Why microsoft is doomed

[yesthattom]

I didn't think about this aspect until saw it on this show:

I would say low-cost PC's are an obvious example now. Moore's Law has taken us to the point where the hardware cost on a new PC could be under $100. A PC could easily be sold for $200, so a $50 Windows license just doesn't play anymore. As hardware costs go down their model just doesn't work anymore. In the Third World, especially, you'll be seeing that. It just doesn't make sense if there is a free alternative.

Now I understand why MIT is so wild about this project.

Comments

[lovingboth]

Interesting. Sounds like they're not going to have a hard disk, but use something like flash memory instead - less power needed, more rugged. They'd be also be better off ignoring i386 type (or emulating) CPUs in favour of something like ARM.

Re Microsoft's fate, remember that they're still selling applications, despite the fact that you can no longer get $300 (1980s dollars too) for a word processor with less power than WordPad. Similarly, they used to charge more than $50 for MS-DOS, and that cost less to develop than any version of Windows.

Once you've developed the thing, the marginal cost is almost nothing, so all you need is enough sales at the price you can get.

[wotw]

Suppose you have to cross a bridge with two tollbooths,
one at each end. If the first tollbooth disappears,
do you expect the toll at the second booth to rise or
fall?

[yesthattom.livejournal.com]

Rise. (they're doing that all over NJ... double the price and only make you pay in one direction).

However, I don't see the analogy. Are you saying that if hw prices drop, sw prices rise?

[wotw]

To get to the Internet, you've got to pass two tollbooths---
first you buy a computer, then you buy an OS. If each
tollbooth is run independently, and if one of them
disappears (or drops its price), the owner of the other
tollbooth is well advised to raise his price, not drop it.

[yesthattom.livejournal.com]

Ah, I see what you are saying. The two tollbooths are owned by different people. While the best thing might be for the other operator to raise or maintain their price, there is market pressure for them to reduce their cost. People ask, "if they are cheaper, why aren't you?" Even if they are not comparable, like hardware and software.

When I buy hardware (big, multi-thousand dollar items) I expect the yearly maint. fee to be about 20%. When they price drops, I expect the maint. to drop too. Even though they are not comparible (just because someone figured out how to make the hardware cheaper doesn't mean it is less expensive to support. It may be more expensive to support). While I know that support costs didn't drop, I still demand that my maint. costs drop because I have an expectation of 20% per year.

You know a lot more about economics than I ever will, but isn't it true that consumer expectations and pressure are unrelated to reality in certain products?

Here's an a completely different argument:

There aren't two tollbooths. Most people percieve "the computer" as a single toll-booth to getting onto the internet. In their mind they don't separate out the hardware, the OS, the browser, the mail reader. (How many times have you heard tech support people complain about Windows users that don't know what browser they use because IE is so integrated? How many times have I installed Firefox on a friend's machine only to find that they are completely suprized that its possible to have a "separate program that also surfs thar interweb.")

So the tollbooth keeps getting cheaper, because one component gets cheaper. That component hits the limits of how low the price can be. So everyone looks at the other component: the software. They wonder why that can't be cheaper, especially since once the development is paid for the cost of distribution is pennies.

Why do you feel there isn't just one tollbooth?

[wotw]

They're separate tollbooths because they're owned by
different people (i.e. the computer and the OS are
supplied by different companies). That's key to the
analysis, but if you think of the whole thing as one
tollbooth, this key fact gets ignored.

My assumption about consumer behavior is that people look
at the total cost of computer+OS and then decide whether
to buy or not to buy. This differs from some of your
assumptions above. I claim that my assumption is better
than yours, because assumptions like mine have a good
track record of making correct predictions. However, I
can't prove that claim in the space of an LJ post.

Given my assumption, and also given the assumption that both
sellers maximize profits (another assumption with a good
track record), here's what follows:

1) If tollbooth A disappears, the fare at tollbooth B
goes up.

2) If tollbooth A disappears, the fare at tollbooth B
goes up *by less than the (former) fare at tollbooth A*,
so that the total price to cross the bridge goes down.

3) If a single monopolist takes over both tollbooths,
the total fare to cross the bridge goes *down*.

Proving statement 3) is a straightforward exercise in
sophomore level economics, but it's also counterintuitive
to most people. I therefore love assigning it for
homework.

The homework question is usually something along the lines
of: Suppose your computer and your OS are both supplied
by monopolists. Would you prefer that they be supplied by
the *same* monopolist or by *different* monopolists?

The answer is that the total package, computer + OS, is
cheaper when one monopolist provides both.

And yes, I've rambled a bit off topic here.

[yesthattom.livejournal.com]

I would have gotten your homework assignment correct since you put in those terms.

However, I do feel that the perception that "it's all one big tollbooth" is very strong. That might not affect price. However, it shouldn't be ignored.

My problem with the homework question is that it doesn't account for someone coming along and changing the rules. Someone could start selling a transporter that gets you to the other side without using the bridge, or offer to put your car on a train that takes you the same path. I think that's microsoft's big challange, someone arriving with a "new game". Google and Open Source are both "new games" that MS has to adapt to.

It's fun to stand on the sidelines and watch.

That fits in well with the quest for the <$50 cell phone.

[marmota.livejournal.com]

Sure, my impression is that similar blindness to relative pricing is killing (has killed?) PalmOS on cell phones. It should be interesting to see which OS ends up dominant on cell phones; wince gained prevalence by MS loss leading it to gain market share.