Understanding Microsoft

Part 42. Choke Points

Despite the belief that we live in a society with a "free economy," there are certain elements of any economic system which must by their very nature be limited to a handful of controlling entities. While pure economic theory says that a free economy requires many buyers and sellers competing with each other, automatically adjusting the marketplace towards an optimum condition by a sort of "invisible hand" of group activity, the reality is that some products cannot have a large number of suppliers. Take for example the case of an oil refinery.

To build an oil refinery, you need piles and piles of cash. Or else, you need mega-millions in loans. You also need environmental impact statements, federal licenses, employees, engineers, insurance, land, and contracts with fleets of ships, trains, trucking companies, and more. To build an enterprise of this size requires tremendous amounts of skill in management as well as the ability to compete with several strongly-entrenched, high-volume rivals. There simply are not very many people who could build this kind of enterprise from the ground up. Thus we see that oil refining is one of the "choke points" of the economy. Of necessity there are only a few companies in the business of oil refining, and these companies determine the flow of oil through the economy.

In the computer business, we might consider an operating system to be an "information refinery." To design and construct a PC operating system requires capital for development during the initial phase (a zero-income period), plus numerous designers, programmers, testers, and also coordination with application developers, standards bodies, computer manufacturers, and more. This is yet another of the "choke points" that involves a handful of companies qualified to produce and manage such a complex enterprise.

Thus it is the case that PC operating systems, at least those with a significant number of users, naturally gravitate toward a handful of companies. If any one of these companies becomes too powerful, it is easy for them to become a monopoly because the *entry cost* of new competition is so high, and the *entry time* to get such a new enterprise off the ground is so long. If Microsoft gains a total monopoly on PC operating systems (either alone or through surrogate companies like Apple), it would be similar to having a single company refining all the oil in the U.S. Not only would this have the likelihood of price increases, but something far worse: just as any grave error in the refining process could damage all automobiles, a single software design flaw could render millions of computers useless. From this example we can see that something more serious than personal preference is involved in the monopoly issue; it is also a matter of national economic security to prevent monopolies of critical "choke points" in the economy.

Most recent revision: March 11, 1998
Copyright © 1998, Tom Nadeau
All Rights Reserved.

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