The lesson of Microsoft for almost everyone

I recently ran across a young singer in Poland with my last name (actually Mroz is a fairly common name in Poland): Urszula Mroz.  What amazed me as I watched her YouTube video was that she was singing, for a Polish market, in English.  I flashed back to my undergraduate engineering days when we were told that learning German would be a wise move, since so much of the scientific literature of the time was published in that language.

Well, of course it turned out rather differently, and English is now the universal language of the world.  In fact, it often astounds me that many European people speak English with not only an amazingly wide vocabulary, but with impeccable grammar.  English became the world’s standard language in much the same way that Microsoft file types became the computing standard: by something called the network effect.  This effect states that some items increase in value with each incremental unit produced, unlike traditional items which decrease in value as more of them are produced.  For example, what makes rubies valuable is their scarcity; if more were produced each one would be less valuable.  By contrast consider the value, some years ago, of the very first fax machine ever produced: its value was absolutely zero because it couldn’t communicate with any other fax machine.  The second fax machine produced made both itself and the first one valuable, and the more that were produced, the more value each had.

Microsoft is the dominant computing standard for the same reason.  It’s certainly not because of its superior technology (not!), nor its ease of use (not!), nor its security (not!), nor its capabilities (again, not!).  It’s because when you send me, or anyone, a .doc or a .ppt file, we can open it, read it, and modify it.  And the more people that have the same ability (the same Microsoft software), the more valuable my having it is to me.  (Unless of course I’m a spy or secret agent.)

This fact explains why Microsoft has no real competition.  Consider: how much would it cost to assemble a top-notch management and technical team to make equally good products to compete with Microsoft, to build channels commensurate in breadth and depth, and to effectively promote these competing products?  A billon dollars?  Let’s be conservative and say several billion.  Well, raising a few billion for a great idea with a great business plan and a great team might take a few weeks—tops—these days.  But it hasn’t happened, because of the network effect, and because Microsoft got there first.  (How IBM hand-delivered and gave up that opportunity to a few kids in a garage is another story.)

The lesson for your industry, the new products you are developing, and the new markets you are opening up is clear: controlling the standard is worth a lot of effort and a lot of up-front sacrificed profit.  Scour your opportunities to control some piece of something that people have to standardize on.

Ralph

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