Understanding IBM

Part 17. How Low Can You Go?

The recent testimony of Bill Gates and his rivals in Washington, DC, reminded me a lot of limbo dancing. A long-lost fad of the 1950s, limbo involved dancing under a horizontal bar that got progressively lower with each verse of song. Various partygoers took turns attempting to glide under the ever-lower bar without touching it. Eventually, of course, a physical limit was reached and the bar was touched by someone. How low can you go?

"In the software business, there is basically no limit to the quantity of production," stated Mr. Gates. True. For a dollar apiece, you can fill a huge warehouse full of program CDs. However, this also shows the far greater danger of a software monopoly than any other kind of monopoly. Since the production costs are so low, the software company that can control distribution channels has a tremendous long-term advantage. This is because a rival cannot find some dramatic cost-reduction strategy on the production side, because production costs per unit are already near zero. How much lower can you go?

When Microsoft gained monopoly leverage over software distribution via the retail channel, many people thought IBM was finished. How would IBM, or any other company, be able to sell software without paying a "Microsoft tax" on every transaction, since the channel was owned by Microsoft? Furthermore, since the per-program distribution cost approached one dollar, how could IBM find a breakthrough that would allow them an increased production efficiency, to offset the monopolistic condition of the channel? It seemed hopeless to many, and that is why most people not only wrote off IBM, but dismissed other software makers as well.

What happened to change all this? IBM lowered the bar. IBM bundled the Internet with OS/2 Warp version 3. Now both unit production costs and distribution costs of software were essentially zero. ZERO! How low can you go? Zero!

Yes, the operating system itself still suffered from the previous verse of the song -- Warp 3 had to fight a losing battle in the channel. But what it brought to the desktop was the legitimization of the Internet. No longer was the Net just a hang-out for geeks and tinkerers. If stodgy old IBM thought it was cool, if trusty old IBM thought is was safe, if profit-driven IBM thought it was part of the business world, then the business world came to accept the Internet as an important tool. IBM made the difference between the Internet as an academic curiousity and the Internet as a corporate fixture.

On the Internet, anybody can ship software essentially for free. Anybody can make a copy of software essentially for free. Nobody pays Microsoft a tax on each transaction, because transactions take place without the retail distribution channel that Microsoft worked so hard to monopolize. But in this gain is also a great risk, the awful possibility that Microsoft might gain control of the Internet as well. There will not be another "second chance" for a free software market. For once you've limboed to the floor, there's no lower you can go.

Most recent revision: March 5, 1998
Copyright © 1998, Tom Nadeau
All Rights Reserved.

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