The Rise & Inevitable Fall of Tech Giants

by on May 18, 2008 · 21 comments

Randall Stross, a Silicon Valley-based technology author, has penned an excellent essay for the New York Times making an argument that many of us here have made in the past: “The Computer Industry Comes With Built-In Term Limits.” That is, tech giants can rise very quickly and attain something approaching market dominance thanks to the power of bandwagon effects and the “winner-takes-all” economics that characterize digital markets in the short-term. But that dominance, Stross rightly argues, is difficult to maintain over the long haul because technology and markets evolve rapidly and new players displace old ones. Mr. Stross notes that IBM is a classic example, but Microsoft is experiencing a similar fate:

two successive Microsoft chief executives have long tried, and failed, to refute what we might call the Single-Era Conjecture, the invisible law that makes it impossible for a company in the computer business to enjoy pre-eminence that spans two technological eras. Good luck to Steven A. Ballmer, the company’s chief executive since 2000, as he tries to sustain in the Internet era what his company had attained in the personal computing era. Empirical evidence, however, suggests that he won’t succeed. Not because of personal failings, but because Mother Nature simply won’t permit it.


Ironically, twelve years ago, Mr. Stross wrote a book I have on my shelf at work entitled, The Microsoft Way: The Real Story of How the Company Outsmarts Its Competition. Today, however, he argues that MS isn’t having as much luck outsmarting too many competitors:

It’s no secret that Microsoft’s online businesses have failed to gain leading market positions. But what is not widely appreciated, perhaps, is that the company’s online initiatives have lately been doing worse than ever. The last year when Microsoft made a profit in its online services business was the fiscal year that ended on June 30, 2005. Its MSN unit used to do a nicely profitable business providing dial-up Internet access to subscribers. When its users began to switch to broadband services provided by others, however, the earnings disappeared. Microsoft’s Web sites brought in a trickle of advertising revenue, which did not grow fast enough to offset the disappearance of the narrowband access business. AOL suffered in similar fashion.

In the 2006 fiscal year, Microsoft’s online services produced a $74 million loss after the previous year’s profit of $402 million. Since then, the numbers have become uglier, as Microsoft’s online segment has added employees and absorbed growing sales and marketing expenses. In the 2007 fiscal year, the online businesses lost $732 million. In the next nine months, through March 31 this year, they recorded a loss of $745 million, almost double the amount in the period a year earlier. With $2.39 billion in revenue for the nine months, the online segment represents only 5 percent of the company’s total revenue.

What’s sad about this, of course, is that Microsoft still labors under ridiculous antitrust restrictions and government oversight efforts across the globe even though markets and technological innovation are doing a much better job of eroding the market dominance that those regulators fear.

The moral of the story: Every dog has his day. IBM, AOL, Microsoft and (even, eventually) Google. Ironically, Mr. Stross’s next book is called Planet Google: How One Company’s All-Encompassing Vision is Transforming Our Lives. I wonder who he’ll be writing about displacing Google 10 years from now? Probably some company none of us are even talking about right now, or one that is still being dreamed up by a couple of college students just like Google was a decade ago. Things change that fast.

Update 10:40 pm: Charles Cooper of CNet News.com has a new essay up that is relevant to this discussion. In “Microsoft v the DOJ Ten Years Later: Did It Make a Difference?” Cooper notes that:

Ten years ago today, the United States Department of Justice filed a landmark antirust lawsuit against Microsoft. Six months later, Google incorporated in Menlo Park, Ca. The proximity of those two dates raises a delicious `what if.’ Knowing how the subsequent decade turned out, do you think the DOJ would still have gone after Microsoft in 1998?

Indeed, this points to the inherent myopia associated with antitrust regulation in general. The static focus on the technologies and predicaments of the present often leads antitrust officials to put a premium on immediate intervention instead of being willing to let disruptive technologies and evolutionary market developments offer up superior (and non-coercive) resolutions.

  • http://www.voluntarytrade.org Skip Oliva

    “What’s sad about this, of course, is that Microsoft still labors under ridiculous antitrust restrictions and government oversight efforts across the globe even though markets and technological innovation are doing a much better job of eroding the market dominance that those regulators fear.”

    Actually, I think the regulators fear markets and technological innovation more than Microsoft. That’s why you’re seeing the FTC taking steps to usurp control of standard-setting organizations (via the Rambus case and others) and why there’s been a panicked rush to expand antitrust powers via wiretapping and eliminating due process for targets of antitrust investigations.

  • http://linuxworld.com/community/ Don Marti

    To be fair, Microsoft also labors with the benefits of “pro-trust” government policies such as patentability creep and the criminalization of some forms of interoperability through anticircumvention laws. Do pro-trust policies delay the natural succession and make it more painful than it has to be, like suppressing natural wildfires?

  • http://www.voluntarytrade.org Skip Oliva

    “What’s sad about this, of course, is that Microsoft still labors under ridiculous antitrust restrictions and government oversight efforts across the globe even though markets and technological innovation are doing a much better job of eroding the market dominance that those regulators fear.”

    Actually, I think the regulators fear markets and technological innovation more than Microsoft. That’s why you’re seeing the FTC taking steps to usurp control of standard-setting organizations (via the Rambus case and others) and why there’s been a panicked rush to expand antitrust powers via wiretapping and eliminating due process for targets of antitrust investigations.

  • http://www.openmarket.org Ryan Radia

    A counterexample: Intel. They’ve been the king of desktop CPUs for 25 years, and everytime a rival comes close to challenging them, Intel emerges on top. Even when AMD was churning out faster, cooler, cheaper CPUs for a good while(Prescott vs Manchester era) Intel still emerged victorious with the groundbreaking Core architecture.

    Now, with AMD in its death throws, it’s hard to foresee how Intel will be dethroned given the competition. Wouldn’t surprise me if Intel is still the market leader in another 10 years. And with Intel’s foray into mobile devices via Atom, they could take over that market in a few years as well.

  • dmarti

    To be fair, Microsoft also labors with the benefits of “pro-trust” government policies such as patentability creep and the criminalization of some forms of interoperability through anticircumvention laws. Do pro-trust policies delay the natural succession and make it more painful than it has to be, like suppressing natural wildfires?

  • http://bennett.com/blog Richard Bennett

    Intel’s success is mainly on PCs, and that’s all one “era”. If they can establish dominance on smartphones, I’ll give them credit for two.

    Google is looking to use regulation to extend the period of their dominance; “net neutrality,” which they support in a big way, is a recipe for lock-in that raises the stakes for would-be competitors very high.

  • Ryan Radia

    A counterexample: Intel. They’ve been the king of desktop CPUs for 25 years, and everytime a rival comes close to challenging them, Intel emerges on top. Even when AMD was churning out faster, cooler, cheaper CPUs for a good while(Prescott vs Manchester era) Intel still emerged victorious with the groundbreaking Core architecture.

    Now, with AMD in its death throws, it’s hard to foresee how Intel will be dethroned given the competition. Wouldn’t surprise me if Intel is still the market leader in another 10 years. And with Intel’s foray into mobile devices via Atom, they could take over that market in a few years as well.

  • http://bennett.com/blog Richard Bennett

    Intel’s success is mainly on PCs, and that’s all one “era”. If they can establish dominance on smartphones, I’ll give them credit for two.

    Google is looking to use regulation to extend the period of their dominance; “net neutrality,” which they support in a big way, is a recipe for lock-in that raises the stakes for would-be competitors very high.

  • http://enigmafoundry.wordpress.com/2007/10/04/the-riaa-loses-but-doesnt-realize-it-or-boycotting-the-riaa-has-never-made-more-sense-or-been-easier/ enigma_foundry

    @ Don: Yes that’s exactly right, not to mention the intervention of the US government on the behalf of Microsoft in the EU case for example. How pro-trust is that?

    @ Adam: IBM is proabably a bad example to use for an example of a “one trick pony”:

    The company which became IBM was founded in 1888 as the Tabulating Machine Company by Herman Hollerith, in Broome County, New York. It was incorporated as Computing Tabulating Recording Corporation (CTR) on June 16, 1911, and was listed on the New York Stock Exchange in 1916. IBM adopted its current name in 1924, when it became a Fortune 500 company.

    But an interesting point that Paul Ormerod makes in his quite interesting book Why Most Things Fail is that, to double the likelihood that a given company won’t fail in the next year, it has to be twenty times the size. This rather weak correlation between size and survival holds true in many other industries, not just the tech sector so there really isn’t anything surprising in Mr. Stross’s observation. Ormerod also sends up these so-called pundits (like Mr Stross) who announce that some company has found some secret formula of success only to have it shown to be false over time.

    In anycase, the reason why Microsoft is finding its battle so hard to win is very simple. They have, at every turn, shown that they believe they can write the rules, decide when their customers will up grade. Then Mr. Balmer calls the GPL a ‘cancer; they are shown to be behind the funding of the SCO lawsuit vs. IBM. In short they have behaved like a monopolist. Customers don’t like monopolists, neither do economists; there’s a lot of sub-optimal market conditions that come to exist in markets dominated by just one player.

    In the game of being a tech giant the game can’t be won; smart players realize that the objective is to stay in the game as long as possible. If you succeed in become the ‘top dog’ (for a day) everyone will have you in their sights, and your connectivity will be zero. Many criticize IBM for creating the PC standard and then failing to monetize it adequately; BUT we will see who is around 20 years from now.

  • http://enigmafoundry.wordpress.com/2007/10/04/the-riaa-loses-but-doesnt-realize-it-or-boycotting-the-riaa-has-never-made-more-sense-or-been-easier/ enigma_foundry

    @ Richard:
    Google is looking to use regulation to extend the period of their dominance; “net neutrality,” which they support in a big way, is a recipe for lock-in that raises the stakes for would-be competitors very high.

    Google’s attitude towards net neutrality is largely defensive; they understand that given a non-neutral network, they could bee locked out of there main revenue stream extremely quickly. Many don’t appreciate how fragile Google really is.

  • http://enigmafoundry.wordpress.com eee_eff

    @ Don: Yes that’s exactly right, not to mention the intervention of the US government on the behalf of Microsoft in the EU case for example. How pro-trust is that?

    @ Adam: IBM is proabably a bad example to use for an example of a “one trick pony”:

    The company which became IBM was founded in 1888 as the Tabulating Machine Company by Herman Hollerith, in Broome County, New York. It was incorporated as Computing Tabulating Recording Corporation (CTR) on June 16, 1911, and was listed on the New York Stock Exchange in 1916. IBM adopted its current name in 1924, when it became a Fortune 500 company.

    But an interesting point that Paul Ormerod makes in his quite interesting book Why Most Things Fail is that, to double the likelihood that a given company won’t fail in the next year, it has to be twenty times the size. This rather weak correlation between size and survival holds true in many other industries, not just the tech sector so there really isn’t anything surprising in Mr. Stross’s observation. Ormerod also sends up these so-called pundits (like Mr Stross) who announce that some company has found some secret formula of success only to have it shown to be false over time.

    In anycase, the reason why Microsoft is finding its battle so hard to win is very simple. They have, at every turn, shown that they believe they can write the rules, decide when their customers will up grade. Then Mr. Balmer calls the GPL a ‘cancer; they are shown to be behind the funding of the SCO lawsuit vs. IBM. In short they have behaved like a monopolist. Customers don’t like monopolists, neither do economists; there’s a lot of sub-optimal market conditions that come to exist in markets dominated by just one player.

    In the game of being a tech giant the game can’t be won; smart players realize that the objective is to stay in the game as long as possible. If you succeed in become the ‘top dog’ (for a day) everyone will have you in their sights, and your connectivity will be zero. Many criticize IBM for creating the PC standard and then failing to monetize it adequately; BUT we will see who is around 20 years from now.

  • http://enigmafoundry.wordpress.com eee_eff

    @ Richard:
    Google is looking to use regulation to extend the period of their dominance; “net neutrality,” which they support in a big way, is a recipe for lock-in that raises the stakes for would-be competitors very high.

    Google’s attitude towards net neutrality is largely defensive; they understand that given a non-neutral network, they could bee locked out of there main revenue stream extremely quickly. Many don’t appreciate how fragile Google really is.

  • http://bennett.com/blog Richard Bennett

    Google’s attitude toward neutrality is driven by the fact that their mega-datacenters exploit the flaws in Jacobson’s Algorithm (multi-flow, slow start, RTT, loss unfairness) give them fast-lane access to residential networks at a wholesale price.

  • http://bennett.com/blog Richard Bennett

    Google’s attitude toward neutrality is driven by the fact that their mega-datacenters exploit the flaws in Jacobson’s Algorithm (multi-flow, slow start, RTT, loss unfairness) give them fast-lane access to residential networks at a wholesale price.

  • http://www2.blogger.com/profile/14380731108416527657 Steve R.

    I am please that the concept of the “The Rise & Inevitable Fall of Tech Giants”/b> is being raised here. in fact this deserves a lot greater analysis.

    Adam writes “What’s sad about this, of course, is that Microsoft still labors under ridiculous antitrust restrictions and government oversight efforts across the globe even though markets and technological innovation are doing a much better job of eroding the market dominance that those regulators fear.”(emphasis added)

    While I disagree about the antitrust restrictions comment, Adam is quite correct that markets and innovation forces cause companies that have become “established” to fail. An example of this process at work was recently reported by TechDirt. It seems that a hobbyist was able to get Creative audio drivers to work with Windows VISTA. Instead of being grateful and offering this guy a job Creative attempted to shut this person down.

    Regarding this incident, The Register had this quote from Creative: “The huge task of developing driver updates to accommodate the many changes in the Vista operating system and the extensive testing required, including the lengthy Vista certification requirements for audio, makes it very difficult for Creative to develop updates for all past products.”

    Whenever a company makes a statement, such as the one above, it is an indication that the company is now being run as a “cash-cow” business by managers who have lost the entrepreneurial spirit. To put it another way, the company is no longer interested in innovation or serving its customers.

    In terms of Microsoft, TechDirt Reported on April 23, 2008 “Microsoft’s Final ‘Up Yours’ To Those Who Bought Into Its DRM Story”.

    When companies refuse opportunities for innovation or undertake actions that screw their customers, they are starting the long slow ride into oblivion. I look forward to further analysis of how tech companies die because they fail to pursue Technological Freedom.

  • http://www2.blogger.com/profile/14380731108416527657 Steve R.

    I am please that the concept of the “The Rise & Inevitable Fall of Tech Giants”/b> is being raised here. in fact this deserves a lot greater analysis.

    Adam writes “What’s sad about this, of course, is that Microsoft still labors under ridiculous antitrust restrictions and government oversight efforts across the globe even though markets and technological innovation are doing a much better job of eroding the market dominance that those regulators fear.”(emphasis added)

    While I disagree about the antitrust restrictions comment, Adam is quite correct that markets and innovation forces cause companies that have become “established” to fail. An example of this process at work was recently reported by TechDirt. It seems that a hobbyist was able to get Creative audio drivers to work with Windows VISTA. Instead of being grateful and offering this guy a job Creative attempted to shut this person down.

    Regarding this incident, The Register had this quote from Creative: “The huge task of developing driver updates to accommodate the many changes in the Vista operating system and the extensive testing required, including the lengthy Vista certification requirements for audio, makes it very difficult for Creative to develop updates for all past products.”

    Whenever a company makes a statement, such as the one above, it is an indication that the company is now being run as a “cash-cow” business by managers who have lost the entrepreneurial spirit. To put it another way, the company is no longer interested in innovation or serving its customers.

    In terms of Microsoft, TechDirt Reported on April 23, 2008 “Microsoft’s Final ‘Up Yours’ To Those Who Bought Into Its DRM Story”.

    When companies refuse opportunities for innovation or undertake actions that screw their customers, they are starting the long slow ride into oblivion. I look forward to further analysis of how tech companies die because they fail to pursue Technological Freedom.

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