Sunday, May 18, 2008 - The Progress & Freedom Foundation Blog

The Rise & Inevitable Fall of Tech Giants

Randall Stross, a Silicon Valley-based technology author, has penned an excellent essay for the New York Times making an argument that many of us here have made in the past: "The Computer Industry Comes With Built-In Term Limits." That is, tech giants can rise very quickly and attain something approaching market dominance thanks to the power of bandwagon effects and the "winner-takes-all" economics that characterize digital markets in the short-term. But that dominance, Stross rightly argues, is difficult to maintain over the long haul because technology and markets evolve rapidly and new players displace old ones. Mr. Stross notes that IBM is a classic example, but Microsoft is experiencing a similar fate:

two successive Microsoft chief executives have long tried, and failed, to refute what we might call the Single-Era Conjecture, the invisible law that makes it impossible for a company in the computer business to enjoy pre-eminence that spans two technological eras. Good luck to Steven A. Ballmer, the company’s chief executive since 2000, as he tries to sustain in the Internet era what his company had attained in the personal computing era. Empirical evidence, however, suggests that he won’t succeed. Not because of personal failings, but because Mother Nature simply won’t permit it.

Ironically, twelve years ago, Mr. Stross wrote a book I have on my shelf at work entitled, The Microsoft Way: The Real Story of How the Company Outsmarts Its Competition. Today, however, he argues that MS isn't having as much luck outsmarting too many competitors:

It’s no secret that Microsoft’s online businesses have failed to gain leading market positions. But what is not widely appreciated, perhaps, is that the company’s online initiatives have lately been doing worse than ever. The last year when Microsoft made a profit in its online services business was the fiscal year that ended on June 30, 2005. Its MSN unit used to do a nicely profitable business providing dial-up Internet access to subscribers. When its users began to switch to broadband services provided by others, however, the earnings disappeared. Microsoft’s Web sites brought in a trickle of advertising revenue, which did not grow fast enough to offset the disappearance of the narrowband access business. AOL suffered in similar fashion.

In the 2006 fiscal year, Microsoft’s online services produced a $74 million loss after the previous year’s profit of $402 million. Since then, the numbers have become uglier, as Microsoft’s online segment has added employees and absorbed growing sales and marketing expenses. In the 2007 fiscal year, the online businesses lost $732 million. In the next nine months, through March 31 this year, they recorded a loss of $745 million, almost double the amount in the period a year earlier. With $2.39 billion in revenue for the nine months, the online segment represents only 5 percent of the company’s total revenue.

What's sad about this, of course, is that Microsoft still labors under ridiculous antitrust restrictions and government oversight efforts across the globe even though markets and technological innovation are doing a much better job of eroding the market dominance that those regulators fear.

The moral of the story: Every dog has his day. IBM, AOL, Microsoft and (even, eventually) Google. Ironically, Mr. Stross's next book is called Planet Google: How One Company's All-Encompassing Vision is Transforming Our Lives. I wonder who he'll be writing about displacing Google 10 years from now? Probably some company none of us are even talking about right now, or one that is still being dreamed up by a couple of college students just like Google was a decade ago. Things change that fast.

Update 10:40 pm: Charles Cooper of CNet News.com has a new essay up that is relevant to this discussion. In "Microsoft v the DOJ Ten Years Later: Did It Make a Difference?" Cooper notes that:

Ten years ago today, the United States Department of Justice filed a landmark antirust lawsuit against Microsoft. Six months later, Google incorporated in Menlo Park, Ca. The proximity of those two dates raises a delicious `what if.' Knowing how the subsequent decade turned out, do you think the DOJ would still have gone after Microsoft in 1998?

Indeed, this points to the inherent myopia associated with antitrust regulation in general. The static focus on the technologies and predicaments of the present often leads antitrust officials to put a premium on immediate intervention instead of being willing to let disruptive technologies and evolutionary market developments offer up superior (and non-coercive) resolutions.

posted by Adam Thierer @ 9:47 AM | Capitalism , Generic Rant , Innovation , Internet