Essay About Software Industry And New Position

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1.Microsoft (MS) operates in a highly attractive growth industry with above-normal performance. Having a closed source business model, the first mover advantage in the 1970s and 1980s when the software industry was an emerging industry, still is the basis for their present success. This allowed them to achieve technological leadership. Above that MS acquired strategically valuable assets before their full value was widely understood (e.g.: cheap acquisition of an existing operating system (OS) from a local programmer in the 1980s; later: acquisition of PowerPoint, stakes in web companies). After the market saw a flood of IBM PC clones in the mid-1980s, MS used its new position, which it gained in part due to a contract from IBM, to dominate the home computer operating system market with MS-DOS (Microsoft Disk Operating System) by selling their OS software to original eqipment manufacturers (OEM), thus achieving a market of 85 % in 1985. This position enabled MS to create customer switching costs (training costs exceed the price of an application or operating system by up to 5 times). Launching the first version of windows was a great success and since MS-DOS and Windows were complementary products, MS was able to double its OS revenues per PC. By that time MS achieved a monopolistic position in that segment having reached a market share of 85% in 19993. In the late 1980s MS emerged as the worlds largest application vendor by bundling their application software to office suites and selling them for discount prices and thus creating switching costs again (as training costs are much higher than the actual price of applications). By selling Internet Explorer as a feature of MS Windows for free, MS quickly achieved a monopolistic position in the Internet Browser segment as well. By – first of all – embracing widely used standards and then extending those standards with proprietary capabilities, MS was able to use those differences to disadvantage competitors and finally establish their “adjusted” standard protected by a secret source code characterizing the closed source model (CSM). The CSM enables MS to maximise profits and protect their competitive advantage whereas the major disadvantage is that they can not share their research cost. However, as MS has achieved a monopolistic position for standardised software products the advantages greatly outweigh the disadvantages. This monopolistic position in the software market helped to create a network effect as the softwares value to a potential customer depends on the number of customers already owning and using that software. The network effect further strengthened the monopolistic position of MS. 2. There are several reasons why MS could grow much faster than their industry in respect of both – profits and revenue. MS was able to even increase their market share throughout the 90s and therefore their revenues grew over proportionally. As a result they further strengthened their monopolistic position which enabled to lower price elasticity and thus boost their profits. Above that the industry growth was still very strong and as MSs business model since day one has been rooted in a focus on high-volume sales of (relative) low-margin software they could profit from economies of scale in respect to fix cost regression by spreading costs over a larger customer base (e.g. R&D costs, administrative costs etc.). In addition