How Microsoft Caused the DotCom Bubble

Since the mid-nineties, I have nurtured a thesis about the dotcom bubble, tech bust, and the role Microsoft played in it. The opportunity to discuss it has never came up.

That is, until Microsoft's purchase of Skype yesterday.

I have long argued that while Microsoft might have begun life as a software firm, it long ago morphed into something that was more a very clever IP/marketing firm with a huge tactical legal advantage that gave rise to a monopoly, rather than a true technology company.

Microsoft remains hugely profitable today, but increasingly irrelevant. Their purchase of Skype is an attempt to buy back some relevance. They are the rich, uncool fat kid at school, trying desperately to buy their way into some popularity. On a spectrum of relevance, where would you place MSFT: Are they closer to Google or Apple or Facebook or Twitter, or are they more comparable to the Maytag repairman of the tech world?

Let's back up a bit, and look at Microsoft’s history, including the impact they had on other technology in the 1990s.

The first PC was given to the world in 1980 by IBM. The mainframe giant looked down upon the idea of a personal computer for home or even business use. The PC was insignificant, never to replace the big iron they made. In 1981, they happily outsourced the operating system to Gates’ geeks, who themselves outsourced the OS code writing. By 1982, MS-DOS was released.

Embedded within that original IBM deal was the seed of Microsoft's vast fortunes. Microsoft's true genius was in their license agreements of MS-DOS (and Windows) to computer manufacturers. They offered a variety of different licenses, but the version that charged the least per copy included a clever kicker: Microsoft had to be paid for every machine sold, regardless of whether MS-DOS was the operating system.

Of course, the PC makers gravitated to the cheapest option. Hence, that clever licensing trick led to both a monopoly in Operating Systems and an eventual FTC and Justice department Anti-Trust lawsuit.

Thus, Microsoft had their deal with the devil: Their lightning in a bottle was not some awesome technology or brilliant breakthrough "“ it was a legal clause that led to enormous monopoly power. That was the prime basis of their success. They pre-installed Office in Windows, creating a second near monopoly and billions more in profits. They also had all sorts of dirty tricks, like undisclosed APIs that other software developers did not know of and could not use. They bullied competitors and friends alike. But that is another discussion entirely.

The monopoly profits they accrued were ginormous, but it made Mister Softee fat and fuzzy headed. True innovation was not to be their strength; they may have been competitive, but they were not hungry. Theirs was a one shot, never-to- be-repeated, decade-long “moment” of glory.

Throughout the 1980s and even more so in the early "?90s, all manner of potentially competitive software products were conceived elsewhere. yet many of these were stillborn. Why? They had a very difficult time getting funding or venture investments. One question "” "The Question" "” was a perennial problem. In Silicon Valley, in Venture Capital conference rooms, in garages, in the offices of potential start ups, "The Question" resonated again and again:

"What about Microsoft?"

Or asked in greater detail: "What is there to stop Microsoft from putting out their own version of this idea, integrating it into DOS or Windows, or giving it away for free?"

The answer was usually, "Nothing." There was nothing that prevented the Redmond behemoth from copying the basic concept, making it part of Windows. If that happened, how you could you possibly sell something MSFT was giving away free with every PC?

Handshakes all around, thanks for coming by, sorry, wish we could do something, but we just cannot help you.

Countless ideas, apps, utilities, programs, businesses, start ups were thwarted . . . That was, until the rise of the internet. Freed from the oppressive Microsoft monopoly, it became a viable competitor to the desktop. Microsoft had neither strategic nor tactical advantages there. As soon as an opportunity arose to get out from under Bill Gates' thumb, tech companies leaped at it.

A million flowers bloomed.

Entrepreneurs, geeks, VCs, coders, two guys in a garage "“ suddenly, it was possible to develop a web-based product or site without the beast from Redmond breathing down your neck.

Early stage investors, angels, VCs threw billions of dollars at tens of thousands of companies. A Cambrian explosion of life took place once firms could develop without the threat of Microsoft hovering over them. The enormity of the potential, the vast amounts of start up money was no longer oppressed by the shadow of Gates & Co.

Freed from the tyranny of their OS overlord, a massive outpouring of technological innovation and creativity occurred. More than a growth spurt, this was the modern equivalent of the Industrial Revolution: Mobile Telecom, Gaming, Storage, Web Sites, Broadband, e-commerce, Microprocessor Development, and all manners of related technologies flourished once "The Question" was no longer an impediment.

At the same time, Microsoft had grown fat and wealthy and complacent: They became a Wall Street darling and founder Bill Gates became the wealthiest man in the world. But, the company lost its drive and whatever creativity it had. The history of Microsoft is not one of innovation "“ most of its major products were purchased, copied or stolen "“ but it quickly became a utility, with Windows and subsequent replacements a necessary evil to maker computers operate.

And what of their Innovation today? Microsoft has missed just about every major trend in computing over the past decade. They missed Search, they missed MP3 players, had to buy webmail, missed user generated content, maps,blogging, online video, cloud computing, location sensitive apps,  smart phones, Apps, texting, social networking, tablets, micro-blogging (ie, Twitter). On and on goes the list of latest and greatest technologies, with MSFT nowhere to be seen.

The list of recent Microsoft innovations is astonishingly short. They were always better copiers than they were innovators; even now, they seem to have forgotten how to steal effectively. They may have bought their way into gaming, dropping several billion dollars to become competitive, develop the X-Box and buying Bungie "” but all in, it is hardly a winner for them.

And now their latest ill-advised, wildly over-priced, $8.6 billion purchase of Skype. It is their attempt to buy their way into the Smart Phones, yet another innovation they missed. It is their attempt once again to purchase relevancy.

The rich fat kid just wants to be cool . . .

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

And before someone asks, we have no position in Microsoft (MSFT)

Very well said, Barry. I had the same reaction to the Skype purchase. To think of all the toys Microsoft could have invented decades ago: Facebook, Google search and mail, iPhone, iPad, an OS which was not full of worm and Trojan Horse holes, and the list goes on . . . . . .

Great point….Lex has a nice take on it too…doubt any of this will lead to that $25-35 breakout.

Great analysis. It’s what I’ve been trying to tell friends for years, that Microsoft basically hasn’t created a thing in it’s existence, and has been lucky enough to ride a the massive wave of monopoly power after copying the Mac OS and calling it Windows. Thank goodness Jobs could come back and throw it back into their face with what Apple is these days.

Now, Let’s hear part II – how Silicon Valley churns through billions of dollars to create silly products like Facebook and Twitter.

I would also add that when Compaq engineered a Turing machine equivalent of IBM’s BiOS, the barn was opened for Microsoft. IBM had lost control of the clones. And then when that fool sold Apple’s look and feel, Windows was finally able to feel the sunshine on its ugly face. Good times ensued.

Who can forget the ugliness of the Netscape wars after Gates was taken by surprise by the internet.

…from Wikipedia:

The Road Ahead occupied the top spot on The New York Times’ bestseller list for over seven weeks in late 1995 and early 1996, and sold 2.5 million copies.[citation needed]

A reviewer at The Seattle Times (and coauthor of Gates: How Microsoft’s Mogul Reinvented an Industry and Made Himself the Richest Man in America, a 1993 biography of Gates), called Gates’ coverage of the Internet “weakest of all” the topics Gates covered, saying the “World Wide Web receives just four index citations and is treated as a functional appendage of the Internet (rather than its driving force), and both come off as a subset of the Information Highway, a term Gates uses with abandon despite its disfavor among digerati.”[6]

The New York Times review called the book “bland and tepid” and reading “as if it had been vetted by a committee of Microsoft executives”; it is “little more than a positioning document, sold in book form with accompanying CD-ROM and designed mainly to advance the interests of the Microsoft Corporation.”[7] It also said that Gates “has been caught flat-footed by [the Internet's] sudden emergence” and saying the book is “part of Mr. Gates’s extensive effort to force his way back into the game before it’s too late.”[7]

Time magazine, in a December 1995 article about Gates in general rather than his book, said:[8]

Gates is as fearful as he is feared, and these days he worries most about the Internet, Usenet and the World Wide Web, which threaten his software monopoly by shifting the nexus of control from stand-alone computers to the network that connects them. The Internet, by design, has no central operating system that Microsoft or anybody else can patent and license. And its libertarian culture is devoted to open"”that is to say, nonproprietary"”standards, none of which were set by Microsoft. Gates moved quickly this year to embrace the Net, although it sometimes seemed he was trying to wrap Microsoft’s long arms around it.

I am no MSFT fan, but how is Apple, with its closed ecosystem, really any different as an providing an impetus for innovation? I think it could be argued it is worse. How many budding engineers got their teeth cut putting together their own DOS/Windows PC? How much automation came about by being able to get to down and dirty to the hardware level?

[...] Barry on why MSFT-Skype is irrelevant.  (TBP) [...]

Awesome piece on Mr. Softee. Spot-on.

[...] How Microsoft Caused the DotCom Bubble and why their Skype "?Hail Mary' is irrelevant | The Big P…. [...]

MSFT + Skype doesn’t quite have the scale of AOL + TWX (that market the absolute top of dot-com 1.0 mania) but I have a feeling we’re getting very close to the top of dot-com 2.0

MSFT is not buying “coolness.” They’re simply making a few VCs mega-wealthy… (i wonder if there will be a payback in terms of favorable press , etc)

And what if this is just the beginning? What if RIMM is next? What if MSFT comes back for Yahoo? Then the hopes for a “juicy” one-time dividend or a mega-buyback are gone. I’m no longer considering buying MSFT… not until it goes to $20

I mentioned the acquisition news to my wife, by starting with “Oh, we’re going to switch from Skype to Google Talk”. I then mentioned MSFT is buying Skype and ended with “Probably everyone else will do it, too. The only people who won’t switch are the uncool people.” (I think I was kidding. But…I’m not sure.)

You do realize that you are saying you can’t believe Microsoft didn’t invent every technological advance in the last three decades right? That is like saying why doesn’t Ford invent every advance in automobile manufacturing. You are suggesting that a single company can invent everything and that the free market system that actually provides for the innovation that we love so much is irrelevant. Of course that is right after saying that when they did control all things in the tech space they were also bad. Which is it? Are they bad if they have invented or copied everything in the tech space to the point that they are the only player or are they bad if they are not inventing every little tech advance that happens? They can’t be bad for both reasons.

A little short sighted if you ask me. Sounds more like you are jumping on the MSFT bashing bandwagon to get readership (which I guess worked because I am commenting).

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BR: I have been a longstanding member of the MSFT bashers; this has been kicking around my head for a long time (I wrote it in an hour this AM) .