Whenever information needs to be shared among machines, those machines must agree on the format of that information. After all, if you send me a file that I can't open, you might as well not have sent me the file at all. To be useful, communication must be understood by all parties involved. In technology, useful communication is enabled by common protocols, or rules that specify how communication takes place.
Protocols come in two flavors: open and proprietary. Open protocols are published specifications that may be adopted by any vendor. Proprietary protocols, on the other hand, are usually owned by a single company that views them as strategic assets to be guarded from competitors.
At some critical mass, a protocol becomes a standard if it is widely adopted enough. A given protocol can be considered standard once it becomes the default choice in the marketplace.
When Protocols Become Standards (Or Not)
Markets for communications systems develop differently depending on whether a given protocol becomes standard and whether that standard is open or proprietary. Generally, one of three scenarios will play out:
* The first possibility is that no protocol--open or proprietary--reaches critical mass in the marketplace. Let's say there are five vendors of fax machines, all of them using incompatible protocols, and each vendor captures 20% of the market. Any fax machine purchased is therefore limited to communicating with only 20% of the fax machines in use. The overall utility of the fax machine is limited, which depresses demand for them. In the absence of a standard, the market stagnates.
* Another possibility is that an open protocol becomes standard, which is what occurred in the real-world case of fax machines. Unlike the first scenario, the market is not hampered by fragmentation. The network will grow much larger, leading to greater utility from fax machines. And, because no one company controls the protocol, fax machines are commoditized, creating price competition among vendors. This scenario provides the greatest utility at the least expense to the customer, but is the least desirable to vendors harboring monopolistic ambitions.
* In the third scenario, a proprietary protocol achieves market dominance. For example, let's say one company develops a fax machine incompatible with all others, and the company seizes a large share of the market through excellent marketing. In this case, fax machines from that vendor would provide the greatest utility, while the rest--unable to communicate with those from the dominant vendor--would be virtually useless. Customers wanting the functionality of a fax machine would have little choice but to purchase one from the market leader. A monopoly develops, solidified by switching costs: ditching the dominant vendor requires replacing most of the machines in use. Once a proprietary protocol becomes standard, monopolies can be built fairly easily and defended with little effort.
Microsoft's Document Monopoly
Microsoft Office currently captures most of the market for office suite software. Office suites are collections of commonly-used applications essential to any organization; they typically include word processors, spreadsheets, databases, and graphics programs.
Every day, hundreds of thousands of documents--things like resumes, contracts, presentations, sales data analyses, etc.--are created using Microsoft Office. People create most of these documents with the intention of sharing them with others; very rarely do they stay exclusively on the computer used to create them.
Because Microsoft Office documents are used so frequently for data sharing, they have effectively become communications protocols. And, because Microsoft controls the file formats of these documents, the company controls a vital standard, allowing it to exercise and defend its monopoly with very little possibility of being challenged by competitors.
The use of Microsoft Office documents is so pervasive that they're essential to participation in the modern economy. Although there are programs from other sources capable of interacting with Microsoft Office documents, none of them are 100% compatible; owning a copy of Microsoft Office is the only way for a business to guarantee that it can communicate fully with others. As long as these documents continue to be the lingua franca of data exchange for business, network economics will protect Microsoft's monopoly in the office suite category.
- "Repeal the Microsoft Tax, Part I"
- "Repeal the Microsoft Tax, Part II"
- "Repeal the Microsoft Tax, Part III"
