There's two main reasons why this would be a monumentally bad idea. One is that if Apple computers were no longer the only ones offered with Mac OS X, competition would soon drive prices down and those fat profit margins Apple currently enjoys would disappear. Hold on, you must be thinking, what does Apple care, won't it be making the same kind of money as Microsoft if it's in the same game?
The answer is, unfortunately, no. You see, there's another important component to Microsoft's gigantic success: Something called network effects, also called network externalities. Network effects appear when the value of a product increases the more people have it; telephones are a classic example. If you're the only person in the world with a telephone, it's completely worthless; only when other people get telephones does it become useful to you, and the more people have telephones, the higher a telephone's value - and hence the chance that you'll want to get one.
The telephone example is not a perfect analogy; ever since Alexander Graham Bell's patent expired, you can get a telephone from a whole number of vendors. Now in theory, anyone can create software that does everything a competitor's software does. In theory, Mac OS X and Windows are 100% interchangeable. In practise, this is rarely the case for software, and especially for operating systems.
The problem of data compatibility is one of the largest problems faced by software. The classic example is the Microsoft Word document, something I believe everyone is familiar with. Now in theory, anyone can write a program that handles Word documents in exactly the same way Microsoft Word does, thus offering a replacement for Word that can compete in the marketplace. In fact, there are several such programs on offer at the moment: The open-source OpenOffice.org and Apple's Pages are two notable examples. Unfortunately, none of these competing word processors are 100% compatible with Microsoft Word; often you will open a Word document in these word processors and it will appear different to how it appeared in Word. This isn't necessarily the fault of their creators; first of all, Microsoft doesn't publish any details about how data is laid out in a Word document. If you're a Microsoft programmer working on Word, you have access to load of documentation that explains how to read files, how to write them, and all the quirks and details of how they work. If you're writing a word processor independantly, you have none of this information; you have to actually open up the files, look at the bits and bytes inside and reverse engineer the behaviour of Microsoft Word; this is a time-consuming process, and is by nature imperfect; your reverse engineering is only as good as the examples you can examine, and there's always some document with a certain combination of features that you never thought of, that will be handled differently by Word.
Even in cases where the standards for data are open and publicly available, a software vendor with an entrenched monopoly position can introduce intentional bugs in their software, so that it is incompatible with the standard. Microsoft has been repeatedly found to have done this in the past; the most famous example is Internet Explorer, which displayed Web pages in ways that were non-standard. However, since Internet Explorer had, at one point, a 96% share of the installed base for web browsers, all the web pages on the Internet were designed to work with Internet Explorer, including all the bugs it contained, instead of following the standards. Competing web browsers had a choice: They could follow the standard, or they could mimic Internet Explorer. If they mimicked IE, they were back to the same place as the Word competitors: Reverse-engineering cryptic behaviour. If they followed the standard, users wouldn't use their browsers because they would display web pages "the wrong way."
In fact, these browsers would be displaying the pages the right way, and IE was displaying them the wrong way - but to the end user this is a philosophical distinction of little to no importance. In the end, he's going to pick the browser that works with the websites out there, and cares little for standards and which browser follows them.
There is a third feature of software that is rather important in this case: The near-zero unit cost. Almost all of the costs in software are up front; you spend years employing a large software team to develop and test a piece of software, but after it's complete, you collect money every time a copy is sold, even though making a copy of a piece of software is as close to free as makes no difference. As I have noted repeatedly, the vast majority of software sales are not at retail and do not incur all the additional costs per unit that retail incurs; software is either pre-installed on your computer or distributed electronically.
If you take into account network effects, data incompatibility and near-zero unit costs, you can see how, with some clever manoeuvering, an incumbent in any software market has an almost unassailable advantage. Any challenger entering the market has to overcome two gigantic barriers to entry:
1. He has to expend more effort than his competitor to achieve a certain level of compatibility - which will never be perfect - while the incumbent has no reason to be compatible with the challenger. In fact, by remaining as incompatible as possible, the incumbent further increases the network effect reinforcing his own market dominance.
2. Since the cost of producing a unit sale is insignificant, the challenger has to get a significant share of the market before he can be profitable. Even though he has to start out with a small share and probably undercut the incumbent on price, his overall costs are actually higher.
Microsoft is by far the absolute champion in using these network effects to maintain its market dominance in the software business. Though they do have a lot of engineers doing great work on their software, it is important to note that Microsoft's primary business goal has never been to create better software than its competitors - in fact in almost all cases users agree that competitors have done a better job at this despite Microsoft's almost limitless resources - but instead to use network effects to drive them out of the market.
The answer is, unfortunately, no. You see, there's another important component to Microsoft's gigantic success: Something called network effects, also called network externalities. Network effects appear when the value of a product increases the more people have it; telephones are a classic example. If you're the only person in the world with a telephone, it's completely worthless; only when other people get telephones does it become useful to you, and the more people have telephones, the higher a telephone's value - and hence the chance that you'll want to get one.
The telephone example is not a perfect analogy; ever since Alexander Graham Bell's patent expired, you can get a telephone from a whole number of vendors. Now in theory, anyone can create software that does everything a competitor's software does. In theory, Mac OS X and Windows are 100% interchangeable. In practise, this is rarely the case for software, and especially for operating systems.
The problem of data compatibility is one of the largest problems faced by software. The classic example is the Microsoft Word document, something I believe everyone is familiar with. Now in theory, anyone can write a program that handles Word documents in exactly the same way Microsoft Word does, thus offering a replacement for Word that can compete in the marketplace. In fact, there are several such programs on offer at the moment: The open-source OpenOffice.org and Apple's Pages are two notable examples. Unfortunately, none of these competing word processors are 100% compatible with Microsoft Word; often you will open a Word document in these word processors and it will appear different to how it appeared in Word. This isn't necessarily the fault of their creators; first of all, Microsoft doesn't publish any details about how data is laid out in a Word document. If you're a Microsoft programmer working on Word, you have access to load of documentation that explains how to read files, how to write them, and all the quirks and details of how they work. If you're writing a word processor independantly, you have none of this information; you have to actually open up the files, look at the bits and bytes inside and reverse engineer the behaviour of Microsoft Word; this is a time-consuming process, and is by nature imperfect; your reverse engineering is only as good as the examples you can examine, and there's always some document with a certain combination of features that you never thought of, that will be handled differently by Word.
Even in cases where the standards for data are open and publicly available, a software vendor with an entrenched monopoly position can introduce intentional bugs in their software, so that it is incompatible with the standard. Microsoft has been repeatedly found to have done this in the past; the most famous example is Internet Explorer, which displayed Web pages in ways that were non-standard. However, since Internet Explorer had, at one point, a 96% share of the installed base for web browsers, all the web pages on the Internet were designed to work with Internet Explorer, including all the bugs it contained, instead of following the standards. Competing web browsers had a choice: They could follow the standard, or they could mimic Internet Explorer. If they mimicked IE, they were back to the same place as the Word competitors: Reverse-engineering cryptic behaviour. If they followed the standard, users wouldn't use their browsers because they would display web pages "the wrong way."
In fact, these browsers would be displaying the pages the right way, and IE was displaying them the wrong way - but to the end user this is a philosophical distinction of little to no importance. In the end, he's going to pick the browser that works with the websites out there, and cares little for standards and which browser follows them.
There is a third feature of software that is rather important in this case: The near-zero unit cost. Almost all of the costs in software are up front; you spend years employing a large software team to develop and test a piece of software, but after it's complete, you collect money every time a copy is sold, even though making a copy of a piece of software is as close to free as makes no difference. As I have noted repeatedly, the vast majority of software sales are not at retail and do not incur all the additional costs per unit that retail incurs; software is either pre-installed on your computer or distributed electronically.
If you take into account network effects, data incompatibility and near-zero unit costs, you can see how, with some clever manoeuvering, an incumbent in any software market has an almost unassailable advantage. Any challenger entering the market has to overcome two gigantic barriers to entry:
1. He has to expend more effort than his competitor to achieve a certain level of compatibility - which will never be perfect - while the incumbent has no reason to be compatible with the challenger. In fact, by remaining as incompatible as possible, the incumbent further increases the network effect reinforcing his own market dominance.
2. Since the cost of producing a unit sale is insignificant, the challenger has to get a significant share of the market before he can be profitable. Even though he has to start out with a small share and probably undercut the incumbent on price, his overall costs are actually higher.
Microsoft is by far the absolute champion in using these network effects to maintain its market dominance in the software business. Though they do have a lot of engineers doing great work on their software, it is important to note that Microsoft's primary business goal has never been to create better software than its competitors - in fact in almost all cases users agree that competitors have done a better job at this despite Microsoft's almost limitless resources - but instead to use network effects to drive them out of the market.
Microsoft has bent all its power and all its energy to one goal: Making sure that Windows and Office are the only viable choice for operating systems and office suites today. Every time a competitor rises to the challenge, they will use exclusive distribution deals, intentional incompatibilities, misinformation and proprietary data standards to enforce the idea that users that choose their competitor's product will find themselves unable to work in a world dominated by Microsoft software.
They are not alone in this, however; practically every established software vendor has done exactly the same thing, with Apple being just as guilty of propping up its lead in the personal music player and online music sales businesses by using data incompatibility to increase network effects and shut out new entrants to the market.
Incompatiblities, network effects and monopolistic behaviour are by no means exclusive to software; look at the history of any business and you'll see examples of corporations acting similarily to protect their market share. In software, however, the effects are hugely magnified; in no other market is it so hard to create an equivalent product; in no other market is the unit cost of each sale so low. Well, OK, maybe this isn't strictly true; I can think of at least one other one, but that's a topic for a future entry!
Retail sales (which remain a tiny, fickle and troublesome part of the market that consumers have never really taken to) and bundling software with hardware (as Microsoft, Apple and a number of other software vendors do) are not the only ways people have found to make money out of software. In the next entry, we'll examine these other ways and their relative merits and disadvantages.
Next post: Death and Taxes
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