A very good article on Economic Times: I copied entire content from here.
Ten years after its birth, Google is threatening to reopen the ‘Browser Wars’ of the 1990s, when Microsoft’s Internet Explorer eliminated its rival, Netscape’s Navigator.
This time, however, it is Google’s Chrome that promises to transform the economics underlying the entire software industry, and not only because of its technical innovation in linking very different kinds of software to an Internet browser. In doing so it eliminates the need for a program such as Windows, which previously controlled access to every kind of software.
Google’s new technology is impressive, and will no doubt prove convenient for many consumers once the initial security problems are resolved. But the fundamental innovation lies elsewhere.
Chrome is a breakthrough because it offers a completely novel approach to a dilemma created by the legal and regulatory regime of competition policy in the world’s two major legal jurisdictions, the United States and the European Union.
Between 1995 and 1997, Explorer almost completely eradicated Navigator, although Navigator had initially opened up the World Wide Web for most users and its dominance appeared unassailable.
The major advantage of Explorer was not so much a technical one, but rather that Microsoft’s Windows provided the operating software for the overwhelming majority of personal computers.
As a result, an Internet browser — and, indeed, other media software — could be integrated into the Windows framework as an entire software package.
The ability to have operating systems and software bundled together made life much easier for the average consumer. You simply got everything you wanted (and probably much more) with the purchase of a computer.
But this also reduced the possibility of choice, of selecting and combining different software. Microsoft’s critics have complained endlessly about this, claiming that the browser’s integration into the operating system drove out inherently superior software solutions.
For instance, many users preferred the word-processing program WordPerfect to Microsoft’s Word, but the ease of having a bundled solution meant that Word had the advantage of being used more widely, and thus drove its rival into extinction.
Microsoft’s advantage, and its business model, goes back to another protracted legal struggle. Computer software was originally not a commodity to be bought, but a service. IBM built up a massively dominant position because it leased a carefully custom-designed and individualised package.
It did not sell anything, computers or software. IBM’s leasing model seemed to challenge the entire legal philosophy of US competition policy that was established in the New Deal era.
President Franklin Roosevelt had originally wanted to control American business by setting price levels, but when the US Supreme Court rejected this approach, his administration started to use competition policy to challenge the positions of market-dominant companies.
Competition policy, however, faces great difficulty in dealing with industries in which technical breakthroughs can create apparently instant monopolies.
In line with the philosophy of challenging dominant positions, the US department of justice in 1969 started a major investigation of IBM, which had just revolutionised business computing with its 360 line. The case dragged on until it was dismissed in 1982 as being “without merit.”
But so long as the anti-trust case remained a threat, IBM was nervous, and began to back away from its business model. Microsoft’s current position is a direct outcome of the old anti-trust case pushed against IBM.
When IBM launched its personal computer, it could easily have bundled it together with its own operating software, and in this way maintained its dominance.
But, worried that the US authorities would accuse it of attempting to control a new market, IBM left the Disk Operating System (DOS) for the new PCs to a tiny new company that no one saw as a threat: Microsoft.
Of course, Microsoft ran into its own legal troubles when it took over IBM’s former dominant position, waging long drawn-out court cases on both sides of the Atlantic. The EU, which has looked increasingly to the US model for competition law, began proceedings against Microsoft in 1993.
The US started only after Microsoft’s victory in the browser wars, with a case beginning in 1998. Initially, both cases went decisively against Microsoft, with a US ruling in 2000 that would have required the company’s break-up, although this was subsequently overturned on appeal.
Google’s position is so interesting and so powerful because the legal philosophy that challenges any ascendant position, even in an industry that seems naturally to produce monopoly, remains in place. Leasing software and hardware, as IBM initially did, is problematic.
But so is selling computer services on a one-time basis, in the manner of Microsoft. By contrast, on the face of it, there cannot be anything wrong with offering services or products for free, and then simply using the resulting advertising possibilities.
Google’s model is a neat example of what might be termed “post-modern economics.” The amazing story of technical innovation is that it was, and remains, hard for innovators to benefit from radical technological breakthroughs.
Industrial Revolution-era cotton makers in England did not make a great deal of money, even though their products revolutionised personal life and hygiene, and even extended life expectancy.
In our own time, air travel has become much cheaper, but airlines lose money; telephoning is no longer unaffordable, but the telecommunications companies lost fortunes by over-bidding for mobile telephony rights.
Google has taken the logic of loss-making technology to its ultimate culmination of not charging at all for its product.
(The author is professor of History and International Affairs at Princeton University, and Professor at the European University Institute, Florence)(C): Project Syndicate, 2008
