18/5 Socioeconomic Actualities | IT.pdf
Conclusion
1. IT OS considerations lead to a strong Network Effect and the business model is to engineer a monopoly or a secure duopoly in the market
2. Excel’s use in the distribution of public sector data worldwide indicates the pervasiveness of the model with its block on business entry
3. The Microsoft failure in the mobile phone and device market reinforces the lessons of the model with competition policy implications
4. Of the four companies taken, Google and Microsoft have grossly high mark ups, Amazon and Apple have lower but still high mark ups
AR Research and Opinion
Discussion
In IT there is a strong first mover advantage enabling a monopoly through the Network Effect as evidenced by the Kazuo Nishi advice of ‘a market penetration first strategy’ for Microsoft MS DOS penetration in 1981. The MS strength in OS was further assisted by the introduction of the MS GUI OS or ‘Windows’ launched in 1985, the protection from the GUI OS TRON 'BTRON' competition obtained in 1989 and the bundling with the applications MS Word and MS Excel etc in 1990 leading to a 77.6% market share (Statcounter 2019) with the global public sector now publishing data in the proprietary Excel. In the mobile phone market the situation is a stable duopoly Google’s Android having an 86.1% share and Apple’s iOS 13.9% (IDC 2019). Microsoft has been defeated after numerous attempts to establish itself there: notably via the failed 2014 Nokia acquisition. Android was acquired by Google in 2005 and is now supported as a mobile open source OS by the Open Handset Alliance, while iOS is an Apple proprietary closed source OS for the Apple iPhone leading to a stable duopoly. This aperçu into IT indicates the working of the Network Effect, where a customer lock in occurs with data transfer to an alternative OS being an expensive burden. Closed source proprietary OS is therefore a barrier to business entry with competition policy problems as understood by the EU Commission. The Windows vs BTRON Event 1989 tells all with the Takeshita Cabinet caving in to the USTR Carla Hills: allegedly a free trade promoter. The market power given by a monopoly or secure duopoly enables mark ups with price unrelated to marginal cost meaning pure profit or rent. This has been discussed in academic papers eg Eggertsson et al (NBER W24287). The 2017 P&L results for the four IT companies taken show their Gross Profit Margin GPM percents, which give a first approximation of the Mark Up MU: where MU = 100/(100 - GPM%). The pure software Google and Microsoft have mark ups at 2.4 and 2.6 indicating large rents, while the more retail hardware Apple is at 1.6 and the retail distribution cum Cloud oriented Amazon is at the same 1.6. Amazon is notably driven by the ‘Bezos Philosophy’ towards operational scale and market dominance with no dividend distribution: as for the other GAFA members excepting Apple from 2012.
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Chronology
1936 |
Turing Machine a computer defined: Zuse 3 1941, Atenasoff-Berry 1 1942, Colossus 1944, ENIAC 1945, Manchester Baby 1948, Ferranti 1 commercially available 1951 |
1976 |
Jobs and Wozniak launch Apple I, Apple incorporated with funding and mentoring by Markulla Apple II launched 1977, followed by the GUI LISA/Mackintosh in 1983/84 |
1981 |
Microsoft acquires 86-DOS, renames MS DOS and Gates is doubtful about DOS, but Nishi advises ‘a market penetration first strategy’ and supplied to IBM for the IBM PC |
1985 |
MS GUI OS named Windows is launched and Office is launched bundling applications Word, Excel etc further to entrench the MS quasi monopoly position 1990 |
1985 |
Jobs leaves Apple for NeXT, PIXAR etc before returning to Apple in 1997 with the Ive designed iMac 1998, iPod 2001, iPhone 2007, iPad 2010 but an early death in 2011 |
1989 |
Professor Sakamura’s open source OS software BTRON is blocked by a US Trade Act Section 301 threat to protect Microsoft’s Windows against the Tokyo University’s OS |
1995 |
Bezos launches amazon.com as an online bookshop with its IPO 1997, diversifies causing near bankruptcy recovering in 2002 and now seeking market dominance in retail |
1998 (i) |
Brin and Page report search engine design with academic citations as a back link methodology: ignoring Baidu a monopoly with Gmail etc and Network Effect intensification |
1998 (ii) |
Google is incorporated to market Google Search with AdWords and AdSense generating sales by a charge per click: as with the other GAFA there is aggressive tax avoidance |
2017 |
Google fined by EU Commission EUR2.4bn for favouring Google services in search results and EUR4.3bn for requirement for Chrome installation on Android phones 2018 |
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Glossary
Bezos Philosophy |
Reportedly driven by overlooking early internet |
In a ‘Get Big Fast’ drive all profits are retained and reinvested to raise operational scale and market dominance |
Business Model |
A scheme for the maximisation of profits |
As Profit = Income (p x q) - Expenditure (c x q) - Levies: it is all about raising p x q and lowering c and the levies |
Closed Source |
Software zero access as a proprietary product |
Suffers from a total reliance on the author for maintenance and improvement with spy agency back doors possible |
Cost c x Quantity q |
Minimal costs given high volumes maintained |
Intellectual Property businesses are under IP protection with Network Effects giving exceptionally high unit volumes |
GUI |
Graphical User vs Command Line Interface CLI |
Challenging CLI replaced by intuitive clickable icons ‘widgets’ each with a user interface markup language coding |
Levies |
Corporation Tax Statutory vs effective rate |
The effective rate borne is substantially lower than the statutory rate: further reduced by aggressive tax avoidance |
MS DOS |
Originally written by Patterson as 86-DOS |
An emulation of CP/M for the Intel 8086 microprocessor Nishi’s involvement in the NEC PC-8000 series a parallel |
Open Source |
Software full access on a licensing agreement |
Benefits from a stable of pro bono authors for maintenance and improvement with spy agency back doors avoided |
Price p x Quantity q |
High unit pricing with high volumes maintained |
A monopoly or stable duopoly situation is engineered by exploiting IT Network Effects as a ‘value capture’ model |
TRON |
Japan's Real Time Operating system Nucleus |
A coherent OS system with the advanced GUI BTRON suppressed, but ITRON has gone from strength to strength |
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