
Sometimes (oftentimes?) when a company gets too big for its market's britches or, like airlines such as Northwest, gets too entrenched in its ways, this creates opportunities for smaller companies to come in and provide value to customers. Sometimes that value comes in the form of a new product that people want. Sometimes that value comes in more efficient ways to do things.
That was just the opposite of how Microsoft's new rivals worked. Google and others developed test versions of software and shipped them over the Internet. The best of the programs from rivals were like Lego blocks -- they had a single function and were designed to be connected onto a larger whole. Google and even Microsoft's own MSN online unit could quickly respond to changes in the way people used their PCs and the Web by adding incremental improvements.
In April 2004, Google, seemingly out of nowhere, introduced its Gmail service, competing with Microsoft's Hotmail program. Tiny Internet browser maker Mozilla Foundation beat Microsoft to market with browser features planned for Longhorn.
Most alarming: By July 2004, it became clear that Google was working on a "desktop search" tool for finding information on a PC -- offering some of the features that Mr. Gates's WinFS program was supposed to bring to Longhorn. Google, previously focused exclusively on the Internet, was now stepping onto Microsoft's turf as the creator of software inside the PC.
The existence of market power and the profits that generates for frms that have it provides incentives for new firms to try and enter the market. To the extent that barriers to entry are low, over time, that market power will get eroded.