Microsoft vs Open Source

An article on the Harvard Business Working Knowledge raised the issue again about how the proprietary (Microsoft) software world will compete with the open source (Linux) world.

The discussion is based on an economic model rather than someone’s personal beliefs; this doesn’t necessarily make it more authoritative or accurate, just a different perspective. But there are some interesting findings that came out of running the model (parts below are direct quotes, others I have edited):

  1. As long as Windows has a first-mover advantage (a larger installed base from the start), Linux never displaces Windows of its leadership position.
  2. The presence of strategic buyers (eg, governments and large companies like IBM) together with Linux’s sufficiently strong demand-side learning (ie, users can modify the code directly)  results in Windows being driven out of the market.
  3. Because OSS (open source software) implies lower profits for Microsoft, the larger the cost differences are between Linux and Windows, the less able Microsoft is to guarantee the survival of Windows.
  4. The more forward-looking buyers are, the more advantageous it is to use fear, uncertainty, and doubt tactics to drive the competing system out.
  5. In countries where piracy is highest, Linux has the lowest penetration rate. The model shows that Microsoft can use piracy as an effective tool to price discriminate, and that piracy may even result in higher profits to Microsoft.
  6. While a monopoly of Linux is preferable (for societal welfare) to a Windows monopoly, it is ambiguous whether a Linux-Windows duopoly is better than a Windows monopoly.  With a duopoly, no operating system ends up exploiting fully its potential because developers’ efforts are divided. However, with a monopoly, the efforts to develop new software and improve the platform are directed towards one system only and this may turn out to be better from a social welfare perspective.
  7. Microsoft’s initial advantage (larger installed base) together with its pricing power allows the company to price strategically to control Linux’s market share. By lowering the price of Windows, the demand for Linux shrinks to the point where Linux is not a threat to the survival of Windows. The model also shows that a “milking strategy” (setting high prices in the short term and leaving the market at some point in the future) is not desirable to Microsoft.

Some of the points are pretty obvious, but for me it was interesting to read what a supposedly objective model came up with.

Have a look at the article to see what the authors recommend Microsoft should do to remain competitive.

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One thought on “Microsoft vs Open Source

  1. I really do think Microsoft need to drop their prices. £350 for Vista Ultimate Eedition? I could buy a new laptop for that.
    I think their prices are disgraceful. They wonder why people turn to piracy, its because their prices are way too high. They could easily market it for say £100 and still make their billions.

    I wonder if they are pricing themselves too high to create piracy. This may seem a disjointed view but look at the facts. There is an old belief by many that the higher the price, the better the product. If people think Windows is better than linux then they would rather steal it than switch to linux. This is where market share comes in. Microsoft have so much money that money is no longer an issue. What is more important to them is market share. If having a large chunk of the market share is by piracy then that is the course they will take.
    Now imagine if MS dropped their price to be £50 for Ultimate version. People will be saying to themselves, well hang on, its only £50 why is it so cheap I might as well try the free one. Then MS start to lose their market share.

    It will go further to explain why MS have never really made a proper attempt to block XP versions that have certain product keys. They don’t want the money, they want the share.
    Does that seem odd? well yes maybe, but consumer psychology is a very powerful tool.

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