Laws of Tech: Commoditize Your Complement

A classic pattern in technology economics, identified by Joel Spolsky, is layers of the stack attempting to become monopolies while turning other layers into perfectly-competitive markets which are commoditized, in order to harvest most of the consumer surplus; discussion and examples.
technology, history, insight-porn
2018-03-17–2019-09-07 finished certainty: highly likely importance: 5

Joel Spol­sky in 2002 iden­ti­fied a ma­jor pat­tern in tech­nol­ogy busi­ness & eco­nom­ics: the pat­tern of “com­modi­tiz­ing your com­ple­ment”, an al­ter­na­tive to ver­ti­cal in­te­gra­tion, where com­pa­nies seek to se­cure a choke­point or qua­si­-mo­nop­oly in prod­ucts com­posed of many nec­es­sary & suffi­cient lay­ers by dom­i­nat­ing one layer while fos­ter­ing so much com­pe­ti­tion in an­other layer above or be­low its layer that no com­pet­ing mo­nop­o­list can emerge, prices are dri­ven down to mar­ginal costs else­where in the stack, to­tal price drops & in­creases de­mand, and the ma­jor­ity of the con­sumer sur­plus of the fi­nal prod­uct can be di­verted to the qua­si­-mo­nop­o­list. A clas­sic ex­am­ple is the com­mod­i­fi­ca­tion of PC hard­ware by the Mi­crosoft OS monopoly, to the detri­ment of IBM & ben­e­fit of MS.

This pat­tern ex­plains many oth­er­wise odd or ap­par­ently self­-s­ab­o­tag­ing ven­tures by large tech com­pa­nies into ap­par­ently ir­rel­e­vant fields, such as the high rate of re­leas­ing open-source con­tri­bu­tions by many In­ter­net com­pa­nies or the in­tru­sion of ad­ver­tis­ing com­pa­nies into smart­phone man­u­fac­tur­ing & web browser de­vel­op­ment & sta­tis­ti­cal soft­ware & fiber-op­tic net­works & mu­nic­i­pal WiFi & ra­dio spec­trum auc­tions & DNS (Google): they are pre-emp­tive at­tempts to com­mod­ify an­other com­pany else­where in the stack, or de­fenses against it be­ing done to them.

Ex-MS prod­uct man­ager Joel Spol­sky’s 20021 “Strat­egy Let­ter V: The Eco­nom­ics of Open Source” (Slash­dot; HN) dis­cusses a pat­tern he saw in tech­nol­ogy com­pa­nies, soft­ware, and Mi­crosoft in par­tic­u­lar. While he does not cite, it’s likely he was in­flu­enced by Carl Shapiro & Google econ­o­mist Hal Var­i­an’s best-selling 1999 tech­nol­ogy eco­nom­ics book, In­for­ma­tion Rules: A Strate­gic Guide to the Net­work Econ­omy, which dis­cusses the idea ex­ten­sively. De­fi­n­i­tion: make your­self a mo­nop­oly by grow­ing the mar­kets around you. I ex­cerpt the de­fi­n­i­tion & ex­am­ples be­low (em­pha­sis in orig­i­nal, most links added):

Every prod­uct in the mar­ket­place has sub­sti­tutes and com­ple­ments. A sub­sti­tute is an­other prod­uct you might buy if the first prod­uct is too ex­pen­sive. Chicken is a sub­sti­tute for beef. If you’re a chicken farmer and the price of beef goes up, the peo­ple will want more chick­en, and you will sell more.

A com­ple­ment is a prod­uct that you usu­ally buy to­gether with an­other prod­uct. Gas and cars are com­ple­ments. Com­puter hard­ware is a clas­sic com­ple­ment of com­puter op­er­at­ing sys­tems. And babysit­ters are a com­ple­ment of din­ner at fine restau­rants. In a small town, when the lo­cal five star restau­rant has a two-for-one Valen­tine’s day spe­cial, the lo­cal babysit­ters dou­ble their rates. (Ac­tu­al­ly, the nine-year-olds get roped into early ser­vice.)

All else be­ing equal, de­mand for a prod­uct in­creases when the prices of its com­ple­ments de­crease.

…In gen­er­al, a com­pa­ny’s strate­gic in­ter­est is go­ing to be to get the price of their com­ple­ments as low as pos­si­ble. The low­est the­o­ret­i­cally sus­tain­able price would be the “com­mod­ity price”—the price that arises when you have a bunch of com­peti­tors offer­ing in­dis­tin­guish­able goods. So:

Smart com­pa­nies try to com­modi­tize their prod­ucts’ com­ple­ments.

If you can do this, de­mand for your prod­uct will in­crease and you will be able to charge more and make more.

When IBM de­signed the PC ar­chi­tec­ture, they used off-the-shelf parts in­stead of cus­tom parts, and they care­fully doc­u­mented the in­ter­faces be­tween the parts in the (rev­o­lu­tion­ary) IBM-PC Tech­ni­cal Ref­er­ence Man­ual2. Why? So that other man­u­fac­tur­ers could join the par­ty. As long as you match the in­ter­face, you can be used in PCs. IBM’s goal was to com­modi­tize the ad­d-in mar­ket, which is a com­ple­ment of the PC mar­ket, and they did this quite suc­cess­ful­ly. Within a short time scril­lions of com­pa­nies sprung up offer­ing mem­ory cards, hard dri­ves, graph­ics cards, print­ers, etc. Cheap ad­d-ins meant more de­mand for PCs.

When IBM li­censed the op­er­at­ing sys­tem PC-DOS from Mi­crosoft, Mi­crosoft was very care­ful not to sell an ex­clu­sive li­cense. This made it pos­si­ble for Mi­crosoft to li­cense the same thing to Com­paq and the other hun­dreds of OEMs who had legally cloned the IBM PC us­ing IBM’s own doc­u­men­ta­tion. Mi­crosoft’s goal was to com­modi­tize the PC mar­ket. Very soon the PC it­self was ba­si­cally a com­mod­i­ty, with ever de­creas­ing prices, con­sis­tently in­creas­ing pow­er, and fierce mar­gins that make it ex­tremely hard to make a profit. The low prices, of course, in­crease de­mand. In­creased de­mand for PCs meant in­creased de­mand for their com­ple­ment, MS-DOS. All else be­ing equal, the greater the de­mand for a pro­duct, the more money it makes for you. And that’s why Bill Gates can buy Swe­den and you can’t.

“Smart companies try to commoditize their products’ complements”

Spol­sky pro­vides 8 ex­am­ples (IBM com­modi­tiz­ing the ad­d-on man­u­fac­tur­ers, MS com­modi­tiz­ing IBM+PC man­u­fac­tur­ers, IBM/Transmeta/Sun/HP fund­ing FLOSS/Linux, Netscape open-sourc­ing Nav­i­ga­tor, Sun de­vel­op­ing Java & the JVM):

Un­der­stand­ing this strat­egy ac­tu­ally goes a long, long way in ex­plain­ing why many com­mer­cial com­pa­nies are mak­ing big con­tri­bu­tions to open source. Let’s go over these.

  • Head­line: IBM Spends Mil­lions to De­velop Open Source Soft­ware.

  • Myth: They’re do­ing this be­cause Lou Ger­st­ner read the GNU Man­i­festo and de­cided he does­n’t ac­tu­ally like cap­i­tal­ism.

  • Re­al­ity: They’re do­ing this be­cause IBM is be­com­ing an IT con­sult­ing com­pa­ny. IT con­sult­ing is a com­ple­ment of en­ter­prise soft­ware. Thus IBM needs to com­modi­tize en­ter­prise soft­ware, and the best way to do this is by sup­port­ing open source. Lo and be­hold, their con­sult­ing di­vi­sion is win­ning big with this strat­e­gy. …

  • Head­line: Netscape Open Sources Their Web Browser.

  • Myth: They’re do­ing this to get free source code con­tri­bu­tions from peo­ple in cy­ber­cafes in New Zealand.

  • Re­al­ity: They’re do­ing this to com­modi­tize the web brows­er. This has been Netscape’s strat­egy from day one. Have a look at the very first Netscape press re­lease: the browser is “free­ware”. Netscape gave away the browser so they could make money on servers. Browsers and servers are clas­sic com­ple­ments. The cheaper the browsers, the more servers you sell. This was never as true as it was in Oc­to­ber 1994. …

  • Head­line: Trans­meta Hires Li­nus, Pays Him To Hack on Linux.

  • Myth: They just did it to get pub­lic­i­ty. Would you have heard of Trans­meta oth­er­wise?

  • Re­al­ity: Trans­meta is a CPU com­pa­ny. The nat­ural com­ple­ment of a CPU is an op­er­at­ing sys­tem. Trans­meta wants OSs to be a com­mod­i­ty.

  • Head­line: Sun and HP Pay Ximian To Hack on Gnome.

  • Myth: Sun and HP are sup­port­ing free soft­ware be­cause they like Bazaars, not Cathe­drals.

  • Re­al­ity: Sun and HP are hard­ware com­pa­nies. They make box­en. In or­der to make money on the desk­top, they need for win­dow­ing sys­tems, which are a com­ple­ment of desk­top com­put­ers, to be a com­mod­i­ty. Why don’t they take the money they’re pay­ing Ximian and use it to de­velop a pro­pri­etary win­dow­ing sys­tem? They tried this (Sun had NeWS and HP had New Wave), but these are re­ally hard­ware com­pa­nies at heart with pretty crude soft­ware skills, and they need win­dow­ing sys­tems to be a cheap com­mod­ity, not a pro­pri­etary ad­van­tage which they have to pay for. So they hired the nice guys at Ximian to do this for the same rea­son that Sun bought Star Office and open sourced it: to com­modi­tize soft­ware and make more money on hard­ware.

  • Head­line: Sun De­vel­ops Java; New “Byte­code” Sys­tem Means Write On­ce, Run Any­where [WORA]. [See also Mi­crosoft’s .NET Frame­work.]

    The byte­code idea is not new—pro­gram­mers have al­ways tried to make their code run on as many ma­chines as pos­si­ble. (That’s how you com­modi­tize your com­ple­men­t). For years Mi­crosoft had its own p-code com­piler and portable win­dow­ing layer which let Ex­cel run on Mac, Win­dows, and OS/2, and on Mo­toro­la, In­tel, Al­pha, MIPS and Pow­erPC chips. Quark [QuarkX­Press?] has a layer which runs Mac­in­tosh code on Win­dows. The C pro­gram­ming lan­guage is best de­scribed as a hard­ware-in­de­pen­dent as­sem­bler lan­guage. It’s not a new idea to soft­ware de­vel­op­ers.

    If you can run your soft­ware any­where, that makes hard­ware more of a com­mod­i­ty. As hard­ware prices go down, the mar­ket ex­pands, dri­ving more de­mand for soft­ware (and leav­ing cus­tomers with ex­tra money to spend on soft­ware which can now be more ex­pen­sive.)

    Sun’s en­thu­si­asm for WORA is, um, strange, be­cause Sun is a hard­ware com­pa­ny. Mak­ing hard­ware a com­mod­ity is the last thing they want to do. Oooooooooooooooooooooops! Sun is the loose can­non of the com­puter in­dus­try. Un­able to see past their rag­ing fear and loathing of Mi­crosoft, they adopt strate­gies based on anger rather than self­-in­ter­est. Sun’s two strate­gies are (a) make soft­ware a com­mod­ity by pro­mot­ing and de­vel­op­ing free soft­ware (S­tar Office, Lin­ux, Apache, Gnome, etc), and (b) make hard­ware a com­mod­ity by pro­mot­ing Java, with its byte­code ar­chi­tec­ture and WORA. OK, Sun, pop quiz: when the mu­sic stops, where are you go­ing to sit down? With­out pro­pri­etary ad­van­tages in hard­ware or soft­ware, you’re go­ing to have to take the com­mod­ity price, which barely cov­ers the cost of cheap fac­to­ries in Guadala­jara, not your cushy offices in Sil­i­con Val­ley.3

“Open Source as a Strategic Weapon”

In Eric S. Ray­mond’s fa­mous 1999 The Cathe­dral and the Bazaar, he in­cludes a sec­tion, “Open Source as a Strate­gic Weapon” on com­mer­cial mo­ti­va­tions for spon­sor­ship of FLOSS along the lines of Spol­sky’s ex­am­ples, list­ing Apache, the X win­dow sys­tem, and Netscape Mozilla as ex­am­ples of strate­gic uses of FLOSS which look like “com­modi­tize your com­ple­ment” ex­am­ples:

Cost-shar­ing as a com­pet­i­tive weapon

Ear­lier, we con­sid­ered Apache as an ex­am­ple of bet­ter and cheaper in­fra­struc­ture de­vel­op­ment through cost-shar­ing in an open-source pro­ject. For soft­ware and sys­tems ven­dors com­pet­ing against Mi­crosoft and its IIS web server, the Apache project is also a com­pet­i­tive weapon. It would be diffi­cult, per­haps im­pos­si­ble, for any other sin­gle web server ven­dor to com­pletely off­set the ad­van­tages of Mi­crosoft’s huge war chest and desk­top-mo­nop­oly mar­ket pow­er. But Apache en­ables each cor­po­rate par­tic­i­pant in the project to offer a web­server that is both tech­ni­cally su­pe­rior to IIS and re­as­sures cus­tomers with a ma­jor­ity mar­ket share—at far lower cost. This im­proves the mar­ket po­si­tion and cost of pro­duc­tion for val­ue-added elec­tron­ic-com­merce prod­ucts (like IBM’s Web­Sphere).

…Re­set­ting the com­pe­ti­tion

When the de­vel­op­ment of the open-source X Win­dow Sys­tem was funded by DEC in the 1980s, their ex­plicit goal was to “re­set the com­pe­ti­tion”. At the time there were sev­eral com­pet­ing al­ter­na­tive graph­ics en­vi­ron­ments for Unix in play, no­tably in­clud­ing Sun Mi­crosys­tem­s’s NeWS sys­tem. DEC strate­gists be­lieved (prob­a­bly cor­rect­ly) that if Sun were able to es­tab­lish a pro­pri­etary graph­ics stan­dard it would get a lock on the boom­ing Unix-work­sta­tion mar­ket. By fund­ing X and lend­ing it en­gi­neers, and by al­ly­ing with many smaller ven­dors to es­tab­lish X as a de-facto stan­dard, DEC was able to neu­tral­ize ad­van­tages held by Sun and other com­peti­tors with more in­-house ex­per­tise in graph­ics. This moved the fo­cus of com­pe­ti­tion in the work­sta­tion mar­ket to­wards hard­ware, where DEC was his­tor­i­cally strong.

Pre­vent­ing a choke hold

In ex­plain­ing the loss-leader/market-positioner busi­ness model above, I de­scribed how Netscape’s open-sourc­ing of the Mozilla browser was a (suc­cess­ful) ma­neu­ver aimed at pre­vent­ing Mi­crosoft from effec­tively lock­ing up HTML markup and the HTTP pro­to­col

Generalizing

A way I would ex­press it as: Any prod­uct is the joint out­come of a large num­ber of in­di­vid­ual com­po­nents, each of which lay­ers is nec­es­sary but not suffi­cient to the fi­nal valu­able use of the en­tire stack put to­geth­er; a smart­phone is not much good with­out a pow­er-effi­cient sen­si­tive ra­dio, but the ra­dio is not much good with­out a good OS on top of it, and a good OS is not much good ei­ther with­out great apps like web browsers (and is a web browser all that use­ful if there aren’t use­ful web­sites to use in it, and where are the lan­guages & com­pil­ers for all this com­ing from any­way…?). Many prod­ucts are formed by a stack of two-sided mar­kets.

The end prod­uct of a Sym­bian, iOS, or An­droid smart­phone is with­out a doubt fan­tas­ti­cally valu­able to the user, but what is the fair di­vi­sion of the rev­enue among the count­less peo­ple, tech­nolo­gies, man­u­fac­tur­ers who cre­ated each of the many crit­i­cal­ly-im­por­tant lay­ers in the full tech stack? Cer­tainly con­tem­po­rary in­tel­lec­tual prop­erty law (eg “soft­ware patents”) does not pro­vide a so­cial­ly-effi­cient dis­tri­b­u­tion like the Shap­ley value to all the par­tic­i­pants! There are con­straints in that the fi­nal prod­uct can­not cost more than the value to the user (other­wise con­sumers sim­ply would­n’t buy it, and if the con­sumer sur­plus is­n’t at least con­sid­er­ably above ze­ro, no one would bother to learn about it) and the com­pa­nies in the com­modi­tized lay­ers can’t be forced down to be­low mar­ginal costs (other­wise they would go bank­rupt & exit the mar­ket), but these are weak, and do not give any good hints as to who will cap­ture the ma­jor­ity of the val­ue: the chip fab man­u­fac­tur­ers? the chip de­sign­ers? the de­vice man­u­fac­tur­ers? the OS de­vel­op­ers? the user­land ap­pli­ca­tion de­vel­op­ers? the ISPs? the web­site own­ers?

Ver­ti­cal in­te­gra­tion can be an effec­tive way of re­solv­ing the in­tractable mar­ket dis­pute with top-down dic­ta­tor­ships, but can re­quire lax an­ti-mo­nop­oly reg­u­la­tions, high cap­i­tal in­vest­ment, mas­sive cor­po­ra­tion overex­ten­sion & em­pire-build­ing, and risks be­ing out­com­peted at every level by nim­bler com­peti­tors; this makes it diffi­cult for any up­-and-com­ing com­pany to im­ple­ment, and often in­effec­tive. Com­modi­tiz­ing the com­ple­ments, in con­trast, per­mits a com­pany to re­main (rel­a­tive­ly) small & lean, can often be ac­com­plished with small strate­gic in­vest­ments in re­leas­ing in­tel­lec­tual prop­erty or other in­vest­ments, can be done in­cre­men­tally fo­cus­ing on spe­cific lay­ers with­out the “Big Bang” ori­en­ta­tion of ver­ti­cal in­te­gra­tion and per­mit­ting “de­feat in de­tail”, re­tains the gen­eral fa­cade of com­pe­ti­tion, and en­sures the ex­treme com­pe­ti­tion re­mains con­fined to other lay­ers of the stack where the prod­uct can ben­e­fit from the cost re­duc­tions in the com­ple­ment but is not it­self at any risk.

In prac­tice, the di­vi­sion winds up be­ing due to power plays and mar­ket dy­nam­ics, and who can most effec­tively erect a moat while sab­o­tag­ing com­peti­tors, ex­ploit­ing tac­tics like law­suits & soft­ware patent trolling, pro­pri­etary APIs, cross-busi­ness sub­si­dies, kick­backs, DRM, de­lib­er­ate in­com­pat­i­bil­ity or “em­brace and ex­tend”, FUD, op­er­at­ing at a loss in­defi­nite­ly, etc. (“There’s An App For That” is why you buy an iPhone—but it’s Ap­ple with the $930 bil­lion mar­ket cap & not the app de­vel­op­er­s.)

Done cor­rect­ly, this is effec­tive at per­pet­u­at­ing in­cum­bents’ long-term con­trol of mar­kets & jus­ti­fies their enor­mous val­u­a­tion­s—by de­fi­n­i­tion, the com­peti­tors else­where in the stack, who might de­velop a choke­point, are too nu­mer­ous, frag­ment­ed, and low-mar­gin to in­vest sub­stan­tially into threat­en­ing R&D4 or long-term strate­gic ini­tia­tives, and any up­start star­tups can be rel­a­tively eas­ily bought out or sup­pressed (eg In­sta­gram or What­sAp­p). Nor does this re­quire con­vo­luted ex­pla­na­tions like “they are pre­tend­ing to not be mo­nop­o­lists” or fully gen­eral un­fal­si­fi­able claims like “it’s good PR” for why big com­pa­nies like Google steadily fund so many ap­par­ently odd­ball projects like new for­eign lan­guage fonts (or free True­Type fonts & True­Type it­self) or open source TCP/IP pro­to­col re­place­ments, which are nei­ther di­rectly profitable nor well-known nor im­pres­sively char­i­ta­ble—but do have clear ex­pla­na­tions in terms of busi­ness ob­jec­tives like “dri­ving more mo­bile web brows­ing” (thus al­low­ing Google to show them more ads, be­cause the com­ple­ment, mo­bile web brows­ing, has be­come cheaper/easier). I won­der if this also ex­plains some of the strik­ing copy­cat be­hav­ior we see some­times—as en­ti­ties get wor­ried some­thing might be a com­mod­i­fier, ei­ther be­cause it is cru­cial but was for­merly con­sid­ered ‘neu­tral’ or be­cause they as­sume the other en­tity knows some­thing they don’t. (Google cared lit­tle about an al­so-ran code-host­ing site like Git­Lab other than some VC in­vest­men­t—well, right up un­til Mi­crosoft out­bid it for Github & Github be­came free for in­di­vid­ual de­vel­op­ers & ac­quired NPM, and then sud­denly Git­Lab be­comes a uni­corn with even more VC from Google & oth­er­s.) As ucae­tano puts it:

An­other way that I like to ex­press that is “cre­ate a desert of profitabil­ity around you”. I once had a strat­egy pro­fes­sor de­fine the Google busi­ness model some­what like that, where “Google tries to make every other busi­ness around it free or ir­rel­e­vant”…A desert of profitabil­ity shifts con­sumers to you, and keeps com­peti­tors away.

Examples

A list of ex­am­ples I think re­flect this dy­namic to some ex­tent:

  • hard­ware vs soft­ware: IBM’s 1956 con­sent de­cree set­tling a 1952 an­titrust law­suit: IBM was re­quired to sell as well as lease its de­vices; more im­por­tant­ly, its busi­ness ser­vices arm was spun off and IBM had to li­cense software/patents/manuals/training to com­peti­tors.

    Pre­vi­ous­ly, IBM (like many other hard­ware man­u­fac­tur­ers) in­cluded all nec­es­sary soft­ware with its hard­ware for ‘free’, par­tic­u­larly for the OS/360, stran­gling any in­de­pen­dent soft­ware mar­ket; the de­cree and the even­tual “un­bundling” is cred­ited with spark­ing a vi­brant (and highly profitable) mar­ket for IBM main­frame soft­ware. (It is also cred­ited with putting the fear of God into IBM & pro­tect­ing smaller com­pa­nies like Mi­crosoft; in an ironic rep­e­ti­tion, Mi­crosoft’s own an­titrust tra­vails in the 1990s are cred­ited for caus­ing it to back off its clas­sic ruth­less tac­tics and en­able Google’s own rise to dom­i­nance5.)

    IBM’s paten­t-free re­lease of the Pow­erPC ISA in 2019 might be an­other ex­am­ple.

  • banks vs mer­chants: credit card companies/small busi­ness­es: in­ter­change fees in par­tic­u­lar (part of why the credit card in­dus­try is one of the high­est-profit mar­gin ones after aca­d­e­mic pub­lish­ing—it­self a highly sus­pi­cious ex­am­ple). Ama­zon vs Pay­Pal is a big ex­am­ple.

  • in­te­grated vs open ar­chi­tec­tures: Lisp ma­chines vs x86/SPARC/Sun

  • apps vs OSes: Netscape vs Win­dows (in Robert Met­calfe’s in­fa­mous ex­pres­sion, cross-plat­form web browsers & the In­ter­net would re­duce Win­dows to a “poorly de­bugged set of de­vice dri­vers”); MS’s ini­tial re­sponse was to… li­cense IE free for all users, not just non­com­mer­cial users like Netscape, killing a ma­jor rev­enue stream for Netscape early on6

  • FLOSS: Red Hat, Google etc

    • ed­i­tors vs IDEs: XEmacs rep­re­sented an early ex­am­ple of a com­pany try­ing to im­prove a FLOSS ver­sion of a genre of soft­ware pre­vi­ously typ­i­cally sold com­mer­cially (text ed­i­tors) in or­der to sup­port sales of more niche tool­ing (their C++ IDE)
    • IDEs vs soft­ware devs: GNU and compiler/interpreter com­pa­nies: GCC; com­mer­cial C++ im­ple­men­ta­tions would them­selves be can­ni­bal­ized by GCC, and IDEs by other FLOSS IDEs (apro­pos of IBM and Java, Eclipse)
    • pro­gram­ming lan­guage ecosys­tems vs users: in pro­gram­ming com­mu­ni­ties (e­spe­cially func­tional lan­guages like Haskell/OCaml/Scala/Clojure), it is com­mon for a lot of work on compilers/libraries/tutorials/books to be spon­sored by web de­vel­op­ment or con­sul­tan­cies, serv­ing both as ad­ver­tise­ments for their ca­pa­bil­i­ties and also re­mov­ing pain points to use of said pro­gram­ming lan­guages and thus in­creas­ing de­mand for their ser­vices. (If no­body uses Haskell be­cause GHC has a ma­jor bug, no­body is go­ing to hire a Haskell con­sul­tancy like Well-Typed, ei­ther. In the sales fun­nel, you have to have cus­tomers en­ter­ing the fun­nel to get any cus­tomers out.)
    • art tools vs artists: me­dia de­sign tools like Au­todesk’s AutoCAD/Maya vs FLOSS al­ter­na­tives like Blender, the lat­ter of which are sup­ported by com­mer­cial users such as the an­i­ma­tion stu­dio Khara feel­ing the pain. Other ex­am­ples in­clude Net­flix spon­sor­ing de­vel­op­ment of 4k HDR anime (which would be high­ly-band­width-in­ten­sive to stream)

  • TTRPG game pub­lish­ers vs them­selves’ “open gam­ing”:

    In 2000, Wiz­ards of the Coast (owner of Dun­geons & Drag­ons) ex­ec­u­tive Ryan Dancey mas­ter­minded the cre­ation of the Open Game Li­cense, mod­eled on the GPL, and the re­lease of the 3rd Edi­tion’s core d20 Sys­tem rules un­der the Open Game Li­cense; Dancey’s rea­son­ing was ex­plic­itly based on the idea that by open-sourc­ing D&D, that would help it pre­vail over the con­stant stream of table­top RPG com­peti­tors through net­work effects, and drive sales of the (ex­pen­sive) core rule­book, the Player Hand­book

  • game por­tals vs game devs: Valve: Steam vs game developers/studios such as Epic Games7

    Steam can be seen as a ‘con­sole maker’, and ex­em­pli­fy­ing con­sole mak­ers vs game devs: the suc­cess of Epic Games’s Fort­nite is at­trib­uted in part to its use of the cross-plat­form Un­real game en­gine, al­low­ing it to run seam­lessly on all ma­jor PC, mo­bile, and con­soles (“Mi­crosoft Win­dows, ma­cOS, Nin­tendo Switch, PlaySta­tion 4, Xbox One, iOS, An­droid”); when Sony tried to main­tain the usual PlaySta­tion 4 walled-gar­den by break­ing in­ter­op­er­abil­ity with Fort­nite play­ers on other plat­forms, the back­lash forced it to an­nounce it would com­pro­mise, and Epic Games sim­ply opted out of An­droid’s walled gar­den & Google’s cut of rev­enue, sav­ing Epic Games more than $50 mil­lion an­nu­al­ly.

    • apps vs OSes: Linux (“SteamOS”) vs Mi­crosoft Win­dows (“Gabe I think saw it as a stick to beat Mi­crosoft with­—and he was ab­solutely cor­rect, it worked.”)

    • games vs game hard­ware: VR: Valve’s Vive vs Face­book Ocu­lus.

      Valve will be fine if Vive does­n’t win the VR mar­ket as long as no one else wins too—be­cause no one makes money on com­puter games ex­cept… Steam. While for Ocu­lus, the dan­ger is in be­com­ing just an ex­pen­sive hard­ware pe­riph­er­al, whose parts they don’t man­u­fac­ture but merely as­sem­ble against a stan­dard soft­ware in­ter­face, where they are forced to com­pete against cut-rate Chi­nese man­u­fac­tur­ing gi­ants for near-zero profit mar­gin, a re­run of the smart­phone mar­ket (a sim­i­lar mar­ket, as they even use the same screen­s). The dan­ger of lockin to an Oculus/Facebook walled gar­den is clear to gamers, and has made life diffi­cult for Ocu­lus: they can’t push ex­clu­sives too hard or be as ag­gres­sive in fight­ing out­siders as they want, lest they spark a back­lash or crip­ple the VR mar­ket as a whole. Which makes it in­ter­est­ing—both Vive and Ocu­lus have in­cen­tives to co­op­er­ate… for now. But there’s con­stant pres­sure for a be­trayal when a player gets des­per­ate or de­cides the mar­ket has ma­tured and it’s time to break for the fin­ish line, like Mi­crosoft re­leas­ing IE.

    • pub­lish­ers vs es­ports teams: game pub­lish­ers, due to DRM & forc­ing matches to go through pub­lish­ers, have a death-grip over their plat­forms, and pub­lish­ers like Riot Games or Bliz­zard En­ter­tain­ment have been care­ful to main­tain con­trol over their es­ports lest the tail wag the dog, weak­en­ing teams by down­play­ing team mer­chan­dise & reg­u­larly adding in IP re­quire­ments & tak­ing rev­enue cuts up­front

  • tele­coms vs users: ISPS vs tech com­pa­nies via Net neu­tral­ity (eg spec­trum auc­tions, Google Fiber, ze­ro-rat­ing)

    eg Jio Re­liance, an In­dian tele­com ISP, dis­rupted the In­dian mo­bile In­ter­net mar­ket by can­ni­bal­iz­ing ex­ist­ing mar­gins, un­der the logic that after com­modi­tiz­ing data & voice, it’ll profit (China/Africa-style) off broad­band & “con­tent, fi­nan­cial ser­vices and ad­ver­tis­ing”8

  • net­work­ing hard­ware man­u­fac­tur­ers vs In­ter­net com­pa­nies: spe­cial-pur­pose net­work­ing hard­ware (e­spe­cially Cisco Sys­tems) vs Soft­ware-de­fined net­work­ing (as em­ployed by Google/Mi­crosoft/Amazon/cloud gi­ants)

    Peo­ple are al­ways sur­prised how much cus­tom sil­i­con goes into a dat­a­cen­ter server or a smart­phone (it’s com­put­ers all the way down), but a com­pany like Ap­ple or Ama­zon can­not risk be­ing held up by a would-be mo­nop­o­list like In­tel, thus the peren­nial in­ter­est in fab­bing their own cus­tom chips or dab­bling in chips from In­tel ri­vals ARM & AMD—cutting-edge CPUs, how­ev­er, re­main hard and ex­pen­sive enough to de­sign & make that no one has yet suc­ceeded in com­modi­tiz­ing top-end x86 CPUs, and these moves re­main largely ne­go­ti­at­ing ploys or im­prove­ments for niche use-cases

  • smart­phones (lot­s):

  • genome se­quencer man­u­fac­tur­ers vs doctors/researchers: Il­lu­mina vs 23andMe & BGI:

    The Il­lu­mi­nati have a no­to­ri­ous stran­gle­hold on the genome se­quenc­ing mar­ket, with enough of an In­tel-style lead in con­sum­ables effi­ciency that they can drop prices just enough to sup­press com­peti­tors (this is may what is be­hind the oc­ca­sional in­ex­plic­a­ble “pauses” in the fa­mous graph of genome se­quenc­ing cost drop­ping ex­po­nen­tially over time); in re­sponse to the high prices, heavy users of genome se­quenc­ing have launched des­per­ate at­tempts to es­cape the Il­lu­mina monopoly, such as BGI’s il­l-fated ac­qui­si­tion of Com­plete Ge­nomics whose se­quencers ul­ti­mately proved in­ad­e­quate after sow­ing in­ter­nal chaos & wreck­ing many pro­jects; ru­mor has it that 23andMe launched its own very ex­pen­sive in­ter­nal at­tempt to de­velop re­place­ment genome se­quencers, and this was a ma­jor con­trib­u­tor to its fi­nan­cial woes after the FDA de­ba­cle.

  • ride-shar­ing ser­vice vs dri­vers: Uber/Lyft vs self­-em­ployed dri­vers vs self­-driv­ing cars

    • Car Soft­ware Devs vs Car Man­u­fac­tur­ers: self­-driv­ing car de­vel­op­ers like Google Waymo vs car man­u­fac­tur­ers like Honda (the Hon­da-Waymo part­ner­ship fell apart in 2018 re­port­edly be­cause Honda wanted ac­cess to the AI & soft­ware of Waymo, and Way­mo, for rea­sons that should be clear now, re­fused; Honda was forced to in­vest in ri­val GM’s Cruise). As the WSJ de­scribes au­tomak­ers’ think­ing:

      The global auto in­dus­try thinks it sees the fu­ture, and it will re­quire a trans­for­ma­tion with­out prece­dent in busi­ness his­to­ry: The gi­ant in­dus­trial sec­tor has to turn it­self into a nim­ble provider of soft­ware and ser­vices…Auto ex­ec­u­tives say they need to avoid a night­mare tech sce­nario that’s be­come a com­mon re­frain at in­dus­try gath­er­ings. They don’t want to be­come the next “hand­set mak­ers”—com­mod­ity sup­pli­ers of hard­ware, help­lessly watch­ing all the profits flow to soft­ware mak­ers like Ap­ple Inc. and Al­pha­bet In­c., the par­ent of Google. Both com­pa­nies are in­vest­ing in soft­ware for dri­ver­less cars.

  • voice syn­the­siz­ers vs singers: Cryp­ton’s Vocaloid vs singers: the voice-syn­the­sizer soft­ware sparked an am­a­teur ex­plo­sion of song pro­duc­tion, as ap­par­ently even finicky soft­ware made high­-qual­ity singing far more ac­ces­si­ble; Cryp­ton sells the soft­ware and main­tains con­trol over spe­cific char­ac­ters like Hat­sune Miku (sam­pled from mi­nor voice ac­tress Saki Fu­jita), par­tic­u­larly over all li­cens­ing and com­mer­cial rev­enue, which for­merly would have to be shared with the hu­man idol.

    Note the seg­men­ta­tion—­soft­ware like Vocaloid syn­the­siz­ers em­power the mu­si­cians (who can now pro­duce high­-qual­i­ty, com­pet­i­tive with hu­mans given enough tweak­ing, vo­cals to go along with their mu­sic) at the ex­pense of the more-spe­cial­ized singers. (A singer can pro­duce their own ver­sion of a Vocaloid hit, but are no longer a choke­point.)

  • In­ter­net ser­vices vs man­u­fac­tur­ers: FB’s Open Com­pute Project pro­vid­ing free de­signs like Open Rack for build­ing effi­cient dat­a­cen­ters, and ac­qui­si­tions of In­sta­gram/What­sApp

    • FLOSS vs SaaS: Elas­tic vs Amazon/Netflix/Ex­pe­dia: Elas­tic­search is tex­t-search soft­ware for large-s­cale doc­u­ment search­es; it is com­mer­cial­ized by Elas­tic, which fol­lows a split-FLOSS model where the core Elas­tic­search is FLOSS but fea­tures crit­i­cal for large-s­cale com­mer­cial use (like ‘any se­cu­rity’) are closed-source & must be li­censed. In re­sponse to Elas­tic de-em­pha­siz­ing the FLOSS and in­creas­ingly switch­ing de­vel­op­ment to closed-source-on­ly, on 2019-03-11, Amazon/Netflix/Expedia—who offer Elas­tic­search as part of their cloud offer­ings or rely on it in­ter­nal­ly—an­nounced a fork, “Open Dis­tro for Elas­tic­search”. Con­verse­ly, con­sider Ama­zon AWS vs Ku­ber­netes/Docker. (As one of the main cloud providers, Ama­zon is merely one the most vis­i­ble & crit­i­cized prac­ti­tion­ers of this kind of en­clo­sure, but, rhetoric about ‘strip-min­ing’ aside, of course this sort of thing is why much FLOSS soft­ware is funded in the first place by en­ti­ties large and small & those com­plain­ing often ben­e­fit enor­mously from com­modi­tize-y­our-com­ple­ment fights else­where—what OSes do they all run on, for ex­am­ple?)

  • im­age hosts vs so­cial me­dia ser­vices: Imgur vs Red­dit: “The De­cline of Imgur on Red­dit and the Rise of Red­dit’s Na­tive Im­age Host­ing”

  • me­dia com­pa­nies vs the In­ter­net: Vevo vs YouTube (“a for­mer YouTube exec” is quoted as say­ing “Huge huge suc­cess for YouTube…Y­ouTube needed Vevo to ex­ist for just long enough to be­come so pop­u­lar that the la­bels had no lever­age any­more.”) , Hulu vs Netflix/Amazon/BitTorrent…

  • search en­gines vs mar­ket op­er­a­tors:

    • Dark­net Mar­kets: many DNMs pro­vided an API for the DNM search en­gine “Grams” when small9, then ne­glected or re­voked it at some point; this has an easy in­ter­pre­ta­tion: DNM sell­ers and buy­ers want mar­kets to be com­modi­ties that they can smoothly move their rep­u­ta­tions & busi­ness be­tween as DNMs go up or down (as they his­tor­i­cally have); while of course, mar­kets want ven­dors to be trapped and locked into them, and the mar­ket able to charge high com­mis­sions for the priv­i­lege of be­ing where buy­ers go to find drugs

    • Book­ing Agen­cies vs Hotels/Airlines: ex­em­pli­fied by the story of Room Key and Book­ing.­com

  • Restau­rants:

  • Ven­ture Cap­i­tal: Y Com­bi­na­tor: run­ning Hacker News, re­leas­ing “SAFE” notes & sales tem­plates, de­vel­op­ing Startup School

See Also

Appendix

Information Rules

Quotes from In­for­ma­tion Rules: A Strate­gic Guide to the Net­work Econ­omy, Shapiro & Var­ian 1999:

  1. “Chap­ter 1: The In­for­ma­tion Econ­omy”:

    Tra­di­tional rules of com­pet­i­tive strat­egy fo­cus on com­peti­tors, sup­pli­ers, and cus­tomers. In the in­for­ma­tion econ­o­my, com­pa­nies sell­ing com­ple­men­tary com­po­nents, or com­ple­men­tors, are equally im­por­tant. When you are sell­ing one com­po­nent of a sys­tem, you can’t com­pete if you’re not com­pat­i­ble with the rest of the sys­tem. Many of our strate­gic prin­ci­ples are specifi­cally de­signed to help com­pa­nies sell­ing one com­po­nent of an in­for­ma­tion sys­tem.

    The de­pen­dence of in­for­ma­tion tech­nol­ogy on sys­tems means that firms must fo­cus not only on their com­peti­tors but also on their col­lab­o­ra­tors. Form­ing al­liances, cul­ti­vat­ing part­ners, and en­sur­ing com­pat­i­bil­ity (or lack of com­pat­i­bil­i­ty!) are crit­i­cal busi­ness de­ci­sion­s…The his­tory of the Mi­crosoft­-In­tel part­ner­ship is a clas­sic ex­am­ple. Mi­crosoft fo­cused al­most ex­clu­sively on soft­ware, while In­tel fo­cused al­most ex­clu­sively on hard­ware. They each made nu­mer­ous strate­gic al­liances and ac­qui­si­tions that built on their strengths. The key for each com­pany has been to com­modi­tize com­ple­men­tary prod­ucts with­out erod­ing the value of its own core strengths. For ex­am­ple, In­tel has en­tered new prod­uct spaces such as chipsets and moth­er­boards to im­prove the per­for­mance of these com­po­nents and thereby stim­u­late de­mand for its core pro­duct: mi­cro­proces­sors. In­tel has helped to cre­ate a highly com­pet­i­tive in­dus­try in com­po­nent parts such as video cards, sound cards, and hard dri­ves as well as in the as­sem­bly and dis­tri­b­u­tion of per­sonal com­put­ers.

    Mi­crosoft has its fol­low­ing of in­de­pen­dent soft­ware ven­dors (ISVs), and both com­pa­nies have ex­ten­sive li­cens­ing pro­grams with orig­i­nal equip­ment man­u­fac­tur­ers (OEMs). And they each have each oth­er, an ex­tra­or­di­nar­ily pro­duc­tive, if nec­es­sar­ily tense, mar­riage. It’s in the in­ter­est of each com­pany to cre­ate mul­ti­ple sources for its part­ner’s piece of the sys­tem but to pre­vent the emer­gence of a strong ri­val for its own piece. This ten­sion arises over and over again in the in­for­ma­tion tech­nol­ogy sec­tor; Mi­crosoft and In­tel are merely the most vis­i­ble, and profitable, ex­am­ple of the com­plex dy­nam­ics that arise in as­sem­bling in­for­ma­tion sys­tems.

    From “Chap­ter 8: Co­op­er­a­tion and Com­pat­i­bil­ity”:

    …S­tan­dards that “don’t quite work” are the bane of cus­tomers. It used to be that you were never quite sure ex­actly which video cards would work with which sound cards; your PC maker added value by mak­ing sure that the com­po­nents in the sys­tem you or­dered all worked to­geth­er. Nowa­days, pretty much all PC hard­ware works to­gether be­cause of efforts by In­tel and Mi­crosoft to pro­mul­gate in­dus­try stan­dards. This has been great for In­tel and Mi­crosoft but has par­tially com­modi­tized the PC OEM busi­ness, in which com­pe­ti­tion is in­creas­ingly based on be­ing the low-cost pro­ducer and dis­trib­u­tor.

  2. “Chap­ter 3: Ver­sion­ing In­for­ma­tion”:

    Bar­gain Finder is a case in point. Brian Krul­wich, a re­searcher at An­der­sen Con­sult­ing, de­signed a lit­tle pro­gram that would search on­line CD stores for the best prices for mu­sic CDs. Bar­gain Finder was an im­me­di­ate hit on the Web: it had more than 100,000 uses in the first two months it was avail­able. But after a few months of use, three of the eight stores that Bar­gain Finder searched de­cided to pre­vent it from ac­cess­ing their price lists.

    Re­mem­ber the first les­son in Chap­ter 2? Avoid com­modi­ti­za­tion. The on-line CD stores did­n’t want to com­pete on price alone. They wanted to com­pete on ser­vice and value added. By al­low­ing Bar­gain Finder to look only at one di­men­sion of what the stores offered, they ended up com­modi­tiz­ing their prod­uct.

    This sort of com­modi­ti­za­tion may be hard to avoid with In­ter­net shop­ping. Ser­vices like PriceS­can com­pile lists of ad­ver­tised prices for com­puter equip­ment and con­sumer elec­tron­ics. This is a great ser­vice for con­sumers, but it will make the re­tail­ing mar­ket even more cut­throat than it al­ready is.

  3. “Chap­ter 9: Wag­ing a Stan­dards War”:

    Com­modi­tiz­ing Com­ple­men­tary Prod­ucts: Once you’ve won, you want to keep your net­work alive and healthy. This means that you’ve got to at­tend not only to your own prod­ucts but to the prod­ucts pro­duced by your com­ple­men­tors as well. Your goal should be to re­tain your fran­chise as the mar­ket leader but en­cour­age a vi­brant and com­pet­i­tive mar­ket for com­ple­ments to your prod­uct.

    This can be tricky. Ap­ple has flipped back and forth on its de­vel­oper re­la­tions over the years. First it just wanted to be in the com­puter busi­ness and let oth­ers de­velop ap­pli­ca­tions. Then it es­tab­lished a sub­sidiary, Cor­bis, to do ap­pli­ca­tions de­vel­op­ment. When this soured re­la­tions with other de­vel­op­ers, Ap­ple spun Cor­bis off. And so it wen­t—a back­-and-forth dance.

    Mi­crosoft faced the same prob­lem, but with a some­what differ­ent strat­e­gy. If an ap­pli­ca­tions de­vel­oper be­came suc­cess­ful, Mi­crosoft just bought it out! Or tried to—Mi­crosoft’s in­tended pur­chase of In­tuit was blocked by the De­part­ment of Jus­tice. Nowa­days a lot of new busi­ness plans in the soft­ware in­dus­try have the same struc­ture: “Pro­duce pro­duct, cap­ture emerg­ing mar­ket, be bought by Mi­crosoft.”

    En­ter ad­ja­cent mar­kets only if in­te­gra­tion adds value for con­sumers.

    Our view is that you should try to main­tain a com­pet­i­tive mar­ket in com­ple­men­tary prod­ucts and avoid the temp­ta­tion to med­dle. En­ter into these mar­kets only if (1) in­te­gra­tion of your core prod­uct with ad­ja­cent prod­ucts adds value to con­sumers or (2) you can in­ject sig­nifi­cant ad­di­tional com­pe­ti­tion to keep prices low. If you are truly suc­cess­ful, like In­tel, you will need to spur in­no­va­tion in com­ple­men­tary prod­ucts to help fuel growth.

    …When you’ve won your war, don’t rest easy. Cater to your in­stalled base and avoid com­pla­cen­cy. Don’t let the de­sire for back­ward com­pat­i­bil­ity hob­ble your abil­ity to im­prove your pro­duct; do­ing so will leave you open to an en­trant em­ploy­ing a rev­o­lu­tion strat­e­gy. Com­modi­tize com­ple­men­tary prod­ucts to make your sys­tems more at­trac­tive to con­sumers.

  1. It was re­pub­lished in the 2004 an­thol­o­gy, Joel on Soft­ware: And on Di­verse and Oc­ca­sion­ally Re­lated Mat­ters That Will Prove of In­ter­est to Soft­ware De­vel­op­ers, De­sign­ers, and Man­agers, and to Those Who, Whether by Good For­tune or Ill Luck, Work with Them in Some Ca­pac­ity, but I only spot­ted mi­nor for­mat­ting changes like re­mov­ing some hy­per­links, so the 2002 blog post is the canon­i­cal ver­sion.↩︎

  2. To quote David J. Bradley, who worked on the IBM PC team, “We had learned from the Data­Mas­ter de­vel­op­ment and from the ex­pe­ri­ences of oth­ers that even a com­pany the size of IBM could­n’t de­velop all the hard­ware and soft­ware to make a per­sonal com­puter a suc­cess. From the be­gin­ning, we de­cided to pub­lish data con­cern­ing all the hard­ware and soft­ware in­ter­faces. Any­one de­sign­ing an adapter or a pro­gram to run on the IBM PC would get as much in­for­ma­tion as we had avail­able.” The suc­cess of this strat­egy and the (un­patent­ed, roy­al­ty-free) In­dus­try Stan­dard Ar­chi­tec­ture prompted IBM’s (failed) at­tempt to put the cat back in the bag with its Mi­cro Chan­nel ar­chi­tec­ture; as Ma­her de­scribes it:

    Un­like the orig­i­nal IBM bus ar­chi­tec­ture, MCA was locked up in­side an iron­clad cage of patents, mak­ing it legally un­clone­able un­less one could some­how ne­go­ti­ate a li­cense to do so through IBM. The patents even ex­tended to ad­d-on cards and other pe­riph­er­als that might be com­pat­i­ble with MCA, mean­ing that ab­solutely any­one who wanted to make a hard­ware ad­d-on for an MCA ma­chine would have to ne­go­ti­ate a li­cense and pay for the priv­i­lege. The re­sult should be not only a lu­cra­tive new rev­enue stream but also com­plete con­trol of busi­ness com­put­ing’s fur­ther evo­lu­tion. Yes, the clon­esters would be able to sur­vive for a few more years mak­ing ma­chines us­ing the older 16-bit bus ar­chi­tec­ture. In the longer term, how­ev­er, as per­sonal com­put­ing in­evitably tran­si­tioned into a realm of 32 bits, they would sur­vive purely at IBM’s whim, their fate pred­i­cated on IBM’s will­ing­ness to grant them a patent li­cense for MCA and their own will­ing­ness to pay dearly for it.

    ↩︎

  3. Sun did­n’t find a place, and the re­mains of Sun Mi­crosys­tems were ul­ti­mately pur­chased by Or­a­cle in 2009 –Ed­i­tor.↩︎

  4. Of course, this can pose a prob­lem of its own: if the other lay­ers of the stack have near-zero profits, how will they afford to de­velop new tech­nol­ogy that the in­cum­bent might de­sire? Ap­ple, for ex­am­ple, ap­par­ently has to ex­tend large loans and pro­vide other life-sup­port for hard­ware mak­ers to get the new ma­te­ri­als & man­u­fac­tur­ing tech­niques it wants. This does not al­ways end well, like in the case of the ul­tra­-hard sap­phire screens for the iPhone (TechCrunch; WSJ).↩︎

  5. “The Case Against Google: Crit­ics say the search gi­ant is squelch­ing com­pe­ti­tion be­fore it be­gins. Should the gov­ern­ment step in?”

    Any­one who said that the 1990s pros­e­cu­tion of Mi­crosoft did­n’t ac­com­plish any­thing—that it was com­pa­nies like Google, rather than gov­ern­ment lawyers, that hum­bled Mi­crosoft­—­did­n’t know what they were talk­ing about, Re­back said. In fact, he ar­gued, the op­po­site was true: The an­titrust at­tacks on Mi­crosoft made all the differ­ence. Con­demn­ing Mi­crosoft as a mo­nop­oly is why Google ex­ists to­day, he said.

    Sur­pris­ing­ly, some peo­ple who worked at Mi­crosoft in the 1990s and early 2000s agree with him. In the days when fed­eral pros­e­cu­tors were at­tack­ing Mi­crosoft day and night, the com­pany might have pub­licly brushed off the salvos, in­sid­ers say. But within the work­place, the at­ti­tude was to­tally differ­ent. As the gov­ern­ment sued, Mi­crosoft ex­ec­u­tives be­came so anx­ious and gun-shy that they es­sen­tially un­der­mined their own mo­nop­oly out of ter­ror they might be pil­lo­ried again. It was­n’t the con­sent de­crees or court de­ci­sions that made the differ­ence, ac­cord­ing to mul­ti­ple cur­rent and for­mer Mi­crosoft em­ploy­ees. It was “the con­stant scrutiny and be­ing in the news­pa­per all the time,” said Gene Bur­rus, a for­mer Mi­crosoft lawyer. “Peo­ple started sec­ond-guess­ing them­selves. No one wanted to test the reg­u­la­tors any­more.”

    In pub­lic, Bill Gates was de­clar­ing vic­to­ry, but in­side Mi­crosoft, ex­ec­u­tives were de­mand­ing that lawyers and other com­pli­ance offi­cial­s—the kinds of peo­ple who, pre­vi­ous­ly, were rou­tinely ig­nored—be in­vited to every meet­ing. Soft­ware en­gi­neers be­gan ca­su­ally drop­ping by at­tor­neys’ desks and de­scrib­ing new soft­ware fea­tures, and then ask­ing, in des­per­ate whis­pers, if any­thing they’d men­tioned might trig­ger a sub­poe­na. One Mi­crosoft se­nior ex­ec­u­tive moved an ex­tra chair into his office so a com­pli­ance offi­cial could sit along­side him dur­ing prod­uct re­views. Every time a pro­gram­mer de­tailed a new idea, the ex­ec­u­tive turned to the offi­cial, who would point his thumb up or down like a capri­cious Ro­man em­per­or. In the early 2000s, Mi­crosoft’s top ex­ec­u­tives told some di­vi­sions that their plans would be proac­tively shared with com­peti­tors—lit­er­ally de­scrib­ing what the com­pany in­tended to cre­ate be­fore soft­ware was even built—to make sure it would­n’t offend any­one who was likely to sue. Mi­crosoft’s en­gi­neers were out­raged. But they went along with it. And most im­por­tant, as Mi­crosoft lived un­der gov­ern­ment scruti­ny, em­ploy­ees aban­doned what had been nascent in­ter­nal dis­cus­sions about crush­ing a young, emerg­ing com­peti­tor—­Google. There had been in­for­mal con­jec­tures about re­pro­gram­ming Mi­crosoft’s web browser, the pop­u­lar In­ter­net Ex­plor­er, so that any­time peo­ple typed in “Google,” they would be redi­rected to MSN Search, ac­cord­ing to com­pany in­sid­ers. Or, per­haps a warn­ing mes­sage might pop up: “Did you know Google uses your data in ways you can’t con­trol?”

    Mi­crosoft was so pow­er­ful, and Google so new, that the young search en­gine could have been killed off, some in­sid­ers at both com­pa­nies be­lieve. “But there was a new cul­ture of com­pli­ance, and we did­n’t want to get in trou­ble again, so noth­ing hap­pened,” Bur­rus said. The myth that Google hum­bled Mi­crosoft on its own is wrong. The gov­ern­men­t’s an­titrust law­suit is one rea­son that Google was even­tu­ally able to break Mi­crosoft’s mo­nop­oly. “If Mi­crosoft had­n’t been sued, all of tech­nol­ogy would be differ­ent to­day,” Re­back told me.

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  6. “‘Crush Them’: An Oral His­tory of the Law­suit That Up­ended Sil­i­con Val­ley”:

    Jon Mit­tel­hauser (NCSA Mo­saic co-author/Netscape co-founder): “The ac­tual li­cense for the Netscape browser was free for non­com­mer­cial use, but com­mer­cial com­pa­nies had to pay. … We were ac­tu­ally bring­ing in a fair amount of browser rev­enue. Mi­crosoft came along and just gave away the browser for free, for any use, for com­mer­cial use, non­com­mer­cial use, what­ev­er. That un­der­cut that whole busi­ness.”

    Harry First (an­titrust bu­reau chief, New York At­tor­ney Gen­er­al’s Office): “It was­n’t be­ing free that was a bad thing. It was the end re­sult of that be­ing that In­ter­net Ex­plorer would be the ex­clu­sive browser and that no other com­peti­tor would arise as a com­pet­ing op­er­at­ing sys­tem. … It was ba­si­cally ex­clu­sion­ary be­hav­ior. It was an effort to smother Netscape in the cra­dle and cut off its air sup­ply.”

    Gary Re­back (an­titrust lawyer rep­re­sent­ing Netscape): “What Mi­crosoft was do­ing was not just dam­ag­ing to a com­pany - namely Netscape - but it was dam­ag­ing to a whole new gen­er­a­tion of tech­nol­o­gy.”

    …Mit­tel­hauser: “What both Mi­crosoft and Netscape missed out on was that re­al­iza­tion that the browser did­n’t re­ally mat­ter. It was sites that mat­tered. We eas­ily could have bought Ya­hoo, Google, etc. But the Google guys and the Ya­hoo guys ba­si­cally worked with us and we helped get them set up.”

    Stephen Houck (an­titrust bu­reau chief, New York At­tor­ney Gen­er­al’s Office): “Some peo­ple say the de­cree caused Mi­crosoft to lose its edge. I’m not re­ally con­vinced that was the case. I think what it did do is make them very care­ful about us­ing mar­ket power they had in Win­dows to affect re­lated ar­eas of soft­ware like the browser or search or op­er­at­ing sys­tems for hand­held de­vices.”

    Steve Lohr (tech­nol­ogy and eco­nom­ics re­porter, The New York Times): “It helped pro­vide an open­ing for Google, for sure. I re­mem­ber do­ing this story when Google was up­set be­cause Mi­crosoft was try­ing to hide the Google Search box. And then they fell away from that, they had to make it eas­ier for the Google Search box to ap­pear.”

    Houck: “If there had­n’t been the law­suit or had­n’t been the [con­sent] de­cree, based on their past be­hav­ior, Mi­crosoft very well might have done things that made it a lot more diffi­cult for Google. Even with desk­top search, that was one of the ar­eas we were look­ing at in terms of what Mi­crosoft could and could­n’t do with Win­dows. Google was prob­a­bly one of the ben­e­fi­cia­ries.”

    Re­back: “Mi­crosoft had run Netscape out of the browser mar­ket. In­ter­net Ex­plorer was lit­er­ally 98% of the mar­ket. The only way you could get to Google was through Mi­crosoft. You had to go onto the Mi­crosoft browser and type www.­google.­com. Now if you did that, there’s no rea­son Mi­crosoft had to send you to Google. They could have just put up the big red warn­ing screen, say­ing ‘Don’t click on this site. It’s a bad site. It takes your per­sonal in­for­ma­tion with­out telling you …’ I have long as­sert­ed, based on my con­ver­sa­tions with Mi­crosoft peo­ple, that they did­n’t do it be­cause they were tired of get­ting fined a bil­lion eu­ros a pop. It was clear what would hap­pen to them if they killed Google or the next gen­er­a­tion of tech­nol­o­gy. The rea­son they did­n’t do that was the threat of an­titrust en­force­ment. Be­cause of an­titrust en­force­ment, that’s why we have Google. There is no other rea­son.”

    … Lawrence Lessig: “It’s in­ter­est­ing to think about the right to com­pete on the Mi­crosoft plat­form and the right to com­pete on the Face­book or Google plat­form. Google and Face­book cre­ate in­no­va­tion plat­forms, but they re­serve the right per­pet­u­ally to de­cide whether your ap­pli­ca­tion is al­lowed to run, and they can pull the plug any­time they want, and they do. With Mi­crosoft run­ning soft­ware on the op­er­at­ing sys­tem they pro­vid­ed, they never as­serted the power to de­ter­mine which pro­grams were al­lowed to run or not. … Mi­crosoft might have learned a les­son and be­haved in a more open or re­spect­ful way with com­peti­tors, but the whole in­dus­try moved to a world where the plat­form owner has more power than the plat­form owner ever pre­sumed to have in the days of Mi­crosoft. That’s an im­por­tant differ­ence, which you might say un­der­mines the sig­nifi­cance of the case.”

    Re­back: “The thing about these tech­nol­ogy in­dus­tries is I can’t go back and fix things. If some­thing an­ti­com­pet­i­tive hap­pened in the air­line in­dus­try, I could eas­ily go back in and fix things and break things up. They’re still the same planes, they’re the same pas­sen­gers, they’re the same gates, they’re the same air routes. They don’t change. That’s not the case with tech­nol­o­gy. Once a new tech­nol­ogy is crushed, it’s gone. It’s not com­ing back - ever. We can’t do the same kind of fix eas­i­ly. We’re at a sit­u­a­tion with Google where I can’t go back and re­store com­pe­ti­tion. If I’m go­ing to make some com­pe­ti­tion, I’m go­ing to have to do it by break­ing the com­pany apart, and that be­comes all the more diffi­cult.”

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  7. A cu­ri­ous not-quite ex­am­ple from com­puter gam­ing is offered by the rise and fall of Star­Craft e-s­ports, caused in part by in­tel­lec­tual prop­erty right dis­putes.↩︎

  8. WSJ:

    Mukesh Am­bani, head of Re­liance In­dus­tries, one of In­di­a’s largest con­glom­er­ates, has shelled out $35 bil­lion of the com­pa­ny’s money to blan­ket the South Asian na­tion with its first al­l-4G net­work. By offer­ing free calls and data for pen­nies, the tele­com late­comer has up­ended the in­dus­try, set­ting off a cheap in­ter­net tsunami that is open­ing the mar­ket of 1.3 bil­lion peo­ple to global tech and re­tail­ing ti­tans. The un­known fac­tor: Can Re­liance reap profits it­self after un­leash­ing a cut­throat price war? An­a­lysts say the com­pa­ny’s ul­ti­mate plan, after con­nect­ing the mass­es, is to use the plat­form to sell con­tent, fi­nan­cial ser­vices and ad­ver­tis­ing. It could also re­coup its mas­sive in­vest­ment in the years to come by charg­ing for high­-speed broad­band to con­sumers’ homes and con­nec­tions for var­i­ous busi­ness­es, ac­cord­ing to a per­son fa­mil­iar with the mat­ter.

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  9. Archives of Grams list­ings are avail­able.↩︎