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Date:      Mon, 15 Nov 1999 23:31:27 -0800
From:      "David Schwartz" <davids@webmaster.com>
To:        "Joseph Scott" <joseph.scott@owp.csus.edu>
Cc:        <walton@nordicrecords.com>, <freebsd-chat@FreeBSD.ORG>
Subject:   RE: Judge: "Gates Was Main Culprit"
Message-ID:  <000001bf3004$979c2b60$021d85d1@youwant.to>
In-Reply-To: <383102B9.8CD2AE12@owp.csus.edu>

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> 	I'm not really big on beating this into the ground, but I thought I
> might point out a  few things here.
>
> David Schwartz wrote:
> >
> >         Right, because if they don't maximize revenue, they
> won't be able to do the
> > research needed to keep Windows competitive. The software market is
> > sufficiently dynamic that Windows has to become almost an entirely new
> > product every two years to maintain its status as market leader.
>
> 	To put it simply, I don't agree that MS has made Windows an entirely
> new product every two years.  From everything that I've gathered
> Win95->Win98 was mostly large number of patches+IE.

	I could not disagree more. Comparing NT4.0 with no service packs to NT4.0
with SP6 is like comparing two completely different products. Microsoft
gives these enhancements away for free because it very much fears that
market changes will make Windows obsolete.

> So from 1995 to now
> ( 1999, almost 2000 ) MS has been able to maintain, at the very least,
> it's leadership with the same product ( with some patches ).

	Nonsense. You're just glossing over all the changes that you don't see.
Windows 95 on 1999 hardware bares almost no resemblance to Windows 98 on
1999 hardware. There are almost no similarities. What you don't see are all
the major OS changes that are hidden in the patches -- like DirectX 7 and
AGP drivers.

> The time
> span MS takes to introduce Windows as a new product would be something
> more on the order of 6.5 years, give or take.

	I would say it's closer to 3, actually. I think you're missing how
fundamentally some of the patches for 95, 98, and NT change the product.

> >         Actually, they Microsoft's pricing is consistent with a
> firm that needs to
> > spend massive amounts on research and development to keep its products
> > competitive. Yes, they maximize revenue (as every firm does)
> primarily to
> > allow them to maintain Window's competitiveness. This is far
> different from
> > the type of price raising that is monopoly harm.
>
> >         Would does this "could have charged" mean? They could
> have given it away
> > for free.
> >
>
> 	To take a page from my business management class, setting
> the price of
> the product has little and/or nothing to do with it's cost.  I won't go
> into the details of how or why this is true, it took the instructor
> months to convince us :-)  But in the end I believe this is true.

	Right. However the decision to make the product or not in the first place
has a lot to do with its cost. Smart companies set revenue maximizing
prices.

> 	This nice thing in a monopoly area, the best price is the
> most you can
> charge until the marginal return for increased price becomes useless.
> There are some pricing constraints, even for monopolies, but they are
> very different than "normal" competitive markets.

	That's not true at all. The pricing constraints on Microsoft are different
from "normal" competitive markets (if by that you mean the classic pricing
models you see in Economics books), but that's for a huge variety of reasons
that have little to nothing to do with whether it's a monopoly or not.

	If we assume that Microsoft's products stink and that the only reason
people buy them is to be compatible with everything else, then we have to
acknowledge that this compatability has value to consumers. In other words,
if this argument is right, then a monopoly in operating systems would be a
beneficial outcome. So far from correcting some 'market problem', the
government would actually be undoing market efficiency.

	Of course, I don't believe that's true. I believe there is some value in
using the same operating system as someone else, but there's also some value
in using a superior operating system. This benefit allows Microsoft to
charge more for Windows now than it could have to the first person who
bought it.

	But there are hundreds of ways for smart companies to solve this problem.
After all, we do all have telephones and FAX machines, even though the first
person who bought them could do nothing with them. Microsoft's competitors
know this, and many of them give their products away for free (or nearly
free) precisely because they know that this is a good way to build the
market share needed to reach critical mass.

> >         I'm not sure I believe that. Personally, I think
> Microsoft set the price
> > far above the revenue-maximizing price. Heck, the more people who use
> > Windows the more people they can sell Microsoft office too, right?
>
> 	I would tend to think that this statement supports my claim, in a
> monopoly area you set you price that will get the most people to buy
> it.  More or less, it's never quite that easy.

	Well, $1 would get more people to buy Windows 98 than the price Microsoft
chose. When Microsoft considers maximizing their revenue, they have to take
a lot of factors into account that traditional companies may not have to.
They have to consider how long they can retain their position in the market.
High prices will reduce that time. Lower prices may increase it.

	I assure you, Microsoft is extremely concerned with how _long_ Windows will
holds its position. Traditional monopolies are not supposed to be making
business decisions based upon how long they can retain their monopoly
status. That's more what successful competitors do.

> >         Of course, every company sets its prices at the
> revenue-maximizing price.
> > If Microsoft didn't do that, their management should be fired.
> The biggest
> > balancing factor for Microsoft is that the more expensive
> Windows is, the
> > more incentive there is to market and develop alternatives to it.
>
> 	The difference is that in a monopoly what determines the
> revenue-maximizing price is different than in competitive markets.

	Not at all. It's how high you can set the price without chasing customers
away and how low you can afford to sell it to help build critical mass. It's
the same as telephones, FAX machines, and even cars.

> >         To the extent that Windows is a monopoly, it is a
> temporary one. Much as
> > vinyl records were a monopoly for awhile, soon replaced by
> cassette tapes,
> > now replaced by CDs, and probably soon to be replaced by some
> other format.
> > Microsoft will do everything possible to maximize the amount of time its
> > operating systems matter, but ultimately, there will be nothing
> it can do --
> > it will have to invent a new product or lose its market share.
>
> 	I think this is an apples vs. oranges argument.  Both the
> software and
> music industries are very complex, and this makes it sound just a wee
> too simple.  I'm not going to  list problems with this argument because
> I think that they are fairly obvious.

	I'm not going to make it rigorous here. I'll defer to economists such as
Liebowitz and Margolis who have made this argument sufficently rigorous that
I find it convincing.

> >         This is not the type of monopoly that the anti-trust
> laws were meant to
> > prevent. They were supposed to stop a static monopoly, where a
> company can
> > charge whatever it wants and sell whatever it wants. Microsoft can't do
> > that.
>
> 	I don't think that history would support this statement.

	So you're saying that Microsoft is a run-of-the-mill monopoly case?

	DS



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