Benedict Evans take on: Market power dominance

Published on
January 1, 2020
by
Benedict Evans
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Benedict Evans take on: Market power dominance
“Power isn't wealth or sophistication or complexity. Power is the ability to make people do things they don't want to do” - Roger Lovatt

When Steve Wozniak created the original Apple I in 1975, IBM dominated the computing industry. It was nicknamed ‘Big Blue’, it was so far ahead of its competitors that people talked about ‘IBM and the seven dwarves’, and it had just come through yet another anti-trust case.

IBM’s dominance, of course, was based on the mainframe, which was the central paradigm of the computing industry, and it had sealed its dominance just a decade earlier with the launch of the 360 system. However, over the next decade it became obvious that the flood of PCs that followed the Apple 1 were going to overtake the mainframe. All of the focus of innovation, investment and company creation moved to the PC. Indeed, PCs created the very idea that software could be a separate industry, and not just something that was bundled with your hardware. Microsoft, not IBM, dominated the PC ecosystem, and so Microsoft became the centre of the tech industry - it became the new sun in the solar system.

The funny thing is, though, that mainframes didn’t go away. IBM went through a near-death experience in the 1990s, but mainframes carried on being used for mainframe things and IBM remained a big tech company. In fact, IBM’s mainframe installed base (measured in MIPS) has grown to be over ten times larger since 2000. Most people working in Silicon Valley today weren’t even born when mainframes were the centre of the tech industry, but they’re still there, inside the same big companies, doing the same big company things. (This isn’t just about IBM either - the UK’s sales tax system runs on DEC’s VAX. Old tech has a long half-life). Mainframes carried on being a good business a long time after IBM stopped being ‘Big Blue’.  

Much the same thing then happened to Microsoft. 20 years after the Apple 1, Microsoft launched Windows 95, which sealed its dominance of the PC industry, but Netscape had launched a year earlier, and Netscape and the web ended Microsoft’s dominance just as the PC had ended IBM’s dominance - the focus of innovation, investment and company creation moved elsewhere. Instead of creating software and companies around Windows APIs, the industry moved to creating software and companies around the internet and, especially, around the web. Microsoft never had dominance in the web, though it tried, just as IBM never had dominance in PCs, though it tried. And so in the 1970s, people worried about what IBM might do, and in the 1990s people worried about with Microsoft might do, but today, very few people in tech worry about what Microsoft might do - they worry about Google or Apple or Facebook or Amazon. Microsoft (or even IBM) might be a competitor, but they no longer have that dominance. Indeed, if you talk to senior Microsoft execs about this, they will say that for 20 years everything in tech was a PC accessory, but now the PC is just a smartphone accessory.

Just as for IBM, when Microsoft lost dominance of tech that didn’t mean the business went away. In fact, the opposite happened. The web removed most of Microsoft’s levers of power, but it also sold a lot of PCs - for the first time there was a real reason for a ‘normal’ person to buy a computer. Hence, in 1995 there were perhaps 100m PCs on Earth, and three quarters of them were in offices, but today there are 1.5bn. If you wanted to get online, you needed a computer, and with Apple prostrate and Linux never quite managing to produce a consumer product, Windows was the only real option. In a sense this is also what happened to IBM - PCs meant that mainframes were much less important, but they also expanded the overall computing market and the market for computing services provided by companies like, well, IBM.

This takes me to the quote at the beginning of this post - what is ‘power’? When we talk about ‘power’ and ‘dominance’ and perhaps ‘monopoly’ in tech, we actually mean two rather different things, and we generally conflate them:

  • There is having power or dominance or a monopoly around your own product in that product’s own market…
  • but then there is whether that position also means you control the broader industry.

In the 1970s dominating mainframes meant dominating tech, and in the 1990s dominating PC operating systems (and productivity software) meant dominating tech. Not any more. IBM still dominates mainframes, and Microsoft still dominates PCs, but that isn’t where broader dominance of the tech industry comes from. Once upon a time, IBM, and then Microsoft, could make people do things they didn’t want to do. Not today. Being rich is not the same as being powerful.

This is a useful way of looking at the share prices or indeed profitability of these companies. Microsoft is a much bigger company now than it was in 1995, but then, so is IBM. No-one would look at the IBM chart and say ‘look - IBM dominates tech’, but the same applies to Microsoft. There are now perhaps 700m consumer PCs (mostly running Chrome, not Internet Explorer), but 4bn smartphones. What’s the consumer computing experience? Does the share price tell us that?


*Microsoft and IBM price performance since 1/1/1995. I'll let you guess which is which

Microsoft and IBM price performance since 1/1/1995. I’ll let you guess which is which


Microsoft and IBM price performance since 1/1/1995. I’ll let you guess which is which


Today, it’s quite common to hear the assertion that our own dominant tech companies - Google, Facebook et al - will easily and naturally transfer their dominance to any new cycle that comes along. This wasn’t true for IBM or Microsoft, the two previous generations of tech dominance, but then there’s another assertion - that this was because of anti-trust intervention, especially for Microsoft. This tends to be said as though it can be taken for granted, but in fact it’s far from clear that this is actually true.

The end of Microsoft’s dominance of tech actually came in two phases. First, as above, it lost the development environment to the web, but it still had the client (the Windows PC) and it then provided lots and lots of clients to access the web and so became a much bigger company. But second, a decade or so later, Apple proposed a better client model with the iPhone, and Google picked that up and made a version for every other manufacturer to use. Microsoft lost dominance of development to the web, and then lost dominance of the client to smartphones.

As we all know, there were major anti-trust cases around what Microsoft tried to do with the web, and specific regulatory interventions, and so you can at least argue for some direct connection to Microsoft’s failure to take the lead online, although this can be disputed. But those cases ended in 2001 and none of them said anything about mobile, and yet Microsoft lost that as well. So what happened?

Here, the argument for anti-trust as the decisive factor generally acknowledges that nothing in the actual judgement or remedies that were imposed had any specific effect on Microsoft’s mobile efforts, but instead says that Microsoft somehow became less good at execution or aggression as a result.

There are two problems with this. The first is that it wasn’t remotely apparent in 2007 that Microsoft wasn’t being aggressive in mobile. After all, Microsoft didn’t ‘miss’ mobile -  it had started with the launch of Windows CE in 1996, and accelerated with PocketPC in 2001, and it had a whole bunch of ‘Windows’ smartphones on the market when the iPhone launched.

Rather, the iPhone created such a radical change in every assumption about how you would make a ‘smartphone’ that everyone else had to start again from scratch. It’s important to remember that none of the smartphone companies who’d been building things since the late 1990s - Nokia/Symbian, Palm, RIM and Microsoft - managed the transition. None of the others had anti-trust issues. But, they all had platforms, and just as importantly cultures and assumptions, that were based on the constraints of hardware and networks in 2000, whereas the iPhone was based on what hardware and networks would look like in 2010. The only way to compete was with a totally new platform and totally new assumptions about how it would work, and ‘dump our platform and build an entirely new one’ is always a near-death experience in technology. Failing to make it isn’t about a lack of aggression or execution - it’s that it’s really hard.

Indeed, even knowing quite what to do is hard.  For Microsoft, we know now that the answer would have been to create an entirely new operating system, with no cross-compatibility with Windows apps, and make it open source, and give it away for free. Imagine saying that to Bill Gates that in 2007 - he’d have looked at you as though you’d grown a third arm.  

The second problem, if one wants to draw lessons for the future, is that even if you do believe anti-trust was relevant to Microsoft’s loss of mobile, it’s hard to plan for it. The judgement didn’t say ‘here are our remedies, and we don’t expect any of them to have any effect [they didn’t, really], but we hope that in 6-7 years Microsoft will have been so demoralized by this that it will fumble its reaction to some totally unrelated thing we aren’t thinking about”. That is, I would pay good money to watch a judge say “my judgment will have no direct effect, but hopefully it will make you screw up something totally unrelated, years after I’ve retired”.

The counter-argument here is that just reducing the economic power of a company or ‘putting the fear of god into them’ is by itself an anti-trust objective -  even if you don’t achieve anything more concrete, you’ve still changed the environment. But again, that’s not necessarily what happened here. Microsoft was very aggressive and very well resourced and yet failed totally, just like Nokia, which dominated the actual phone business in 2007 and now doesn’t make phones at all, because the whole basis of competition changed and none of their assets had any value.

The tech industry loves to talk about ‘moats’ around a business - some mechanic of the product or market that forms a fundamental structural barrier to competition, so that just having a better product isn‘t enough to break in. But there are several ways that a moat can stop working. Sometimes the King orders you to fill in the moat and knock down the walls. This is the deus ex machina of state intervention - of anti-trust investigations and trials. But sometimes the river changes course, or the harbour silts up, or someone opens a new pass over the mountains, or the trade routes move, and the castle is still there and still impregnable but slowly stops being important. This is what happened to IBM and Microsoft. The competition isn’t another mainframe company or another PC operating system - it’s something that solves the same underlying user needs in very different ways, or creates new ones that matter more. The web didn’t bridge Microsoft’s moat  - it went around, and made it irrelevant. Of course, this isn’t limited to tech - railway and ocean liner companies didn’t make the jump into airlines either. But those companies had a run of a century - IBM and Microsoft each only got 20 years.

None of this is an argument against regulation per se of any specific issue in tech. If a company is abusing dominance today, it is not an argument against intervention to point out that it will lose that dominance in a decade or two - as Keynes says, ‘in the long term we’re all dead’. The same applies to regulation of issues that have little or nothing to do with market dominance, such as privacy (though people sometime fail to understand this distinction). Rather, the problem comes when people claim that somehow these companies are immortal - to say that is to reject all past evidence, and to claim that somehow there will never be another generational change in tech, which seems unwise.

On the other hand, it’s also worth asking whether or which of the mechanisms of anti-trust intervention are effective - to my metaphor, is it actually possible to fill in the moat and knock down the walls? If one suggests that that the anti-trust attention paid to Microsoft was mostly ineffective and that the company’s loss of dominance was mostly coincidental, that might just be an execution failure, but it might also suggest more general problems with applying traditional anti-trust thinking to software platforms. When a company is explicitly tying and cross-leveraging separate businesses to boost one with the other, there is clearly a mechanical link between the business dynamic and the anti-trust dynamic - if you ban that, or break them up, that tool goes away and the ‘moat’ is filled in. This was the argument for splitting Windows from Office, which didn’t happen. But one could also argue that the network effects inherent in Office itself, or in the Instagram or WhatsApp networks, or in the YouTube contributors and viewers, mean that it wouldn’t really make much difference if you change the ownership: that a breakup wouldn’t actually work. That’s a topic for a future post.

Benedict Evans is a Venture Partner at Mosaic Ventures and previously a partner at A16Z. You can read more from Benedict here, or subscribe to his newsletter.