Strategic Collaboration between Microsoft and Linux
Microsoft was started in 1975 with Bill Gates famous mission statement about every PC in every home running Microsoft software. Microsoft has sought to build a common standard, which some would say is code for a monopoly in personal computer operating systems. This means that Microsoft has historically sought to build large market shares, dominating each market they participate in. Today Gates has stepped back from day to day operations and his friend and colleague Steve Ballmer leads the company whilst Gates offers his vision for the future direction of the company.
Historical Perspective
Bill Gates and Paul Allen founded Microsoft in 1975. Microsofts first product was a condensed version of the BASIC programming language (Yoffie, Mehta and Seseri 2006 2). This programming language was developed for the first generation of Personal Computers. Microsoft continued developing other programming languages becoming a market leader in software development. However Microsoft started to achieve large scale success when it began to collaborate with IBM in 1980. IBM requested Bill Gates to provide an operating system for its new PC (Yoffie, Mehta and Seseri 2006 2). Gates did not develop the operating system completely himself however bought an existing operating system from another programmer for 50 000 and then tailored the operating system to work with Intel microprocessors which powered the IBM PCs (Yoffie, Mehta and Seseri 2006 2). By 1984 Microsoft had achieved 85 market share with its MS DOS product leading to the company going public in 1986. The stock price multiplied by three times within a year (Yoffie, Mehta and Seseri 2006 2). The 1980s saw the company attempt to move beyond MS DOS developing a graphical user interface called Windows. However Microsoft was still a laggard in software applications such as word processors and databases which were dominated by Lotus and Word Perfect. At this stage Microsoft products were perceived to be imitative and low quality.
With the development of Windows in the early 1990s, Microsofts revenue model was based around supplying hardware manufacturers with a single master copy of the software which they would then pre install on their machines. It was by the mid 1990s and the launch of Windows 1995 that development costs and time began to skyrocket. The development of upgrades was a way of keeping operating systems up to date whilst minimizing the cost of developing an entirely new operating system. When Windows became established as the standard operating system, Microsoft was then able to expand in the applications market. Microsoft established dominance over Lotus and Word perfect by bundling applications and offering incentives for customers to switch, however whilst Microsoft was able to dominate the productivity applications market, niche applications were still dominated by specialists such as Adobe.
Post 1993 Microsoft began to focus on operating systems for servers and developed Windows NT to compete with market leaders such as UNIX and Novell. However Windows NT was unable to dislodge UNIX from its market dominance and it was only with the development of Windows 2000 and Windows Server 2003 that Microsoft achieved a 70 server market share (Yoffie, Mehta and Seseri 2006 4). The cost of customer support to keep systems running also increased at this time.
A familiar pattern repeated itself with the emergence of the internet, in which Microsoft was initially dominated by a specialist browser developer Netscape. However after initial investments to create a superior product Microsoft was able to invert market share, bringing Netscape down from 87, to 22 in the late 1990, whilst capturing 77 of the market (Yoffie, Mehta and Seseri 2006 5).
After 2000 Microsoft spent much time, effort and money on resolving an array of legal challenges to its market domination. In 2000 a Federal Court Judge ruled that Microsoft was a monopoly and should be broken up into smaller units in accordance with the Sherman Antitrust Act (Yoffie, Mehta and Seseri 2006 6). However in subsequent years Microsoft won dismissals and denials and settled amicably with various parties which had joined the Department of Justice anti-trust action (Yoffie, Mehta and Seseri 2006 6). In 2004 the European Commission found Microsoft guilty of unfairly competing in the digital media player market leading to anti-trust violations (Yoffie, Mehta and Seseri 2006 6). This has led to Microsoft revealing more of its source code than it is comfortable with.
The Emergence of Linux as a Problem for Microsoft
In the late 1990s Linux emerged as a threat to Microsofts market dominance. Linux was free, had an open source code available to all developers and could run on a standard PC (Yoffie, Mehta, and Seseri 2006 8). It would particularly threaten Microsofts Windows NT operating system and be attractive to corporate users. Linux posed a threat because if hardware manufacturers switched to Linux it would exert strong downward pressure on the price of operating systems. Linux is essentially a potent threat to the Microsoft monopoly. IBM has been trying to promote Linux in order to challenge Microsofts dominance. Linux has particularly been a threat in emerging markets where personal, company and government customers tend to be more price sensitive. It is difficult for Microsoft to compete with a product which is free. Microsoft has had to share some of its source code with customers and launch an education drive which has informed customers of the relative parity in costs between Microsoft and Linux products.
The problem of Linux providing competition in the form of free open source operating systems was particularly potent in developing countries and emerging markets, more so in Asia. There was a developing culture of anti Americanism and anti Microsoft sentiment. A solution to this problem was the introduction of a basic version of Windows XP which could be sold for a more competitive price in countries such as India, Brazil and Thailand. The pricing in these countries was sometimes as low as 10 of the price in mature economies. Related to the pricing issue was the problem of piracy. Microsoft tried to address the issue of piracy by discontinuing updates for pirated versions of its products
Strategies to Counter the Linux Threat
When faced with competition from Linux which is offering a rival product for free through open source code, Microsoft must create a number of possible strategies to protect its business. One strategy which would be quite radical would be to essentially admit defeat to Linux and its open source free software and provide Windows as a free open source operating system. Windows has been experiencing declining revenues over a ten year period. It is certainly the core of Microsofts monopoly however increasing research and development costs and diminishing returns on each new release mean that consumers are less captive than they once were. Microsoft benefits more from the products which follow the operating system than the system itself. One major benefit would be that the question of anti-trust litigation which Microsoft spent so many years dealing with would be resolved, developer support would be garnered to spread the costs of product development, allowing Microsoft to focus more on the development of more profitable products associated with the operating system.
Another possible strategy would be litigation through enforcing intellectual property laws. Microsoft can claim that Linux is violating its intellectual property rights or patents and launch a program of enforcement which would destabilise Linux by shaking the confidence of its users. In such a scenario users of Linux would be carrying a liability by using a product which is in violation of intellectual property rights of Microsoft. In such a strategy Microsoft would be able to collect payments from companies which use Linux under the threat of litigation.
Another major strategy could be to narrow the gap between Microsofts operating system and that of Linux. A strategy to forge interoperability between Windows and Linux could be pursued. Microsoft could enter into a partnership with Novell which sells SUSE Linux to develop ways to run both systems on individual computers. This would essentially be adapting to the needs of customers who find it difficult to manage the use of both operating systems separately for different functions. Besides technical inter operability, a collaboration between Microsoft and Linux would put an end to litigation threats between the two companies, and combine sales and marketing resources. This move could potentially weaken Microsofts core business of operating systems by giving legitimacy to Linux, however would also make many of its other products compatible with Linux.
Evaluation of potential strategies
It would be highly unlikely that Microsoft would offer its operating system as open source in response to the challenge posed by Linux. The Microsoft franchise has been built almost since its inception upon the almost monopoly like grip which Microsoft has held upon the operating system market. It is this virtual monopoly which has allowed it to dominate market share in ancillary markets such as applications, swiftly crushing competition by bundling its applications with its operating system. Furthermore in the past Microsoft has been unwilling to release source code, and only done so in limited circumstances under the threat of judicial action. Microsoft is built around its operating system dominance and this at the core of its business forming part of its corporate culture. Such a radical change would be unlikely to receive the support of Bill Gates who still oversees the broad strategy and vision of the company.
A strategy based upon litigating competitors out of existence would most likely become counter productive. Not only would this make Microsoft unpopular among many of its own customers and Linux users, but would further enforce perceptions of Microsoft as a monopolist habituated toward anti competitive behaviour. Furthermore this strategy would be time consuming possibly stretching into many years as cases wind their way through the judicial system, from lower to higher courts. Microsoft re entering the sphere of litigation which it had worked so hard to move away from would re ignite anti- trust actions which may prove to be a bigger threat to business than the competition which Linux provides.
Rather than concede defeat and radically restructure the Microsoft business model or engage in a litigation battle which may cost more than it is worth, Microsoft would be better served by trying to cooperate and harmonize its operating system with that of its competitor Linux. This would allow Microsoft applications operability on Linux systems essentially expanding the reach of Microsoft products and accepting Linux as a reality. The argument that accepting the competition of Linux as a reality would legitimize Linux and weaken Microsofts position does not solve the problem as it exists but indicates a sense of denial on the part of Microsoft that they have to operate in a competitive environment, and Linux is a competitor which must be engaged with. This would require a cultural change within Microsoft which has exhibited a history of anti competitive and predatory monopolistic behaviour.
Obstacles to the Implementation of the Preferred Strategy
A possible obstacle to the successful implementation of the strategy to harmonize Microsoft operating systems with those of Linux would be in dealing with a potential shift in revenue models away from a revenue stream dominated by operating systems to one more focussed upon applications. As the Microsoft franchise has been built upon dominance in the operating system space, and operability of Linux with Windows applications would lend some stability to Linux market share some restructuring of Microsofts revenue and cost model would be necessary. This would provide a challenge to the senior management of the company in particular who would have to place a greater focus in innovation rather than relying on the advantage of controlling the software platform.
Conclusion
Assuming that the necessary cultural and financial changes can be implemented, in the longer term Microsoft would no longer have the burden of protecting its monopoly position through constantly expanding research and development costs for operating systems which are exhibiting declining sales and would be able to adapt to a changing market place in which applications and the internet will provide greater revenue streams. Furthermore this strategy would ease the legal pressure on Microsoft which it constantly faces due to its status as a monopolist. Federal anti-trust suits although dealt with in the post 2000 period will always threaten the Microsoft franchise and co operation with Linux and a strategic re structuring of the core business may be a small price to pay when confronted with the prospect of a successful anti- trust suit which would break up the company into smaller units.
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