Windows Versus Linux Part 2: A Strategy To Compete With Free

This is the second 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. In part 1, we reviewed an academic paper that modeled this competition. The model showed that Windows' initial megashare would enable it to survive this competitive threat if Microsoft managed pricing to maintain the megashare and kept strategic defections by large groups from reaching a tipping point. It also showed that piracy could be used as part of the pricing strategy, and that using FUD could be effective for Microsoft in maintaining Windows' megashare.

The megashare insures Windows success because of the network effect of operating systems. The network effect occurs when the value of a product or service is increased based on the number of users. For example, the more people who have phones, the more valuable it is to have a phone.

In the case of a computer operating system, there are myriad components to the network effect. Here are some examples. The more users an operating system has, the more attractive it is for application developers to develop for it; the more people can help each other use it; the more hardware manufacturers make their equipment work with it. The list goes on and on. This is why there is a market bias in favor of a dominant operating system. It sets de facto standards and assures a large, reliable platform for end users and businesses that serve them. The market favors the emergence of a megashare winner.

No one is more aware of the network effects of operating systems than Microsoft, nor is anyone more skillful in exploiting them. Thus its early adoption of the "Windows Everywhere" mantra. The strategies that preserve and build the Windows megashare should, of course, continue, like deep and broad ISV and equipment manufacturer support, developing and encouraging rich Windows-specific applications and broadening the very definition of the OS (i.e. bundling in new functionality). In developing a strategic plan for Microsoft in the Windows versus Linux competition, we focus on those things that are specific to the Linux threat: pricing, using FUD and combating strategic defections.

Here is the Windows strategy for competing with Linux:

• Segment prices to align with varying levels of customer perceived value. The Windows Vista editions and pricing are a start at this, but seem clumsy. They are as confusing and opaque to customers as the myriad and often conflicting versions of Office. Microsoft has to get much more sophisticated about this. The objectives are to make a purchase decision as easy as possible and the price feel reasonable.


• Make Windows appear to be free as much as possible. Defend and extend bundling Windows with new computers. Combat the sale of naked PCs.


• Make upgrading cheaper and easier. Under the assumption that an up-to-date Windows customer is more satisfied and thus more sticky, forego short term revenue in favor of market share and make release upgrades more like an automatic update than the big deal they have become. This implies more frequent and thus less dramatic releases. The announced Vista upgrade pricing is of concern here and appears myopic. Make home consumer upgrades free with OneCare Live subscriptions.


• Seed Windows for free in situations where it would otherwise only be used if pirated. Turn pirates into legitimate customers. There is much creative opportunity here, especially among poor populations. Cede nothing with any chance of volume to Linux.


• Use Linux-specific FUD on a perpetual, ongoing basis. The challenge here is to remain credible year after year and to target different FUD messages to different customer segments. This is already being done in the server market.


• Combat strategic customer Linux adoption. Aim to fully satisfy government concerns about non-proprietary file formats, security, privacy and price. Get ahead of the curve by developing an ongoing program to prevent strategic defections rather than reacting to them. Work on winning the hearts and minds of government decision makers. Leave no stone unturned in this regard, it is the Windows Achilles' heel.

Much like Microsoft needed shock treatment to deal with the Internet, it must be made to believe in its corporate soul that the Linux problem will not go away and is threat number one. Microsoft must become even more committed to the "Windows Everywhere" strategy. It turns out that this may be its only protection against a free competitor.

In our next and final post in this series, we predict what the Windows-Linux Duopoly ultimately means for Microsoft.

Copyright © 2006 Philip Bookman

Technorati: Windows versus Linux Microsoft software competition software strategy open source