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The Internet Has Been Good to Microsoft Office

Posted by pbrittan on August 21, 2003 at 2:32 PM PDT

Standards, and corresponding monopolies, can occur naturally

Believe it or not, there are times when I feel some empathy for Microsoft. After all, I myself was once a small-time monopolist.

My first company, Astrogamma, had a product called FENICS that provided foreign exchange (FX) options pricing and risk management functions for traders. FX options are a particular kind of financial contract that banks and corporations trade as a way of taking bets on the fluctuations in the exchange rates between currencies or to protect themselves from those fluctuations (if you want a full primer in FX options, feel free to write me :) ).

The important thing for this discussion is that trading FX options turned out to be much, much easier if the traders on both sides of the transaction were using the same software. Our system caught on initially because of our focus on the user experience, our aggressive pricing, and the fact that we were able to seed our product into the brokerage houses (who were important market influencers) early on. But once we started to see widespread adoption of our software, the FX options market started to realize the benefits of having everyone use a standard system, which in turn drove further sales of our product until we had cornered over 80% of the global market of banks, brokerage houses, and large corporations that traded actively in FX options. We became, in effect, a monopoly. There was nothing nefarious about it. We didn’t set out to become a monopoly; we just wanted to create the best system on the market. We didn’t engage in any uncompetitive practices (we were actually a much smaller company than all of our competitors, starting out). It just happened that way.

This is an example of the network effect, where the network is of people trading on FENICS-calculated prices. The more people joined the network, the more valuable it became, and the more important it was for everyone else to join.

In discussing Microsoft, people like to point out their monopolies on desktop operating systems and Web browsers. But these are really by-products of their most interesting monopoly: Office. As David Kennedy pointed out this morning, Office is what drives the Microsoft desktop which in turn drives Internet Explorer.

A couple years ago, there was lots of speculation that Microsoft’s monopoly would be severely threatened by the Internet. Even Microsoft bought into this, which launched them into a furious and ultimately victorious battle to control the browser. The great irony is that, far from hurting Microsoft, the Internet has cemented its desktop domination. The further irony is that winning the browser war probably hasn’t helped Microsoft that much (except that it now allows them to keep Java off the client). The part of the Internet that helped Microsoft the most has been email. As email became more widespread, people began to email documents to one another (rather than printing and faxing or snail-mailing). This of course brought the network effect into full swing, and Office moved from being a “nice to have” (because of feature set) and an “easy to have” (because bundling arrangements Microsoft forged with PC makers) to a “must have” (because of file compatibility).

I doubt that Microsoft really set out to achieve this, but now it has happened, and I’m sure they are extremely thankful for it. Sun has made the strongest attempt yet at breaking the Microsoft Office hold by offering StarOffice, which has a high degree of file compatibility with MSOffice. It’s a bold strategy on Sun’s part, but so far has not really had widespread success. It will be very hard/impossible to compete effectively on Microsoft's own turf of the Windows desktop. Price doesn't seem to have been a big motivator for customers so far (StarOffice was free for a long time). StarOffice does help to make Linux desktops a little more realistic as an alternative to Windows, but really Windows and MSOffice now have such a strong symbiotic relationship that they are likely impervious to direct attack. The best strategy may be to try to change the rules of the game.

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