Vantage point

Thursday, December 22, 2005

Starting with a little quiz question

Identify the "X" and "Y" in this passage -

X is a technology company. It is huge in terms of revenues, and can pump in a lot of money into development of technology. Using all this money, it has come up with a lot of advancements. X has an 80% market share. It has invested a lot and has a lot of technologies in different spheres. So obviously, to gain an advantage over its competition, it bundles these offerings together and offers them to consumers at a cheaper price than the competition. So if you had to buy technology A from Company AA and technology B from company BB, it would cost you a lot more than if you bought A and B from X. X thus is doing very well. It invested a lot of money in research and is reaping the benefits.

X's major success lay in technology Y. X did not invent Y, but it was largely because of X's innovation, research and smart marketing that the technology Y became so popular and grew so much. X thus holds a huge marketshare in the technology Y.

X's competitors have tried to steal away market share, but have failed. So they start saying that X is ruthless and anti-competitive. They raise the din of "anti-trust" laws and go to the government. The government agrees and starts anti-trust litigation. It says that X is too big and too successful and is thus stifling competition. In other words, X has reached the critical mass beyond which it is not possible for anyone else, no matter how much they innovate or research, to challenge X. Hence, in the interests of competition, X should be broken up into smaller companies, and not be allowed to bundle its different products, especially with the technology Y.

The press loves it. It's always great to see a giant under attack. The people also love it. The general opinion is that X is misusing its size and its technology, and there was no conceivable way its domination could reduce. Only government action, such as forced break-up of the company, would work. SO everyone is in favour of breaking X up.

These anti-trust lawsuits continue for years and years....

So...identify X and Y.

I don't know what answers you'll give, but I'll tell you what I had in mind when I wrote the above passage.

Y - Computers

Isn't it weird how history is being repeated?

Suppose I say

X - Microsoft
Y - Operating Systems

wouldn't the paragraph still make sense?

IBM invested a lot of money in the development of technology. In fact it is said IBM invested more money into the development of computing than the US Government did in the Moon Mission. Naturally, it got handsome returns. It developed great technology, and dominated the market, having an almost 80% marketshare.

But it was hounded by the government, motivated by its competitors accusing it of "anti-competitive" measures. Actually the measures were very competitive. But the government, the press and the competition created a huge bogey out of IBM's size and success, wanting to break the company up. The "Big Evil IBM" spiel was whipped up so much that people thought that the supercomputer in 2001:A Space Odyssey being named HAL was a left-handed tribute to the domination of IBM(since HAL is what you get by taking the next letters of IBM). Everyone wanted to stop it from bundling its products together or pricing them aggressively. IBM was being punished for being successful.

So what happened?

After IBM was hounded for over a decade, the anti-trust lawsuit was dismissed in 1982 "without merit". It had largely to do with the fact that rivals and new companies were beginning to catch up, then-young-upstarts Microsoft being one of them. IBM suddenly didn't dominate the market so much, because when others came up with brilliant ideas, others too found financial backing easily in the market. Pretty soon IBM was just one of the players.

In fact things went wrong after 1982. IBM started losing grip over the business. Technology was changing, and somehow IBM wasn't responding the way it should. It made a few bad decisions, and found itself facing ironically, a situation where everyone says the only way it could survive was by breaking up into smaller companies. From being a company which should have been broken up for the competition's surival, to being a company which should be broken up for its own survival.

This is how rapidly the free market can change.

Well, Louis Gerstner proved the world wrong, and showed that IBM could actually flourish without breaking up. IBM survives as a very successful company, though not as dominant as the 60s and 70s. Who is responsible for this increased competition? The US Government and its regulation? Hardly. It is the market, which rejected the mistakes that IBM made and embraced the right things that its competitors did in the 80s.

Today there is a similar debate going on about Microsoft. It is being portrayed as this giant evil corporation whose domination can never be shaken off by the world. And that government regulation is the best way to "protect" us from these anti-competitive measures of the the company.

I don't think so. I believe Microsoft deserves its success, and that Anti-Trust laws are unfair, anti-merit and extremely Orwellian. I also believe that Microsoft will meet its match unless it keeps satisfying its customers.