Breaking the Microsoft monopoly

As the Bee Gee’s say, I feel I’m going back to Massachusetts. Let me explain.

Back when we led the world in economic reform we deregulated everything in sight. But we actually increased regulation where firms enjoyed “natural monopolies”.

An example is Telstra’s “local loop” - those copper wires to your house. Telstra enjoys a natural monopoly there because, owning the wires, it can always connect houses to the network at less cost than competitors. So firms can’t compete with Telstra elsewhere - for instance in Internet telephony - without access to those wires. So “National Competition Policy” requires Telstra to grant competitors access at reasonable prices.

Funny thing is, the most monopolistic of all businesses escaped our gaze. It still does. Consider this. Microsoft’s Windows operating system and its office suite (comprising Word, Excel and other programs) enjoy higher market shares in their niches and vastly higher profit margins than Telstra in telecommunications.

Microsoft is a new kind of natural monopoly. Software competes on things like features, reliability and, since Apple brought us the graphical user interface, ease of use. But we need something else that bears little direct relation to product quality.

Enter “network effects”.

Developers need confidence that an operating system they write for provides a good market for the programs they write. That creates a spiral - virtuous from Microsoft’s perspective, vicious for everyone else.

Once Microsoft was able to combine its dominance of operating systems with the essential elements of Apple’s user-friendly graphical user interface (which Apple itself bought and developed from Xerox), it became unstoppable - at least until Massachusetts stepped in that is.

Now almost everyone buys Windows because almost all programs are written for it, and almost all programs are written for it because almost everyone has it.

While this “network effect” occurs at the level of software development, another one arises when people use software to collaborate or communicate. You know how much use it is getting a file that won’t open properly because it’s in an incompatible standard?

So on the logic of the National Competition Policy we should impose an access regime on Microsoft. As with utilities, it should only apply to the natural monopoly aspects of the business. With programs like Word, that’s mainly the “standards” in which files are written - like .DOC in Word and .XLS in Excel.

Now while programmers have been sufficiently ingenious to produce programs that read and write .DOC and .XLS files, they remain “closed” or “proprietary standards”. That means that competitors don’t have full access to Microsoft’s programming or the “source code” that defines the standard. So competing programs produce small glitches which preserve Microsoft’s advantage.

Microsoft could “open” its proprietary standard by releasing the programming or “source code” that specifies it. But that would undermine its monopoly. Then you could download word processing programs that compete with Microsoft safe in the knowledge that if someone e-mailed you a Word file you could read, modify, save and return it rather than fight your way through compatibility bugs or even the blue screen of death.

“Open source” programs offer a remarkable alternative that’s giving Microsoft the willies. Their source code is available to users enabling them to continually improve the programs.

The leading open source office suite is “OpenOffice.org” and it’s your regular nightmare for Microsoft. It’s backed by software giant Sun Microsystems and it’s free!

I’m amazed that no country has imposed an “access regime” on Microsoft requiring it to open its file standards. But maybe no one needs to now. The US State of Massachusetts has just determined that open standards are an “overriding imperative” of democracy itself.

Refusing to have its public documents subject to proprietary restrictions on access and “locked up ... perhaps unreadable in the future”, it will now save all public documents in “open standards” such as the newly created open standard “OpenDocument” (ODF).

And guess which office suite supports ODF? OpenOffice.org, in a major upgrade it’s just released. See why Bill Gates has recently been seen on long walks dolefully humming those old Bee Gees lines “The lights all went out in Massachusetts”?

If Microsoft Word supports the new open standard, reading and writing ODF files, then ODF could quickly replace .DOC as the most widely used format - dramatically reducing the “network effect” and with it much of Microsoft’s monopoly.

But if Microsoft keeps refusing to support ODF, Massachusetts will use competing software that does. European governments like Norway have announced similar policies. Each one is no great loss for Microsoft in itself. But as the Internet showed, once open standards gain “critical mass” what user in their right mind would want to be locked into a closed standard - unable to interact with others?

Australia’s federal and state governments should jump on the bandwagon. So should schools and businesses wanting to do their little bit to make the world a better place. They could well do themselves a favour in the process. They’d certainly save on software purchases. And they could hasten the day when we wax nostalgic “Remember the old days when you had to pay for word processing software”.

But whether they do or not, I’m steering clear of Microsoft as an investment.