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What's the social value of Microsoft?
Here is Mark Thoma and Robert Barro, here is Brad DeLong. You may recall that Barro had claimed that the social value of the company was roughly equal to its revenue; of course many critics objected.
Imprecise questions are being thrown around. It is fine to question Microsoft's net contribution by asking what other companies would have done in its stead. But then, to be consistent, we should ask what revenue those alternate-universe companies would have earned. The correct comparison is one set of social values minus revenue (that of Microsoft) to another (hypothetical) social value minus revenue (what would have happened without Bill Gates). Would the alternative have been more or less monopolistic, more or less stifling of innovation, more or less able to enforce copyright? And so on. We can speculate but of course we'll never solve those counterfactuals.
We can, however, assert the nonetheless profound truism that gross social benefits of Microsoft, over time, exceed the gross revenue of the company by quite some amount. The company is a highly imperfect price discriminator and many people rip off its software.
I'll call the comparisons in the counterfactual (different revenues, propensities to monopolize, social values, etc.) a wash and thus I believe that the correct measure of the social value of the company is much greater than its revenue. It would make more sense to compare the company to a first best if we thought there was a feasible antitrust policy to get us there, but I find that hard to believe.
In other words, Barro probably is underestimating the value of Bill Gates and Microsoft.
Posted by Tyler Cowen on June 26, 2007 at 06:46 PM in Economics | Permalink
Comments
Why can you assert and claim as truism that social benefits of Microsoft exceed the gross revenue over time? How does Bill Gates compare with Tim Berners-Lee? With Linus Torvalds?
Surely if you are calling the comparisons with the counterfactual a wash, and that's a big leap, Microsoft has no value at all?
Posted by: Jack at Jun 26, 2007 7:54:21 PM
What I don't get most of all is assigning all Microsoft's value to Gates personally.
Posted by: at Jun 26, 2007 8:30:12 PM
So if Consumer Surplus had been greater in a non-MSFT world (therefore more money "left on the table" and overall lower revenues), all else being equal, you're saying that would be BAD?
Posted by: Ken Houghton at Jun 26, 2007 9:11:35 PM
Leaving out Gates's recent private philanthropic efforts, I could easily argue that Microsoft - the company - has a negative social value in that it has aggressively stifled competition and innovation that might have led to greater advances and more wealth creation.
Seems like you're becoming chummy with Marc Andreesen - ask him what he thinks. :)
Posted by: fustercluck at Jun 26, 2007 10:04:38 PM
I'm sorry, I missed Thoma's contribution to this. All he does is quote two people at length and sorta paraphrase one.
Come to think of it ... that's all he ever does on his blog.
Posted by: Person at Jun 26, 2007 10:56:03 PM
I could easily argue that Microsoft - the company - has a negative social value in that it has aggressively stifled competition and innovation that might have led to greater advances and more wealth creation.
There is considerable truth in that statement. On the other hand, the standardization of Office documents has saved countless hours of wasted time converting file formats. (On the other other hand this is somewhat negated by the hours wasted by people trying to make numbered lists or changing fonts or styles, only to have Word defeat their intentions.)
But going forward, an open file format for Office documents will benefit everybody except Microsoft. Hence their reluctance to commit to a truly open standard.
Posted by: rj at Jun 26, 2007 11:24:42 PM
I have to agree with Jack here, as I am left very confused by this post. The social value to Microsoft existing is how much better they do as the, imho, inevitable monopolist making the OS for the 'winning' computer system than the other monopolist companies that might have arisen. Tyler himself says this, then says he counts this comparison as a wash, so the social value of it existing is close to zero. Then contradicting what he just wrote, he goes ahead and gives them huge social value.
Surely he isn't making the mistake of attributing all the gains from the existence of a good produced by the winning monopolist in a natural monopoly to the existence of that monopolist, as if the alternative to that monopolist existing is that the good is not produced at all compared to what actually would likely happen, there simply being a different monopoly firm in that industry. But if he is not doing this, then what is he doing?
Posted by: Counterfactual at Jun 26, 2007 11:42:55 PM
counterfactual has a point when he writes that we shouldn't be "attributing all the gains from the existence of a good produced by the winning monopolist in a natural monopoly to the existence of that monopolist". But the gains are there nonetheless and somebody deserves the credit; who should we attribute it to?
Posted by: Hei Lun Chan at Jun 27, 2007 7:01:08 AM
Come now. Microsoft's initial deal was to be the exclusive supplier of OSes to IBM's nacient PC business. This was when Bill had no operating system. IBM clearly received a less value for that deal than they paid, so the net social gain from this deal is less than the M$ profit. From there they basically purchased and force one inferior product after another on the market using their existing monopoly as a base.
So the primary benefits are clearly far, far less than their profits. What about the secondary?
Again, this is a lot less than you might at first expect. Did you know, for instance, that there were device-independent formats in use in 1979? I recall the big debate brewing in the early nineties over whether or not wysiwyg (What You See Is What You Get) was a good thing.
Yes, we have standardized on the M$ Office format for the most part, but this format was at the time in competition with other formats, and won by virtue of being the default $etting for enough people that the arguement was settled on that basis alone. So what is the net social gain of a monopolist deciding something like this?
Profits are a useful measure of social good only in a free market. Which is why smart businessmen have always (and will always) avoided them like the plague.
Posted by: Nathan Zook at Jun 27, 2007 9:14:48 AM
I think most people are undervaluing the role of innovator Bill Gates has played. It was his entreprenuerial vision of "computing at your fingertips" applied to the world population that drove the rise of Microsoft. Gates accomplished that vision by assembling and managing a great many resources and keeping them focused on the goal. Many others had the opportunity, he made it happen.
I can not think of many industries and human activities that have not been considerably enhanced and altered by the ubiqutious distribution of inexpensive computing power. We are all free riders on this wave.
Now, the means of continuing this vision, or even the vision itself, may change. Others will, by stepping up on Microsoft's accomplishments, continue forward and new advances will come, new entreprenuers will succeed.
Posted by: Al Abbott at Jun 27, 2007 9:38:04 AM
I think most people are undervaluing the role of innovator Bill Gates has played. It was his entreprenuerial vision of "computing at your fingertips" applied to the world population that drove the rise of Microsoft.
Computing at your fingertips indeed. Microsoft was dragged kicking and screaming into a GUI.
Well, I for one value BIll Gates low on the innovation scale. He scores extremely high on the competitive scale, and high on the unethical business scale, but on innovation not so much.
Posted by: RJ at Jun 27, 2007 10:55:58 AM
It is indisputable that some of the price of Microsoft goods is a form of economic rent. Hardly anyone buys MS software by preference comparison of features with other OSs. Those few that can afford this, often do not choose it. People buy Windows and Office because everybody else has it. Microsoft is collecting rents from those for whom using non-standard software is too expensive. And it is very clear that this sets their prices, since competitive software is always *far* less expensive.
All this means that you can't use the standard model to determine that people get value *from Microsoft* in excess of the purchase price. The disparity between prices of MS software and similar competitive software indicates that at least 70% of the price of Microsoft comes from the value provided by their customer base, and not MS itself.
If the monopoly state is not "natural" then it's clear to me that MS has provided negative net value (value that MS created is less than the cost to consumers).
OTOH, if the monopoly is natural, then the counterfactual monopoly analysis described in your second paragraph is the correct way to determine the value. In that case, it isn't particularly clear whether MS is on balance better or worse than whoever would probably have taken their place.
I believe that it *is* a natural monopoly, and would venture an estimate that their net social value is approximately zero. If MS followed their own profit incentives, then they did their best to maximize their monopoly rents given market conditions. I presume they were fairly good at this, and that other entities in their place would have attempted to do the same, and been similarly effective at maximizing rents. Thus on net the social value that Microsoft has created or destroyed relative to alternative scenarios should be close to zero.
To argue otherwise seems to require supporting one of the following propositions:
1) Microsoft did not set as it's objective to maximize total rents within it's own ethical bounds.
2) Other companies in their place would not have similarly opted to so maximize rents.
3) that Microsoft is/was unusually [in]effective (or [un]ethical) at maximizing monopoly rents compared to other big tech companies.
I see the first two propositions as laughable, and the third as quite unlikely. Any entity capable of capturing a monopoly of that size and keeping it for 20 years has to be one that is quite effective at maximizing rents. That applies to Microsoft, and it also applies to anyone who might have taken their place in a counterfactual.
I agree that your account dominates Barro's theory, for the reasons you've stated. But both seem to assume that monopoly rents do not exist, or are not a significant portion of Microsoft's revenue. I think the facts speak for themselves on that issue.
Posted by: Michael Sullivan at Jun 27, 2007 11:08:26 AM
Actually, thinking about this more deeply, to the extent that there was any serious chance that an open source standard for OS and office software of similar quality could have been adopted, it's quite possible that MS *destroyed* a gargantuan amount of value.
Posted by: Michael Sullivan at Jun 27, 2007 11:09:56 AM
Have to agree with RJ.
Gates's true vision was in targeting the business sector rather than the educational/creative market as Apple did. Were it the other way around we wouldn't be having this conversation.
Posted by: fustercluck at Jun 27, 2007 11:14:38 AM
I agree with Al.
I first used a Mac in 1987-88 and it was far superior to the MS-DOS machines. I read in Wired magazine that Bill Gates approached Apple offering to license their OS and they weren't interested, because they were fat with profits from selling the boxes. Gates came out with his first awful Windows clones, but persistence paid off. My wife uses a Macbook in her teaching job - I've used it and the practical difference between it and a notebook running XP is not great. The premium for the Mac over a Windows notebook is probably 50%-75%. MS Office for the Mac and PC are identical - files swap easily back and forth. That gives the lie to the claim that users have no choice. I suspect a sizable fraction of people only use Office - they have a choice.
I also remember when Lotus 123 owned the spreadsheet market. Along came Gates with his Excel which could read 123 files (123 did not stoop to read Excel files) - I think it was 1991 or so. By 2000, 123 was toast. Gates and Microsoft are directly responsible for driving the cost of computing way down and putting unheard of computer power in the hands of the masses. That is a huge benefit.
Posted by: Rich Berger at Jun 27, 2007 12:10:41 PM
Rich, that is silly. Microsoft did not drive the cost of computing down, hardware manufacturers combined with huge demand did.
And while there is choice between Microsoft and Apple, when you run into a problem, everybody in the world has instructions that fit with Microsoft. Until the last couple years, pretty much every vendor that wasn't specifically mac or unix friendly (and charged a lot more because they could) would refuse to fix simple problems on their end if you were using something other than a windows machine. As an IT professional who runs a whole shop on unix and mac (and who believes that total cost of ownership is actually somewhat lower despite higher initial prices), I was for a long time pretty much forced to have a few windows boxes on hand in order to deal with certain vendors and customers.
That's monopoly rent, not value.
did you ever try to buy an intel box in the 90s without paying the Windows tax? It was hard to do.
I don't argue that Excel was a decent program. But $300 is not an equilibrium price for that product in a market with no monopoly rents. The competition is either very inexpensive or free. The differences are not dramatic when using other software, but they are there, and they justify the price difference for most people. And those differences are pretty much all down to interoperability quirks, and having other people know your software, not inherent advantages of one over the other.
BTW, Mac and PC office are not identical. A number of advanced features that my wife uses are not supported on the mac version. In fact, this is one of a few key reasons she has been hesitant to purchase a mac.
I also can't tell you how many people I have run into over the years who would have chosen macs (or unix) as their standard OS except for *one* piece of critical niche market software -- that only runs on windows. That's a rent MS is getting from it's user/developer base. Effectively MS is charging it's customers not just for it's software, but for access to it's user and developer communities, which are *huge*.
This market is just not a matter of simple competition.
Posted by: Michael Sullivan at Jun 27, 2007 1:08:30 PM
Michael-
I'm not buying it. The existence of a single OS that was machine independent energized competition among the hardware manufacturers and broadened the market. I witnessed this first hand working at various actuarial consulting firms. 1983 - two PCs for 500 employees. 1985 - 3 machines for 30 employees. 1988 - one machine for four employees, 1989 - each employee had his own machine. MS provided the standard.
BTW - MS Excel is $230 at Staples (Full Version). The entire Office Suite is $500 (full version). Discounts are available for students and teachers and upgrades are cheaper, of course.
Your anecdotes aside, MS office is effectively the same on the Mac and PC, for a large segment of the market.
Posted by: Rich Berger at Jun 27, 2007 2:09:01 PM
I've only ever used Mac and Linux OSs because I was required to, and found them very frustrating. Windows is dominant because most users are idiots like me who do not get the same value out of the alternatives.
Posted by: TGGP at Jun 27, 2007 2:51:28 PM
Computing at your fingertips indeed. Microsoft was dragged kicking and screaming into a GUI.
Not true -- Microsoft created the first and most important applications for the Mac. Gates wanted Jobs to license the Mac OS to other manufacturers so that Microsoft could sell more copies of Word and Excel, but Apple refused. So Microsoft created Windows as a way of running Word and Excel on non-Apple computers. Yes, there was a character-based version of Word that sold quite well, but there never was a character-based Excel. Without Apple licensing its OS or creating its own GUI, Microsoft had no way of selling Excel more broadly (and competing with Lotus 1-2-3).
Anyway -- Microsoft's willingness to invest the resources to create a GUI version of Word for the Mac and to go GUI-only for Excel shows that it was not dragged into graphical interfaces.
Posted by: Slocum at Jun 27, 2007 5:11:40 PM
I think it is silly what is assumed in the post and many comments, that the alternative to Microsoft would have had to have been another monopoly. If that is assumed, then the only interesting question is whether MSFT and Bill Gates behaved better or worse than some other monopolist. Even in the presence of network effects, why is it necessary to think that there had to be a monopoly on OSes and office applications, and that these two monopolies had to be owned by the same firm?
Another mistaken point often made is that MSFT is not so powerful, or is more generous than other potential monopolists, because they don't or aren't able to achieve total lockdown patent protection on every machine running their OS. I would think smart people who like economics should realize this is a form of price discrimination that also expands the size of the network -- whether that be Windows, or .doc, or .xls (all apply here) -- therefore increases the value of the product they control. Consider the suppression of innovation in MSFT Office via the artificial incompatibility imposed by Windows on competing products.
Also consider the fact that the people who know how to avoid paying for Windows are often the same people who help people who do pay keep their Windows machines from breaking down. Then a "illegal" free copy of Windows is like a slave wage paid by MSFT to strategically placed people who keep their ill-gotten property from losing value.
I think it is useful to look at the repeated anticompetitive and dishonest behavior of MSFT over the many years, long before Windows. DR-Dos, Caldera DOS, CP/M, OS/2. Never heard of them? They were all technically superior to MS-Dos.
The legal remedies that have been applied to MSFT for past findings of wrongdoing have been ineffective or even counterproductive. For example, punishing MSFT by forcing it to provide computers to school children. Next time they should punish cigarette companies by forcing them to provide cigarettes to teenagers.
Why do some bright names in economics seem to totally misunderstand the industry that produces an appliance they use everyday? Why the lack of curiousity and vision?
Posted by: Dave at Jun 28, 2007 2:53:35 AM
Is Tim Berners-Lee's social value equal to his revenue over time? Is his contribution really less than 1% of Bill Gates?
The hardware manufacturers don't get the credit they deserve when this is debated.
Do those who think that Bill Gates contribution is of enormous value think mobile phones would have done better if there had been a similar figure in that market?
Posted by: Jack at Jun 28, 2007 4:52:37 AM
Dave: I think it is silly what is assumed in the post and many comments, that the alternative to Microsoft would have had to have been another monopoly. If that is assumed, then the only interesting question is whether MSFT and Bill Gates behaved better or worse than some other monopolist. Even in the presence of network effects, why is it necessary to think that there had to be a monopoly on OSes and office applications, and that these two monopolies had to be owned by the same firm?
Which brings us back to my question above, in an oblique way.
If the DOJ hadn't broken up the IBM monopoly of the time, Big Blue remains, with Apple competing and Bill Gates staying in school until he can find something else to buy.
Under that scenario, do you treat Arthur Watson or John Opel as if they "created" all that personal-PC value? Or Woz and Jobs, after the GUI makes Apple a great seller (and maybe saves Apple from Scully, when, realising they are competing with the resources of IBM, they licence the OS in the same way Jobs has realised he should licence the iPod for interoperability)?
Or, again, does society somehow lose value with true competition in the marketplace, just because there is more Consumer Surplus and Gates/Opel/Jobs/Woz makes A Few Dollars Less?
Posted by: Ken Houghton at Jun 28, 2007 11:09:16 AM
If you did not even own a computer prior to 1990, and you haven't studied the history of what occured, your comments are not likely to be credible.
We were there. We horse laughed when IBM attempted to enter the PC market. We derided M$'s pathetic offerings when they came. We scratched our heads at the warnings that our friends asked us about when M$ Word ran on Dr. DOS. And no, I do NOT accept that any businessman would have done that. That "warning" was a lie, and we have the internal memos to prove it.
I admit being young at the start of this. I didn't know why my uncle refered to MSDOS as a "toy OS"--but I do now. I do not suggest that the virii that have blessed us are entirely avoidable, but security was a architectural issue for many of the competing OSes. Even since the very real cost (to society) of security has become undeniable, M$ continues to add features in defiance of basic security concerns. "How is java related to active X? Like a fireman is to a pyromaniac."
Even if I were to agree that if not M$, some other monopolist would have eventually prevailed, every month of delay would be a month in which relatively open competition was driving the market forward at an astounding rate. The IBM-compatible PC market started out way, WAY behind the others, and has not advanced well.
Another M$ tactic that not all businessmen would have tried "Embrace and extend". Over and over, M$ smashed attempts to create interoperable protocals by adding proprietary extentions. BTW, these extentions often created security problems.
Posted by: Nathan Zook at Jun 28, 2007 11:48:27 AM
Well...though I am a long-time Mac user and acolyte, Apple was just as - if not moreso - proprietary with its OS.
I should know: back in the early- to mid-80s my father worked for a company that built an Apple clone (google "Franklin Computer").
As much as I'd like to think that Apple would have done things differently had it enjoyed Microsoft's market share, history hints at an otherwise outcome. Apple's foray into licensing its OS in the 90s was not a stellar time for the company and it has been gunshy ever since.
Posted by: fustercluck at Jun 28, 2007 9:50:21 PM
Counterfactual has it partly right: we should ask whether another monopoly (say, Apple), would have produced better products than Microsoft did. The question seems to me to be undoubtedly YES. In fact, I'd go better than Apple-- the NEXT operating system was better than either Apple or Windows.
Microsoft's gross benefit-- its benefit compared to nothing-- is uninteresting. What is the gross benefit of Castro's government in Cuba? HUge-- it's much better than not having any schools, roads, courts, or currency. What is the gross benefit of the American public school system? HUge-- much better than having no schools at all.
The reason Counterfactual is only partly right is that another realistic alternative to Microsoft would be to not have software copyright or patents and allow free copying. (We could limit this free copying to operating systems, if you like, and perhaps word-processing, spreadsheets, and presentation programs, and exclude other applications.) Does anyone doubt that we'd have better and basic programs as a result?
Posted by: Eric Rasmusen at Jun 30, 2007 9:52:22 AM
