steve-ballmer-580That’s Paul Krugman’s claim today in the NYT. He argues that when Steve Ballmer took over, Microsoft was secure in its core business on the basis of operating system — applications network externalities that raised switching costs for consumers. That led to Microsoft being blind to new developments, such as the smart phone, and hence failing to grow new product lines. Krugman impressively traces this back to the 14th century as a problem of incumbency but I think really sidesteps the depth of the problem to glibly place the same issues on Apple and Google.

Now I don’t normally comment too much on Microsoft strategy as I have worked for them and consulted for them. But since Krugman is a bigger splash than usual I’ll wade in here to try and disentangle all this.

First of all, Microsoft’s core business has grown with the PC market. That means growth has been slower than in the past because the PC became a standard thing with high penetration. But we have to be cautious in comparing this to Apple. For one, Apple is now the most profitable PC maker in the world. But in so doing, it benefits from being integrated and by virtue of that the accounting is going to look better for it. We would have to add to margins for Windows and PC makers to work out the same comparison — looking at company books isn’t enough. Even so, if Apple doesn’t have the scale of Microsoft it is plausible to think that this is because Apple does not choose to have Microsoft’s scale (it prices higher and does better with short-run profits).

On that score, going back to the initial Apple vs PC battle, Apple priced its products too high. But if you read the biography of Steve Jobs, that wasn’t Steve Jobs’ choice. He saw the longer-term issue and wanted to price Macs, in particular, lower. He lost that argument but I think history suggests that Apple would have been better off sacrificing short-term profits at that time.

Second, arguably, the reason Microsoft’s value hasn’t grown is that the new product areas it has entered into (with the exception of X-box but this is a relatively small part of its business) didn’t work out. Lots of cost and not enough revenue to show for it. If Microsoft had been “more blind” it would arguably be a more valuable company now. The hard issue is to work out if it rolled the dice correctly or not.

Third, which brings us to smart phones. Krugman is disingenuous when he lays this blindness at the feet of Microsoft. In its core business, it is hard to think that Microsoft has lost much because of smart phones (although tablets may turn out to be another matter but that is really hard to tell). Instead, Krugman laments that it lost that market opportunity that came to others in the same area. But if anyone was blind it was surely the other device makers. Basically, they have all lost out to new entrants — Apple, Samsung, HTC etc. That was their core business. In many respects, they took too long to approach Microsoft for help or adopt Google’s free opportunity. You can’t hold this up as Microsoft’s big failing when those who were actually in the same market were worse.

Fourth, Apple were, however, in Microsoft’s business and got the opportunity. Krugman argues it is because Apple was lost and so saw opportunity. However, at the time it developed the iPhone, Apple was resurgent. It had restored the Mac business and created a new one, the iPod. This was precisely the time that it should have been blind to opportunities (and given the resources devoted to mobile phone developments it was hard to see that as opportunity) and it should have had traditional difficulties in managing new opportunities when it was trying to keep focus on its growth areas (a la Clay Christensen). So Krugman’s narrative isn’t right. He likes to discount the entrepreneur in this story but it is really hard to make that case. The “without Steve Jobs” preface just looms too large. Failing Ballmer for not being Jobs isn’t a great critique as it turns out neither was anyone else.

Fifth, but why couldn’t Microsoft mobilise. At least on the enterprise side, it surely had huge opportunity to sweep in after Apple. And here I think is where the Krugman, incumbency story comes to the fore. And the story isn’t one of philosophy as much as one of organisation. Microsoft was organized on traditional product lines: Windows, Office, Services, X-Box. Each one had a product with its own revenues and its own costs. The problem is that it is precisely because of network effects that the importance of platforms that this organisational form was outmoded.

Instead, Microsoft needed to break apart these devisions and recognise that revenues flowed to particular areas that were not specifically tied to the traditional costs of those areas. If you want to get into search because that will complement Windows and Office, you have to recognise that costs incurred in search will increase revenues in Windows and Office. Not surprisingly, product divisional managers resist new costs but some form of pass through is required to make decisions for the good of company profits rather than products. Microsoft has now conducted this re-organisation and it was Ballmer’s last significant act to get that done. Put simply, we can’t really judge him until we see how that works out even if the narrative becomes that it came later than it ought to have.

Finally, back to the issue of whether Apple today is the Microsoft of yore. Krugman in trying to understand the iPhone relies on network effects (people have apps and are locked in) but apps are so cheap it is hard to imagine this is anything remotely the same as that in the past. Krugman also considers Apple high priced but that is very recent. Before the followers came in, Apple’s iPhone was significant precisely because it was so cheap compared to other proposed smart phones. The same is true of the iPad.

Indeed, that gives us the current narrative. Competitors can use price to compete with Apple (which they couldn’t do with the old Microsoft). Apple, therefore, has to keep quality high and consumers satisfied to survive. That is precisely why the share market has such a hard time with it than with say Amazon that arguably relies more on switching costs to keep its customers. The important point is that that is what we want in the tech world. We want competition on the basis of price and quality and we want it to be tough. In many respects, therefore, we have the free from monopoly cost market that we tried to get in the 1990s and should be happy for it.

3 Responses to Is Microsoft of the 1990s similar to Apple of today?

  1. […] Is Microsoft of the 1990s similar to Apple of today? – Digitopoly […]

  2. timm0 says:

    You demonstrate that you miss Krugman’s point throughout much of this article.

    Apple created a new distribution method for entertainment and introduced compelling devices and software to exploit it. They are still the king of that market space. And they parlayed that into massive financial success.

    Microsoft was busily tending cracks in its monopoly of OS and productivity software when Apple exploded. Microsoft, fearing the degradation of their core revenue-producing software, has tried – mostly in vain – to slow the ebbing tide toward non-microsoft logo’d tools. And it’s this sad, desperate, late pursuit whose roots are in Balmer’s infamous denigration of the iPhone (which was cited by Krugman).

    Clearly, Krugman’s main point is that Microsoft’s leadership felt those “toys” were nothing but a dead end, which was the main link to the ancient Arabian philosopher who noted that successful conquerors become soft and vulnerable to outside threats over time. Yet you miss this somehow during your post, even when you note with a vague ‘gotchya!’ tone that Apple was swimming in money before the iPhone got rolling. That point is totally irrelevant to Krugman’s.

    Apple is on top of the world right now with legions of religiously fanatical worshippers. That is really the only thing you can use to refute Krugman’s point. Apple doesn’t need to fear the same forces that Microsoft has been stung by. Microsoft’s users have never been blindly in love with their products and criticism has flowed over the years. However, Apple’s faithful would buy a box of human waste if it had an Apple logo on it – and they’d line up for days to be the first ones to wallow in that filth. This bizarre, blind devotion to a company is a very unusual situation that’s difficult to draw direct comparisons over. It’s hard for me to see how much more they can screw over their customers before the customers defect to other solutions… seems like the sky’s the limit at this point… and Microsoft never really had it quite that good.

  3. Flaffer says:

    I think timm0 has it right, especially in the point about Apple not being in the same boat as Microsoft, but I do not agree that fealty to Apple is as strong as he makes out: the number of phones and ipads that are sold FAR outstrip the number of Apple Fanatics out there (though they help to grow the numbers). They have broken into the mainstream markets that Windows has in spades, and they did it through the back door. I also think their breaking into the mainstream has raised all Apple boats in that their computer sales (laptops especially) have grown. Sure, they have not taken over the computer market by all means, but it is gravy when your operational costs and premium pricing made you money with much less market share, allowing Apple to grow their bottom lines. One of the first things Jobs did was trim operational costs while concentrating the brains on the smaller number of product lines.

    Apple can blow it. They can lose that edge and lose out as the markets for smart phones and pads becomes more diversified (we see this already). They become Microsoft, they will die and very quickly. Microsoft’s staying power is more because of their monopoly on the desktop computing market then their business savvy.

    And just a stylistic note for Joshua: I think you need to proofread a bit better. There are many grammatical mistakes and awkward sentences.

Leave a Reply

%d bloggers like this: