Windows Versus Linux Part 1: How Do You Compete With Free?
This is the first in a series of posts in which I attempt to answer the question, "How do you compete with free?" for the case of Windows versus Linux.
Microsoft must defend Windows against all strategic threats, at all costs. It has a formidable arsenal of strategic defenses it can employ and experience using them, having crushed or contained all prior competitive threats to its core strategic products, Windows and Office. However, Linux presents a unique threat because of its price. The classic defensive strategies may not work.
Let's start by framing the discussion. The very way I pose the question "How do you compete with free?" contains an important assumption. It assumes that, to the customer, the essential factual difference between Linux and Windows is price. I believe that all of the other benefits and deficits attributed to either product, to the extent that they exist, could be neutralized in fact, though not necessarily in perception, over a reasonable time frame. These differences have been and will, I am sure, continue to be hotly debated, but not in this discussion. My position is that they are largely subjective, often ideological, and do not ultimately influence the outcome of the competition over the long term.
I also know that this issue is immensely complicated. Consider just one of the complexities, that there are at least three very different platform segments involved: servers, personal computers and handheld devices. I am going to make some sweeping simplifying assumptions to reduce this complexity, that I believe do not compromise my conclusions.
The classic competitive strategies carry an implicit assumption, that both parties to the competition are motivated by the pursuit of profit. This creates a certain symmetry to classical competition. Windows versus Linux is an asymmetrical competition, in which one party, Microsoft, seeks to maximize profit over the long term, and the other party does not. Put another way, Microsoft's profit motive is a constraint on them in this competition.
How do you model this asymmetrical competition? Ramon Casadesus-Masanell and Pankaj Ghemawat of Harvard Business School addressed this in 2003 in a paper entitled Dynamic Mixed Duopoly: A Model Motivated by Linux vs. Windows. They developed an economic mathematical model of the Windows-Linux competition. It addresses the situation in which one party seeks to maximize profit and the other offers its product essentially for free. It makes the following assumptions:
Here are the key findings from this model for Microsoft:
Copyright © 2006 Philip Bookman
Technorati: Windows versus Linux Microsoft software competition software strategy open source
Microsoft must defend Windows against all strategic threats, at all costs. It has a formidable arsenal of strategic defenses it can employ and experience using them, having crushed or contained all prior competitive threats to its core strategic products, Windows and Office. However, Linux presents a unique threat because of its price. The classic defensive strategies may not work.
Let's start by framing the discussion. The very way I pose the question "How do you compete with free?" contains an important assumption. It assumes that, to the customer, the essential factual difference between Linux and Windows is price. I believe that all of the other benefits and deficits attributed to either product, to the extent that they exist, could be neutralized in fact, though not necessarily in perception, over a reasonable time frame. These differences have been and will, I am sure, continue to be hotly debated, but not in this discussion. My position is that they are largely subjective, often ideological, and do not ultimately influence the outcome of the competition over the long term.
I also know that this issue is immensely complicated. Consider just one of the complexities, that there are at least three very different platform segments involved: servers, personal computers and handheld devices. I am going to make some sweeping simplifying assumptions to reduce this complexity, that I believe do not compromise my conclusions.
The classic competitive strategies carry an implicit assumption, that both parties to the competition are motivated by the pursuit of profit. This creates a certain symmetry to classical competition. Windows versus Linux is an asymmetrical competition, in which one party, Microsoft, seeks to maximize profit over the long term, and the other party does not. Put another way, Microsoft's profit motive is a constraint on them in this competition.
How do you model this asymmetrical competition? Ramon Casadesus-Masanell and Pankaj Ghemawat of Harvard Business School addressed this in 2003 in a paper entitled Dynamic Mixed Duopoly: A Model Motivated by Linux vs. Windows. They developed an economic mathematical model of the Windows-Linux competition. It addresses the situation in which one party seeks to maximize profit and the other offers its product essentially for free. It makes the following assumptions:
- Both parties have sufficient resources to compete head-to-head in spite of the differences in how the resources are funded
- The value of an operating system is strongly influenced by its installed base because of the network effect of operating systems
- Linux has benefits to customers over Windows that go beyond price due to its development model
Here are the key findings from this model for Microsoft:
- Initial megashare trumps free. Windows wins so long as Microsoft properly manages Windows pricing and development costs and prevents strategic defections from reaching critical mass. The initial Windows megashare gives it an overwhelming, sustainable network effect advantage.
- Strategic defections can trump initial megashare. If enough large organizations (and, by extension, populations) make strategic commitments to adopting Linux, a tipping point can be reached in which Linux forces Windows out of the market.
- Total long-term profit is maximized by pricing to defend the megashare. In fact, the pursuit of short-term profit can sabotage the future of the megashare.
- Give it away to those who won't pay anyway. Increased Windows piracy among those who would only use a free OS (who would never pay for it) reduces downward pressure on Windows prices by strengthening the megashare without reducing revenue.
- FUD favors the megashare holder. Use of the classic FUD defense (spread fear, uncertainty and doubt) by Microsoft can mitigate price pressure. On the other hand, Microsoft can always neutralize opposing FUD by reducing prices.
Copyright © 2006 Philip Bookman
Technorati: Windows versus Linux Microsoft software competition software strategy open source
Labels: software strategy
posted by Phil Bookman at 10:49 AM
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