Microsoft





Microsoft Corporation is the largest private sector computer software
producer in the world. It headquarters are in Redmond, Washington, a suburb
of Seattle. The company was founded in Albuquerque, New Mexico in 1975 by
Bill Gates and Paul Allen to develop and sell BASIC interpreters under the
company name Micro-soft.

Microsoft is notable for a number of reasons:

   * it is the largest software company in the world
   * it is one of the most dramatic examples of network externality in
     economics
   * it exercises a de-facto monopoly in PC operating systems and office
     software
   * it has made its founders among the richest people in the world
   * it has the largest market capitalization of any publically-traded
     company

Microsoft products

Software

Microsoft produces a wide range of software products.

   * Microsoft's current signature products are the various graphical
     operating systems produced under the name Windows. There have been many
     versions, the most current being Windows XP and Windows Server 2003.
     Windows comes pre-installed on almost all IBM compatible personal
     computers sold. See History of Microsoft Windows for a detailed
     history.

   * The company's older flagship operating system was MS-DOS, which used a
     command line interface. Early versions of Windows required the use of
     MS-DOS code. This requirement was eliminated in Windows NT and its
     descendants, which include Windows 2000 and Windows XP.

   * Microsoft Office is the company's line of office software. It includes
     Word (a word processor), Excel (a spreadsheet), and PowerPoint
     (presentation software). Microsoft also produces Microsoft Office for
     Apple Macintosh computers. Microsoft Office is widely regarded as the
     de-facto standard and category killer for office suites.

   * Microsoft Visual Studio is the company's set of programming tools and
     compilers. It is GUI oriented and links easily with the Microsoft APIs,
     but must be specially configured for non-Microsoft libraries. The
     current implementation is Visual Studio .NET.

   * Internet Explorer is the company's web browser. It is the most widely
     used web browser in the world, and has been included as the default
     browser with all versions of Windows since Windows 95. It is also
     available for the Apple Macintosh. Microsoft invested $400 million in
     the company in 1997 to make Internet Explorer the default web browser
     on every Apple Macintosh. In 2003, Microsoft discontinued development
     on IE for Mac, possibly due to competition from Apple Computer's new
     'Safari' browser.

   * Microsoft FrontPage is a WYSIWYG HTML editor.

   * Windows Media Player is a program to play music and video.

   * Microsoft produces computer games that run on Windows PCs, such as the
     Age of Empires and Microsoft Flight Simulator series.

   * Microsoft develops and publishes video games for its XBox video game
     console. In addition, all "third party" XBox video game publishers,
     such as Electronic Arts and Activision, pay Microsoft a royalty for
     each game software disc manufactured.

   * Microsoft also produces a line of reference works, such as
     encyclopedias and atlases, under the name Encarta.

Microsoft "ecosystems"

Microsoft has sought to build "ecosystems" around its products, allowing the
creation of network externalities which increase the value of its brand and products.

Network Services

In the mid-1990s, Microsoft began to expand its product line into the
networked computer world. It launched its online service MSN (Microsoft
Network) on August 24, 1995, which was a direct competitor to AOL. MSN
became an umbrella service for all of Microsoft's online services.

In 1996, Microsoft and NBC, an American broadcasting network, created MSNBC,
a combined 24-hour news television channel and online news service.

At the end of 1997, Microsoft acquired Hotmail, the original and most
popular webmail service. It was rebranded MSN Hotmail and was used as a
platform to boost Passport, a universal login service.

MSN Messenger, an instant messaging client, was introduced in 1999 to
compete with the popular AOL Instant Messenger (AIM).

Training

Microsoft has created a number of training initiatives, with the intention
of creating a pool of low-cost employees with skills relating partly or
exclusively to Microsoft products. The best known of these is the MCSE
qualification, standing for "Microsoft Certified Systems Engineer". Whilst
the MCSE certifies familiarity with Microsoft products, it is not, as its
name suggests, an engineering qualification.

Some people have been known to pejoratively deconstruct "MCSE" as "must
consult someone experienced". Even those with MCSEs often agree that the
course only covers very basic elements of the systems in the MCSE syllabus,
and that the experience required to properly support those systems must
still be acquired in the usual manner (i.e. actually doing the job).

Hardware

Although Microsoft is primarily a software company, it also produces several
computer hardware products, often to support specific software business
strategies.

   * An early example is the Microsoft Mouse, which encouraged the use of
     the Windows operating system's graphical user interface (GUI). Using a
     GUI without a mouse was awkward, and hence the proliferation of mice
     would speed the widespread adoption of Windows. Current models sport
     scrolling wheels, extra buttons, LED motion detectors and other
     features.

   * Microsoft also sells the Sidewinder line of joysticks and gamepads.

   * The company bought WebTV, a television Internet appliance in an effort
     to bolster their MSN Internet service.

   * When Microsoft released the Xbox in late 2001, the company entered the
     multi-billion dollar game console market dominated by Sony and Nintendo.

History of Microsoft

Formed in 1975, Microsoft (an acronym for MICROcomputer SOFTware) started to
sell its BASIC interpreter at a time when hobbyists, who also wrote small
BASIC interpreters, freely gave away the source code of their creations.
However, because its was one of the few commercial vendors of BASIC
interpreters, many home computer manufacturers chose Microsoft BASIC for
their systems. As the popularity of Microsoft's BASIC grew, manufacturers
adopted Microsoft BASIC's syntax and other features to maintain
compatibility with existing Microsoft BASIC implementations. Because of this
feedback loop, Microsoft BASIC became a de facto standard, and the company
cornered the market. Later, it tried (unsuccessfully) to extend their grip
on the home computer market by designing the MSX home computer standard.

In late 1980, International Business Machines needed an operating system for
its new home computer, the IBM PC. Microsoft licensed an existing operating
system called 86-DOS, written by Tim Patterson for Seattle Computer
Products' line of Intel 8086-based hobbyist computers, and contracted with
IBM to provide one of three alternative operating systems for the PC.
Microsoft subsequently purchased all rights to 86-DOS, renamed it MS-DOS
(for Microsoft Disk Operating System), and modified the operating system for
IBM's 8088-based hardware. It was released as IBM PC-DOS 1.0 with the
introduction of the PC in 1981, and, because it was smaller, cheaper, and
much more readily available than the other system software, quickly became
the default system for the IBM PC. In contracting with IBM, however,
Microsoft had retained the rights to license the software to other computer
vendors as MS-DOS. The flood of IBM PC clones in the early 1980s, from
companies including Texas Instruments, Compaq, and Seiko Epson, made
Microsoft's operating system ubiquitous in that segment of the industry.

Software running on PC hardware was not necessarily technically better than
the mainframe software that it replaced, but it had two advantages that
mainframe software could not beat: it offered more freedom to the end-user.
And it offered this at much lower cost. Microsoft's success rode on the PC boom.

Microsoft developed a wide variety of software products including:

   * operating systems
   * compilers and interpreters for programming languages
   * word processors, spreadsheets and other office software
   * Internet applications, e.g. a web browser and email client

Some of these products were successful, and some were not. A pattern
emerged: although early revisions of Microsoft software were often seen as
buggy, feature-poor, and inferior to its competitors, later revisions
improved rapidly and the software grew in popularity. By the turn of the
millennium, many of Microsoft's software products dominated the market in
their respective categories.

Microsoft has devoted huge amounts of effort to marketing and usability
engineering in developing their products, as well as to the integration of
their software products with one another in an attempt to create a seamless
and consistent computing environment for the user.

Microsoft has attempted to leverage the powerful Windows brand into many
other markets, with products such as Windows CE for PDAs and their "Windows
powered" Smartphone products.

Public perceptions

For a long time, Microsoft was widely seen as the "good guy" in the computer
software market, providing an inexpensive alternative to the expensive
systems provided by the major mainframe and UNIX vendors, and its was
admired for the large amounts of money it made in doing so.

However, even in the early days, Microsoft was accused of following the
maxim "DOS isn't done until Lotus won't run" — a reference to alleged
deliberate incompatibilities between MS-DOS and the Lotus 1-2-3 spreadsheet,
produced by a rival software company Lotus Development. By the 1990s, the
perception that Microsoft had become the "bad guy" had increased
substantially. It was frequently accused of leveraging its market dominance
in desktop computing in order to try to exploit its customers unfairly.

In recent years, Microsoft has been accused of, and some courts have found
that Microsoft engaged in, sharp business practices of questionable legality.

The monopoly question

Microsoft's Windows product has an effective monopoly in the desktop
operating systems market. Those who make this claim point out that, among
other things, almost every PC sold has a copy of Microsoft Windows
pre-installed.

Some observers claim that the characterization of Microsoft as a monopoly
leaves its competitors in a quandary:

   * On the one hand, competitors reject this characterisation as negating
     their own position. In a monopolized market, there exists only one
     provider of a product or service. Therefore, to competitors, calling
     Microsoft a monopoly is a defeatist strategy: it denies either their
     own existence, or their capacity to survive and to compete.
   * On the other hand, competitors favor the characterization of Microsoft
     as a monopoly because such a characterization benefits them. First, it
     raises the potential for regulatory intervention. Second, the public
     relations benefits of being seen as an "underdog" may increase sales.

Monopoly or not, there is no doubt that:

   * In most software application markets, Microsoft is a dominant player.
   * This dominance attracts widespread resentment.
   * This resentment is not restricted to its competitors.

On 20 August 2003, China's government introduced a policy whereby all PRC
government ministries must buy only Chinese-produced software at the next
upgrade cycle. This policy is intended to break the dominance of Microsoft
on desktop computers, by removing Microsoft's Windows operating system and
Office productivity suite from hundreds of thousands of Chinese government computers.

Abuse of Microsoft's monopoly status

Critics of Microsoft have accused it of using its monopoly in desktop
operating system to try to leverage market share in other sectors of the
computer market, such as web browsers (Internet Explorer), server operating
systems (Windows NT), office software suites (Microsoft Office), and
streaming media (Windows Media).

After its bundling of the Internet Explorer web browser into its Windows
operating system, Microsoft acquired an extremely large market share in the
browser market. Partly as a result of this dominance, Microsoft was
convicted by a USA federal court for abusing its monopoly in the desktop
operating systems market.

Microsoft has in all of these cases depicted its actions as its response to
customer demand.

Critics also decry Microsoft's "embrace and extend" strategy of adding
proprietary features to open, established standards, thereby using its
market dominance to gain de facto ownership of standards "extended" in this
way. Some refer to this tactic as "embrace, extend, and extinguish".

Security

By 2002, several of Microsoft's networking- and Internet-related products
had become the subject of intense criticism following several high-profile
security lapses. Malicious programmers increasingly exploited weaknesses in
Microsoft software by creating and distributing worms, viruses, and Trojan
horses designed to spread across the Internet and waste computing resources
or destroy data. These exploits frequently targeted Microsoft's Outlook and
Outlook Express e-mail programs, Internet Information Server (IIS) Web
server, and SQL database server software. Microsoft contends that its
dominant position in several Internet-related software categories naturally
subjects the company's products to more attacks, because the products
themselves are so widespread. Critics counter that these attacks also target
Microsoft products that do not hold commanding market shares, and suggest
that this is because Microsoft products in general are fundamentally less
secure than those of the company's competitors.

In several cases, Microsoft's practice of designing and configuring software
to make it easier to use and less intimidating to novices has facilitated
the spread of these viruses and worms. For example, Windows operating
systems released since 1995 hide file extensions by default, which can help
malicious programmers trick unwitting e-mail recipients into opening
dangerous file attachments that masquerade as harmless files with innocuous
extensions. (Recent versions of Outlook and Outlook Express disable
dangerous file types upon receipt, so that users cannot open them.) Critics
charge that this focus on usability and automation has come at the expense
of important security considerations.

In January 2002, Gates announced the Trustworthy Computing initiative, which
he described as a long-term, companywide initiative to find and fix security
and privacy vulnerabilities in all of Microsoft's products. The initiative
prompted the company to reevaluate and redesign several of its practices and
processes, and has significantly delayed the release of Windows Server 2003,
the successor to the Windows 2000 Server family of operating systems.
Reaction to the Trustworthy Computing initiative has been mixed, with
observers lauding Microsoft's increased focus on security but charging that
the company still has a lot of work to do.

Microsoft political lobbying

Microsoft has reacted to these legal threats and it negative public
perception by intensive political lobbying and spending millions of dollars
on political donations. According to the Center for Responsive Politics
website at opensecrets.org, Microsoft has made donations to 43% of
Democratic and 57% of Republican national candidates in the last federal
election cycle.

Advantages of Microsoft software

Most of the advantages of Microsoft software arise from its ubiquity,
allowing the user to benefit from so-called network effects. For example,
the large installed base of Microsoft Office makes MS Office files the
de-facto standard word-processor format, making a copy of MS Office
essential for most business users.

Microsoft software is also designed to be easy to configure, allowing
companies to hire lower-paid non-expert systems administrators. Microsoft
supporters argue that this results in a decreased "total cost of ownership".

Microsoft software also represents a "safe" option for IT managers
purchasing software systems, in that the ubiquity of Microsoft software
allows them to claim that they are following accepted best practices. This
is a particularly attractive option for IT managers whose technical
knowledge is minimal.

Disadvantages of Microsoft software

Microsoft software makes heavy use of software re-use. Whilst this is very
efficient for rapid software development, it leads to complex
interdependencies between software packages. This can mean, for example,
that crashing the Microsoft web browser can also crash the operating system
GUI.

The same interdependencies mean that the resources of most Microsoft
software can be used from most other Microsoft software. This means that
most programs can run other programs, even where this should not be
possible. For example, macros embedded in documents or HTML in E-mail can
run programs, allowing an attacker to take over the user's computer.
Microsoft has a security stance of "permitted unless forbidden", which is
hard to change, as much Microsoft software relies on this policy.

This is demonstrated in the proliferation of worm and virus programs that
attack Microsoft software.

As a result, the advantage mentioned above of being able to hire less highly
trained, and therefore cheaper, systems administrators is offset by two
factors:

   * greater unreliability means you will have to hire more of them
   * Microsoft shops are more liable to security breaches, because reducing
     computer insecurity requires highly trained systems administrators,
     regardless of the operating system in use.

Microsoft's critics describe the greater costs of running a Microsoft
installation as "total costs of non-ownership" as they point out that the
users of Microsoft software actually do not own the software they run:
something which is crucial to Microsoft's business model.

Microsoft anticompetitive practices

Microsoft has had several lawsuits over alleged anticompetitive practices.

   * Microsoft vs. WordPerfect
   * Microsoft vs. Stac Electronics
   * Microsoft vs. Spyglass
   * Microsoft vs. Netscape
   * Microsoft vs. Sun
   * Microsoft vs. Sendo
   * Microsoft vs. BeOS (and all other OS developers)
   * Microsoft vs. Opera

Microsoft earnings inflation

Factors entirely apart from technology standards could ultimately undo
Microsoft's monopoly. Accounting standards, in question for some years in
the United States, do not require American publicly traded corporations to
declare the expected costs of stock options on their earnings bottom line.
Microsoft has taken unique advantage of this, to build a solid record of
earnings increases even as its stock option payouts have ballooned: The
Economist reported that 1998 earnings of US$5B had been dwarfed by stock
option payouts of US$23B, and that the company had actually lost US$18B
— none of which appeared on its formal books or earnings reports. In
July 2003, Microsoft announced the end of their stock option program,
replacing it with stock grants. Options already granted will still vest,
however most remaining options are underwater due to the ecconomic downturn

Accounting standards changes in the wake of the collapse of Enron stock and
of Arthur Andersen may therefore have a serious impact on Microsoft's standing.

Microsoft vs. Free Software

Microsoft acknowledges that one major potential competitor is free software,
as exemplified by Linux. Microsoft has targeted free software and open
source software with its Embrace, extend and extinguish strategy as revealed
in the Halloween documents.

In establishing its monopoly over desktop computing, Microsoft has risked
losing the advantages of low cost and greater freedom that drove the PC boom
and created its success. It is hard to see how Microsoft can compete with
free software on purchase price alone. Many users who believe that Microsoft
does not value their freedom of choice have found the prospect of free and
open standards offered by free software.

Traditional Microsoft tactics of buying the competition, or of spreading FUD
about the longevity of competing products, have not been effective against
free software, where the product cannot be bought and controlled, and where
software can outlive the companies that first created it.

Microsoft CEO Steve Ballmer has stated that Linux is a "tough competitive
force... It's non-traditional, it's free and it's cheap. We have to educate
people why what they pay for [our offerings] is more than offset by the
value we deliver. We used to be the cheap guys. We were cheaper than Novell,
cheaper than Oracle. We can't do that with this one." (Reported in CRN.com,
June 17, 2002).

Ballmer addressed Fusion 2002, a Microsoft partner conference, saying: "We
have prided ourselves on always being the cheapest guy on the block —
we were going to be higher volume and lower priced than anybody else out
there, whether it was Novell, Lotus or anybody else. One issue we have now,
a unique competitor, is Linux. We haven't figured out how to be lower priced
than Linux. For us as a company, we're going through a whole new world of
thinking." (Reported in VARbusiness, July 15 2002).

Microsoft's initial reaction to the sale of low-cost PCs based on the Linux
operating system was to declare that it will not reduce the price of its
Windows operating system. Some observers have stated that this refusal to
compete on price is characteristic monopoly behavior. However, in a 10-Q
quarterly filing in 2003, Microsoft nonetheless disclosed that it may be
forced to reduce its prices because of open-source competition.

The future

With $50 billion in cash reserves, it is unlikely that Microsoft will lose
its position as a major player in the computer market anytime soon, no
matter what the outcome of antitrust suits.

November, 2002: Microsoft's quarterly 10-Q filing to the Securities Exchange
Commission revealed that most of its businesses were losing money, while two
had enormous profit margins: almost 86% for its "client" division that sells
Windows. Microsoft is likely to focus on these sectors of the market.

Microsoft is working to leverage its current monopoly in desktop operating
systems into new markets such as media players, server software, handheld
devices, web services and video games, with varying degrees of success.

In particular, it has succeeded in displacing the Netscape web browser, and
is working on displacing media player competitors (such as Real Networks and
QuickTime) and instant messaging competitors (such as AOL) by bundling its
own products with Windows.

It is also looking to move towards a "subscription model" for licensing.
Microsoft's current revenue scheme depends on users buying upgrades on a
periodical basis, but this is becoming increasingly difficult, as many users
fail to see the benefits of upgrades and continue to use older packages,
such as Windows 95. Microsoft would like to switch to a subscription basis,
whereby users pay an annual fee for software. The success of this strategy
partly depends on the proliferation of wideband Internet access, as
Microsoft will need build online licence verifying mechanisms into its programs.

At the same time, Microsoft is engaging in a major public relations and
branding exercise to try to combat the negative PR associated with the
recent accusations regarding its business practices.

Microsoft is now positioning PCs running Windows XP Media Center Edition as
a home entertainment hub.

Linux and open source software represents the greatest threat to Microsoft's
domination of the computer software market. However, Microsoft's bundling,
licensing and marketing policies, combined with its policy of closed
software and proprietary standards, currently prevent any other system from
threatening its position.

Based on recent Microsoft management comments, it appears that Microsoft is
attempting to move up-market, positioning its products and services as
high-value, rather than low-cost. Steve Ballmer was quoted as saying in 2002
"We are actually having to learn how to say, 'We may have a high price on
this one, but look at the additional value and how that value actually leads
to a lower cost of ownership despite the fact that our price may be
higher,'" (Reported in VARbusiness, July 15 2002).

This retreat from the high-volume low-cost market represents a strategic
change for Microsoft.

Microsoft's Chief Financial Officer John Connors was quoted in December 2002
as saying in a private webcast that "In terms of growing the company ... it
would be difficult if Linux were to become a phenomenon on the desktop".

Microsoft .NET initiative

The .NET initiative is a major company-wide effort by Microsoft. It has
several aspects including:

   * Easing the development of applications that use the Internet
   * Alleviating problems related to managing and installing multiple
     versions of complex software packages on the same system.
   * Provide a more consistent development platform for all Windows
     applications.

It will achieve this by using a proprietary extention of XML to link several
different devices together to be controlled quickly and easily by other
computers. Critics view .NET as yet another Microsoft attempt to leverage
its operating system monopoly into a similar monopoly on Internet
applications.

Furthermore, in regard to the name of the initiative and its components,
critics also point out that not only are the terms ".net" and "CLI" in use
to mean other things, but Microsoft used it to stand for Common Language
Infrastructure), but that Microsoft regularly overloads generic terms (e.g.
"Windows", "Word", "DNS") to refer to its proprietary technology, and then
attempts to control them using trademark law and patent law.

Microsoft Next-Generation Secure Computing Base initiative

Microsoft has now launched the Next-Generation Secure Computing Base,
recently renamed from Palladium operating system initiative. This effort is
also called Trusted Computing. Microsoft presents this as their solution to
computer insecurity. Opponents have characterised it as another exercise in
entrenching and extending their monopoly, effectively allowing Microsoft to
control all uses of PC technology. In particular, they have accused
Microsoft of using it as a way to combat the emergence of free software.

Microsoft to dump Windows?

Microsoft has a number of new initiatives: .NET, Palladium and the
"Longhorn" operating system (Longhorn is the next home Windows release).

There is speculation that Microsoft may be using .NET and Longhorn as a way
of dumping the Windows operating system. Microsoft has retired a flagship
operating system before, by retiring MS-DOS in favor of Windows. It is
argued that doing this will allow Microsoft to avoid the consequences of any
antitrust settlement, by being able to claim that its new operating system
is an entirely new product, and not subject to any regulation that may be
applied to its Windows operating system.

It has also been speculated that .NET is Microsoft's strategic response to
Linux. The reasoning is that by creating a new higher-level cross-platform
software platform, Microsoft can move its core platform higher up the
software stack, enabling it to replace the old Win32 platform running on the
Windows kernel with a new system which can run on Windows, Linux or any
other operating system.