Windows of Opportunity

Friday, June 27, 2008

Microsoft recently announced what many will see as an unprecedented change in its business model for selling software as commercial products for use by customers immediately after installation. The company’s shift toward substantially greater openness is great for consumers and should put to rest calls for more government action in this area.

Microsoft says it will take a much broader approach to providing access to extensive documentation about the software hookups called APIs for Microsoft ’s high-volume products, such as Windows Vista, Office, Server, and so on. It will also provide licenses to any applicable patents necessary to implement these protocols at low, nondiscriminatory rates. This will help other companies and the open-source community make their own programs interoperable with Microsoft ’s.

Microsoft also committed to greatly enhanced data portability, including the ability to select non-Microsoft document formats as the default, bringing increased interoperability between products sold by Microsoft and those sold by its direct competitors.

Why would a private company be so open? Some surely will say that Microsoft is simply caving to pressure from antitrust regulators, such as those in Europe who recently hit the company with hundreds of millions of dollars in fines at the end of one multiyear investigation and have already announced a new one. The hope of such regulators will be to justify those government proceedings already completed or under way against a host of private firms—including Microsoft, Intel, Apple, and Qualcomm—and then to call for more.

Microsoft’s shift in behavior toward increased openness will make the company more money selling products that its customers will like better.

Although government pressure is one likely factor leading to Microsoft’s increased openness, it would be dangerously simplistic to think such an important and complex business decision turned on this single factor. A prudent analysis also must consider which other factors are at play, which are most effective, and at what cost. In this case, the market is the better bet.

But even if in this case the government’s influence had been greater than the market’s, the market is a better tool to use in future efforts toward constructive engagement between producers and consumers, for several reasons.

At least two major problems are too often overlooked concerning government action in this area. The first is that government action imposes huge costs on the economy. It is hard to imagine why it could be best to shift hundreds of millions of dollars in wealth from the broad base of a corporation ’s public shareholders toward government coffers. The second is that it is highly ineffective in triggering the desired behavior.

Government remedies are largely ineffective because of a lack of credibility, in both complaint and commitment. The public pronouncements that government actors typically must provide to explain their complaints in politically sustainable ways often don ’t provide guidance for what specific behavior is being sought. Any savvy bureaucrat knows to pitch each complaint toward politically powerful constituencies and lobbyists rather than the regulatory targets.

In addition, the government complaints are often not credibly founded on the facts, especially as those facts inevitably evolve during the many years that typically pass during government proceedings. The European Union spent years calling for Microsoft to provide a version of its operating system that did not include an integrated copy of Windows Media Player, fearing that the company would use this integration as leverage to monopolize the market for media players. Meanwhile, the one player that came to occupy the vast majority of the online viewing market was Adobe ’s Flash media player, which is used on popular websites like YouTube, a service run by Microsoft competitor Google.

The lack of a credible complaint also undermines credibility in the government’s commitment to the remedies it achieves. The copies of Windows without the media player that Microsoft was ordered to produce were actually obtained by such an incredibly small number of customers that the only copies easily found today are the “souvenirs” used by law professors as demonstrative aids in class. Not surprising, almost immediately after the European government won the appeal of this remedy, it announced a new proceeding targeting a different result.

Government remedies are largely ineffective because of a lack of credibility in both complaint and commitment.

In contrast, the market provides compelling reasons for companies like Microsoft to listen to its customers. It ’s comparatively easy for a company to respond to input of this type; such direct and dynamic exchange between producers and consumers is also comparatively more effective in generating benefit for them both.

Indeed, many of the important components of the new, corporate-level initiative just announced by Microsoft have been in the works for some time at the division level of the company, through regular interaction between those divisions and their customers. For example, Microsoft operates an open-source lab, providing extensive, hands-on technical support and collaboration on open-source projects with open-source companies to enhance interoperability with Microsoft ’s products.

Microsoft also has inked a number of substantial agreements with open-source companies, including with the provider of a competing business operating system, Novell. Each of these actions has been driven by the demands of customers in the ordinary process that producers use to adapt what they sell to meet buyers ’ demands. Even recognizing the collective action and strategic bargaining problems that plague markets, the free market is shockingly more direct and faithful as a communication mechanism about particular needs than are the public choice processes of interest group politics that drive government action.

In both business and politics, it is often instructive when interpreting behavior to “follow the money.” Microsoft’s shift in behavior toward increased openness will make the company more money selling products that its customers will like better right after installation.

And who has been applauding the government regulation of Microsoft? Companies such as IBM and Google, which, instead of basing their business models on selling operational software products that work right after installation, make their money by selling advertising or consulting services as companions to free software.