The Opportunity Cost of the Microsoft Defense
A lesson can be learned from Microsoft's strategy to squeeze the competition out of markets until it's the only one left standing.
- By Paul DeGroot
- January 01, 2006
Is Microsoft going soft? Deals with RealNetworks and Yahoo!, talk of
a deal with AOL, a pact with Sun Microsystems. What happened to the brash,
take-no-prisoners company of the '90s? Perhaps, at age 30, Microsoft is
growing smarter and more mature. Like many of us do, the company's leaders
may be looking back, wondering at what might have been and learning some
lessons for the future.
One strategy worth reviewing is what our team at Directions on Microsoft
knows as the "Microsoft Defense." The goal of that strategy
isn't necessarily to win a market, but to deny it to anyone else. Microsoft
is one of the few companies capable of this type of defense, which costs
billions of dollars to execute.
The best known example is Netscape. Microsoft feared that Netscape would
turn the browser into a platform for running applications, and platforms
and applications are Microsoft's core businesses. So Microsoft "de-monetized"
Netscape's business by creating and widely distributing free versions
of everything that generated revenue for Netscape, particularly the browser
and Web server. The cost was high, by anyone's standards except Microsoft — perhaps $1 billion poured into producing a browser and Web server that
generated no direct revenue, but did remove a competitor.
MSN was another defensive play that generated little revenue but, by
our estimates, sucked several billion dollars out of Microsoft —
and much more than that from competitors who did not have Microsoft's
Today, the defensive strategy can still be seen in game consoles, where Microsoft has pumped perhaps $3 billion into money-losing Xbox consoles that keep Sony and Nintendo from building ever-more-flexible consoles that could become alternatives to the PC.
Sometimes the defense won't work, as in the case of Linux, where there's
no revenue stream to dry up because the operating system is free. In fact,
what's most frightening to Microsoft is that the open source movement
is actually using its own variation on the Microsoft Defense: de-monetizing
the most profitable parts of Microsoft's business, such as operating systems
and desktop productivity software.
Even greater costs of the Microsoft Defense have been ignored. They're
what economists call opportunity costs. What if, instead of choking off
its competitors' air supply, Microsoft had endeavored to be a partner?
What if, instead of spending billions to compete with AOL and other Internet
service providers, Microsoft had put all that energy into ensuring that
no matter what they did, their businesses would make money for Microsoft?
Microsoft would make sure it produced the best client; it would have the
best servers, the best-embedded platform and the best development tools.
All these products and platforms would help partners succeed, but Microsoft
wouldn't go after its competitors'direct revenues. Instead of losing billions
to compete with them, it would make billions by underpinning their success.
I raise all this not merely to revisit history, but to point out that
competitive strategies have costs. By definition, competition is little
more than a zero-sum game. Your loss is my gain, but the total amount
of money that changes hands is the same (or less, if we drive prices down).
In contrast, a partnering strategy may produce a win-win scenario. Witness
the partnership that, in so many ways, made Microsoft — the deal to provide
an OS for the IBM PC. From that came not only an OS business, but an application
business and about 300 other businesses.
The Microsoft we're seeing today is driven by a variety of pressures,
such as competition from open source, a lackluster record on Wall Street
and Google's leadership on the Internet, so I can't say that this change
of heart is driven entirely by repentance for its earlier cutthroat competitiveness.
In fact, there's ample evidence that the company's competitive instincts
are undiminished as it takes on Intuit in low-end accounting or Salesforce.com
in CRM. Besides, a lot of us benefited from Microsoft's competitive approach:
browsers are free, Web servers are free, instant messaging is free, many
other technologies are free or cheap.
But there's a lesson here. If your competitive roadmap doesn't include
substantial cooperation and partnering, it's not complete. And you learned
that by watching Microsoft.
Paul DeGroot is principle consultant with Pica Communications, which provides consulting services for customers with complex Microsoft licensing issues.