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Consumer Abuse at Apple Computer, Inc.

The United States Justice Department recently convinced Judge Thomas Penfield Jackson that Microsoft Corporation is guilty of engaging in monopolistic practices to the detriment of consumers. In particular, observed Justice, Microsoft started bundling their web browsing software, with their Windows operating system (OS). Microsoft’s price to consumers for the bonus software? Zero dollars, and zero cents. A free gift is, of course, not the direct problem. The problem, according to Justice, is that giving away Microsoft Web Explorer would threaten the ability of Microsoft’s competitors to sell their own web browsers. After all, how can a company sell their product when another company simply gives it away? Naturally, the company would struggle, but the real loser would be the consumer, who would be stuck with only one choice for a web browser: Microsoft Internet Explorer or nothing.

Because Windows runs on 90% of the world’s PCs, bundling Internet Explorer presumably amounts to a free pass for Microsoft to piggy back browser success on top of their success in the OS market. So the real problem is not the free browser; the real problem is that Microsoft has a 90% share of the operating system market. According to Justice, this market dominance amounts to a monopoly; and surely the lack of competition has stifled the innovation that could have occurred.

"For of all sad words of tongue or pen, the saddest are these: 'It might have been!'" --John Greenleaf Whittier (1807-1892)
At first glance the case for Monopoly appears strongly built, but upon closer inspection, the case is found to be floating on a stream of wishful thinking rather than anchored in a foundation of fact. Justice’s argument in favor of monopoly is 100% based on what could have been. The story goes that if Microsoft was not the dominant player in the OS market, then consumers could be better off. If Microsoft had not captured 90% of the OS market, Apple could now have higher revenues and greater market share. If Windows was not the OS of choice for 90% of consumers, other companies could be building more innovative new software. In the absence of real evidence, Justice has resorted to the dubious tactic of presenting hypothetical scenarios as true facts. This cannot even properly be termed arguing. An argument is refutable or irrefutable based on facts. There is no way to refute, accept, or otherwise objectively judge what could have been. What could have been is the business of historians and archeologists. The United States and Britain could possibly have stunted the spread of communism had they marched into Berlin before the Russians. Dinosaurs could possibly have survived into modern times had not a meteor crashed into Earth. On the other hand, perhaps an Anglo-American invasion of Berlin would have accomplished nothing. On the other hand, perhaps the absence of a meteor crash would have made no difference concerning the fate of the dinosaurs. When it comes to World War II or dinosaurs, the idea that no could have been scenario may be proved or disproved is perfectly reasonable and clear. For some reason, however, when applying the same logic to the short and recent history of PC operating systems, this idea becomes cloudy and unacceptable – at least to Janet Reno and her lieutenants.

Breaking the DOS Stronghold
True judgements cannot be made on could have been hypotheses, but as long as those are the rules of Ms. Reno’s game, let’s play along. In 1991-92, Microsoft started selling the Windows operating system. Before then, Microsoft software, and most other PC software, ran on the DOS platform. DOS was (and is) a text intensive, command-oriented, user-unfriendly OS. In the meantime, Apple had been selling a personal computer, which ran an operating system that was graphical, mouse driven, easy to learn, and very user friendly – the Macintosh OS. For mainstream, non-technical PC-Users, the Macintosh was the superior operating system. The Mac OS’s intuitive, user-friendly interface had the potential to make users much more efficient. But despite the promise of Mac OS, DOS based PCs still dominated the market. Undoubtedly, this was partly because the companies supplying DOS based PCs were the same ones that supplied mainframes in the past – namely IBM. In the face of a revolutionary new product, however, the DOS stronghold should have been tenuous at best. One look at the Mac OS, and any corporate manager would immediately see the benefits. And the company selling DOS, Microsoft, should have immediately felt scared (they probably did!). Yet the Mac OS never caught on in corporate America. The comparatively high price of the Macintosh system, along with Apple’s ineffective (or non-existent) corporate marketing strategy, are thought to be the major factors, which contributed to this lost opportunity.

The Price of Failure
In the mid 1980s, while IBM, Compaq, Wang, and others running DOS went after corporate markets, Apple focused on schools. The DOS companies and Apple were each successful in their respective chosen markets. This was good for Apple, but better for DOS because the corporate market was bigger and more demanding than the education market. Just why Apple ignored the corporate market, or why they failed in the corporate market, is anybody’s to ponder. Consider, for a moment, the fundamental difference between Microsoft’s strategy for selling DOS and Apple’s strategy for selling Mac OS. Early on, Microsoft licensed PC manufacturers to sell DOS, whereas Apple retained the exclusive rights to sell Mac OS. The result was that DOS was being marketed and sold by dozens of competing companies, while Mac OS was being sold by just Apple. One might hypothesize that this was the major factor behind the Mac OS-DOS price difference.

The recipe for lowering prices includes two essential ingredients. The first is management’s belief that profits will be higher if prices are lower. The second is the ability to keep unit price higher than unit cost. The former is often a company’s reaction to competition. The latter is achieved through improvements in production efficiency, and likewise, is often spurred on by competitors. In the mid 1980s both of these ingredients appear likely to have been more abundant in the DOS marketplace than in the Mac OS marketplace.

With dozens of companies competing to serve the corporate OS market, downward price pressure must have been great. In the school and home market, on the other hand, relatively few suppliers were competing. Pricing pressure on market leader, Mac, was probably much lower. In the meantime, we can guess that production efficiency improvements were probably more common in the DOS world simply because the incentives for efficiency were much greater, and the rewards much higher. The case for cutting costs by $10 per unit is obviously much more compelling for a DOS company selling 1 million machines than for Apple selling one-tenth as many – especially if the DOS company’s competitor has just made a similar cost cut.

To make matters worse, as DOS and Mac OS each concentrated on the corporate market and education market respectively, unfortunate stereotypes developed. Apple’s perception became that of a toy company supplying playthings to children, whereas DOS companies were perceived as supplying powerful business tools to serious companies. The reality was that Mac was supplying powerful business tools to children.

Whether because of price, marketing strategy, stereotype or some other reason is not terribly important. The fact remains that Apple failed to make the Mac OS as widely available to consumers as DOS. One consequence was that between 1984, when Apple first unveiled the Mac OS, and 1992, when Microsoft unveiled Windows, customers – both consumer and corporate – suffered. During this 8 year period, the Mac OS, driven by a proper strategy, could have been sold to the majority of PC users. But because of Apple’s failure in the corporate market, most users were stuck with the inferior DOS platform. Indeed, the 8 year period should actually be considered an 11 year period, because not until the release of Windows 95 in 1995 was Microsoft’s OS really comparable to the Mac OS. Watchers of the PC market will recall that in 1995, the big joke was that Windows 95 was really just Macintosh 84.

So let’s talk about what could have been. Apple could have been the dominant supplier of PC operating systems had they simply licensed their Mac OS from the beginning in 1984. Or, as the exclusive supplier of Mac OS, Apple could have pursued the corporate PC market much more aggressively, competing directly against the DOS companies, which would have forced Apple to lower price and improve their production efficiency. They could have hired better sales people. They could have offered massive discounts to corporate customers in the hope that early market share would lead to future profits. Instead of shunning them, Apple could have tried to buddy up with IBM and take advantage of their distribution system and customer base (like Bill Gates did). They may even have considered bundling the Mac OS with free bonus software.

The White Knight
Maybe they did all of the above and still came up short against DOS. But that is still no excuse. Apple could have – and should have – found a way to best Microsoft. They bested them in product development. Why not marketing? Perhaps hindsight is 20/20, but in business – where people’s livelihoods and fortunes are on the line, where bad decisions today can lead to layoffs tomorrow – foresight has to be 20/20. For eleven years Apple’s high prices and ineffective strategy stood between consumers and the best OS on the market. Do these miscues amount to consumer abuse? By Department of Justice standards, yes. Based on what could have been, Apple’s abuses tower over Microsoft’s. In fact, in the face of Apple’s abuses, Microsoft looks more and more like the white knight in this whole drama.

In 1992, Bill Gates finally rode to the rescue of overcharged, under served consumers. The first release of Windows was, at best, a poor man’s version of the Mac OS, but at least it was priced at a reasonable level and aggressively peddled in all markets. In 1995, with the release of Windows 95, Microsoft had finally launched an OS that could rightly be compared to Mac OS. Microsoft had truly come of age, and at long last, after 11 years of Apple’s failing, irresponsible, abusive strategies, consumers and corporations alike had the opportunity to buy a world class OS at an affordable price.

Oddly enough, right around the time that the world was anticipating the release of Windows 95, Macintosh finally started attempting to introduce more consumer friendly innovations to both their marketing strategy and their product line. In particular, they licensed out their OS for the first time, and they started equipping their computers with faster (Power PC) processors. The Power PC processor addressed the prominent consumer cry that "Macs are too slow." The cry that Macs are too expensive has also finally been addressed through the incarnation of Apple’s affordable iMac product line. The licensing deal never amounted to much, but nonetheless, Apple finally showed some signs that they wanted to be as consumer-friendly as they have been user-friendly.

Nonetheless, can anything really make up for the 11 years that Apple soaked up profits by gouging a small group of loyal consumers – many of them children and school teachers – with their extraordinarily high prices? Can anything make up for snubbing a large group of potential corporate users by failing to penetrate their market for 11 years? Had the Windows 95 efficiency boom occurred in 1984, how much better off would the technology market be right now? How much of the software written for Windows 95 would actually have been available to consumers 11 years earlier? How much cheaper would PCs and their accessories be right now? How many years earlier would the internet have become available for consumer use? How many years earlier could the first internet browser have been developed – whether by Netscape, Microsoft, Apple, or anybody else? The age of e-commerce could have begun 11 years earlier. All the dot-com uncertainty could be over by now; we could already know what the truly effective e-commerce models are. The whole stock market boom may have started 11 years earlier – meaning that consumers who have recently benefited could have begun benefiting 11 years earlier. That’s 11 years of lost consumer wealth! The sad truth of all this, of course, is that Windows 95 was available in 1984, only it was called Macintosh OS. As a consequence, however, of the abusive tactics which we have already discussed, Apple failed to make the Mac OS a practical alternative for most customers. Essentially, they held the efficiency boost hostage for 11 years, until Bill Gates finally set it free in 1995.

Road to Cupertino
Sound crazy? Maybe. But how is my indictment of Apple any different from Justice’s indictment of Microsoft? Both are based on what could have been – nothing more, nothing less. If it seems ridiculous for me to suggest that Apple’s poor business decisions could be accountable for the "delay" of the internet era, equally absurd is Ms. Reno’s notion that Microsoft’s "monopoly," now 5 years old (dated from the release of Windows 95) has pre-empted a more desirable consumer marketplace. Not only are we both dealing in what could have been, but also, we are both presuming to know more about the best way to serve OS consumers than the OS companies and the consumers themselves. Not only is this notion absurd, but it is supremely arrogant.

In the meantime, if Justice continues to believe that their case against Microsoft is not absurd, then neither is my case against Apple. Ms. Reno and the Justice Department should, therefore, push forth in this Microsoft case. Eventually, the trail will lead them to directly to Cupertino, California – directly to the front doorstep of Mr. Steven Jobs.