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Last modified: 29 June 2017

Regulators and markets

The EU just fined Google €2.42bn for anti-competitive behaviour. So far, the best opinion piece I’ve seen on it is by Ben Thomson on Stratechery (via @mr_james_c who you should all follow and get offended by; it’ll do you good). The best neutral reporting has been in the FT, of which this is one example .

Most of the other coverage has been garbage. Hastily-written by people who seem to have little understanding of the technology, the law, or how the two interact.

I don’t have an opinion on this decision yet.In Ben Thomson’s piece he comes out as weakly against it, so that’s where I’ll start. I’ll listen to podcasts like This Week in Google over the comings weeks (they often feature Ben) for an American angle, and then try and read some of the French press to see what they think.

But I still want to blog about the decision, because some of the discussion that it has prompted is frustrating me. I keep seeing a story about tech, markets, and competition law that doesn’t fit the facts. And I’m worried that clever people are starting to believe it.

The myth is simple... state intervention was not necessary because it was competition from Apple and Google that eventually eroded Microsoft’s market dominance.

But the truth is that Apple and Google could only rival Microsoft because the threat of state intervention stopped Microsoft from crushing them.

To set the scene we need to talk about my favourite piece of software, Microsoft Excel.

How Microsoft killed office competition

Microsoft have always played to win and in the early 90’s their battle was Office applications. Microsoft had Excel and Word, but their competitors Lotus 123 and WordPerfect considerably outsold them both. Microsoft decided to act.

I doubt that the phrase “DOS ‘aint done until Lotus won’t run” was used much within Microsoft; people have looked in the records and never found it. But its popularity among developers suggests that this attitude permeated much of Microsoft.

And we know that Microsoft considered its operating system dominance a legitimate way to crush its rivals because in 1994 Bill Gates famously wrote an internal email that said,

“I have decided that we should not publish these extensions [to Windows]. We should wait until we have a way to do a high level of integration that will be harder for likes of Notes, WordPerfect to achieve, and which will give Office a real advantage . . . We can’t compete with Lotus and WordPerfect/Novell without this.”

Sure enough Microsoft crushed its office competitors. Today, like hundreds of millions of others, I pay my subscription to Office 365 with little alternative.

Based on this, similar, and other complaints, US investigations into anti-competitive behaviour at Microsoft began in 1992 and in Europe a year later in 1993. It was too late to save Lotus and WordPerfect, but in the following 20 years the shadow of these investigations deeply weakened Microsoft, and hugely strengthened its competitors.

And the two competitors that it strengthened the most? Apple and Google.

Anti-trust law made Apple and Google possible

In the 90’s, Microsoft dominated operating systems. It had already used that strength to dominate the office and now it wanted to dominate the internet, and in particular the world wide web.

The web was open and cross-platform and didn’t need Windows to run. It was a huge threat to Microsoft. Bill Gates saw that and on May 26th, 1995 he penned a famous company-wide memo pushing the company to “jump on the internet tidal wave” and understand that the internet was "crucial to every part of our business".

Microsoft acted quickly. By 1996 their Internet Explorer 3.0 supported their secret weapon, Active-X. It added new features to the web, and crucially they worked better on Internet Explorer on Windows.

If you remember websites in the 2000s that only worked in Internet Explorer, or if you were still using in-house business software in Internet Explorer until recently, or if you lived through the security nightmare of Windows XP, then there’s a good chance that you had a taste of Active-X. It was dire, and if Microsoft had been able to push it through, Active-X would have eaten the web, on both desktop and mobile.

 

But Microsoft had a problem. At the start of 1997 barely 10% of computers ran an operating system that wasn’t written by Microsoft . The largest competitor, Apple, had market share below 5% and falling. Apple was worth just over $2bn, and had lost $1bn in the previous year. Microsoft was worth nearly 100 times more, and was making huge profits.

Apple was at risk of going bankrupt, or being asked to wind itself up and return its remaining cash to shareholders. Microsoft was about to win. It could push everyone to Office and Internet Explorer on Windows.

But there was a big problem. Microsoft had been arguing that it couldn't be abusing a monopoly since it didn't have one. So if Microsoft became a monopoly its biggest defence against US and EU investigation would disappear. It would be fined, restricted, or worst of all, broken up.

So on August 6th, 1997 Microsoft did something very surprising. It gave Apple $150m and promised to maintain a version of Microsoft Office for the Mac, as good or better than the version on Windows, for at least 5 years. And in return Apple made Internet Explorer the default browser on Macs (a no-brainer as Apple’s own CyberDog browser was a disaster).

The stock market’s verdict was clear. Apple’s share price jumped 33% instantly. It was saved.

 

Saved from collapse, Steve Jobs spent the next five years at Apple building a new strategy on the back of Microsoft’s life support.

Apple transitioned away from an old dying operating system to a new one based on Unix. It developed the iPod and iTunes, and then the iPhone. Today it is the world’s largest technology company, worth well over 100 times what it was when Microsoft saved them. And their technology has cost Microsoft dearly.

As Apple’s agreement with Microsoft to use Internet Explorer as their default browser came to an end, they started work on an open-source browser project called WebKit. Soon Nokia were using WebKit in their popular smartphones, blocking a Microsoft monopoly at a critical time in the development of the mobile web, and stopping Microsoft from driving home the dominance of Internet Explorer and pushing Active-X everywhere. Later a new company called Google would use WebKit to create a browser called Chrome and end Microsoft’s browser monopoly on the desktop too.

And it wouldn't be long until Apple released the iPhone and Microsoft's decline began.

The law is an ass, but it’s the incentives that matter

In 1996 Microsoft had no option but to save Apple. Later, instead of using their browser dominance to hobble Google, they were forced to allow it to grow and succeed. And in both cases a big factor stopping Microsoft from crushing its competitors was the many ongoing and potentially hugely costly competition investigations going on in the EU and the USA.

The law is complex, slow, and infuriatingly outdated. So it’s easy to poke fun at what seem like poor individual decisions. The EU’s 2004 decision that forced Microsoft to create a version of Windows without Media Player in it seems farcical to many. But it stemmed from a complaint by Sun in 1998 about exactly the practice Bill Gates described in his 1994 email; Microsoft breaking competitors’ software on Windows to prefer its own.

So people laugh about how no-one wants a version of Windows that doesn’t play videos or they laugh at a browser ballot asking you if you want to install Maxthon or Sleipnir. And meanwhile the people who understand the technology laugh at how easily distracted these people are.

The real result wasn’t a version of Windows without Media Player or a browser ballot, but the huge fines, the requirement that Microsoft properly publish the APIs in Windows that would let other software makers compete, and the warning to Microsoft and others that that sent.

What if the state hadn’t intervened?

It is perfectly reasonable at this stage for a libertarian to argue that without state intervention things would have been fine.

They can argue that even if Apple had died, someone else would have come up with WebKit. They can argue that as Microsoft extracted profit from their monopoly other more nimble companies and groups would have swooped in and created Android, Chrome, and HTML5. It’s impossible to disprove that.

But I’m convinced that intervention sped up the development of the modern web, and the browsers on desktops, laptops, and phones that you’re reading this on. Not in a clean, direct, beautiful way. But in a way that really mattered. And it's that modern competitive web that gives you Spotify, Mobike, Gmail, Uber, and all the rest — without Microsoft taking a cut.

 

I hope that I’ve convinced at least a few of you. There are simplifications and missing details, and maybe even errors. I’m happy to talk about them. We can even write an Active-X control together if you like. It’s awful.

Oh and one last thing. I’ve mentioned the two companies that made the complaints against Microsoft that led to the EU’s investigation — Novell and Sun. It might interest you to know that Eric Schmidt, today the Chairman and formerly the CEO of Google, was a senior manager at both at the time they were complaining about Microsoft. I imagine that he had a very different view on competition law back then.

 

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