The stock market blindly lusts after exploitative monopolies

monp

Last week, Microsoft’s longtime CEO Steve Ballmer surprised people with his retirement announcement. A lot of the commentary on this has been insipid, but some has been great. In particular Ben Thompson’s wonderful posts helped me understand something I’ve long been puzzled about. Why did Microsoft build Windows 8 with both a touch screen interface and a completely separate mouse/keyboard interface? The Windows 8 hybrid is simultaneously an engineering marvel and a usability nightmare. Why not just do what Apple did and let phones and laptops have separate interfaces? Well, it turns out a key reason Microsoft did what they did was because the stock market blindly lusts after exploitative monopolies. And Microsoft tried to deliver.

To understand, first realize there are product people and business people. Product people, like say John Gruber, care passionately about products. How they look, feel and smell. They can talk for hours about fonts. In short, fanboys like me. But product people tend to be oblivious to the business side. Also me. In contrast, business people care about business. They are highly aware of competition, market structure, economics. Though often a bit clueless on products.

Eight months ago in December 2012 when Windows 8 and Microsoft Surface came out I posted:

The hybrid UI approach makes PCs more complex to use and understand, and that means only a subset of the existing Windows install base will be savvy enough to use them. So while I think long term the hybrid UI approach will be a minor success, it’ll be to a smaller market than Windows has already, and the tech media will overreact and murder Microsoft in 2013 for their hybrid UI.

We can restate this better using Steve Job’s analogy that tablets are cars and PCs are trucks. The market for hybrid car-trucks is far smaller than either cars or trucks individually. Why go after it? Back then I didn’t get it. Around the same time MG Siegler infamously called Microsoft Surface a turd. He finished his review by posting a picture of his Surface dumped in the trash. A true product dude hard at work.

Contrast to economist Paul Krugman. When Krugman posted about Ballmer’s resignation last week, he talked about how similar Microsoft’s PC dominance is to Apple’s phone dominance. Plus some mistaken thoughts about how to get YouTube videos on an iPad. Siegler trashed Krugman saying “In which Paul Krugman reveals he knows little about Apple, Microsoft, Android, YouTube, PCs, Macs, iOS, iTunes, file formats, digital copyright laws, and technology in general.” Siegler’s taunt is fun. But the larger point is Siegler and Krugman live in different worlds. Krugman’s views are mainstream for business types. While fanboy Siegler assumes great products always win.

Ben Thompson is brilliant because he spans both sides. His recent post If Steve Ballmer Ran Apple makes this clear. If Apple had gone downmarket with a cheap iPhone in 2009 or 2010 they would have locked the entire smartphone market the way Microsoft locked the PC market. Steve Jobs was still around then. But he didn’t do it because it required shipping crappy products. Ballmer would have done it. In fact any CEO who didn’t attempt a market lock should (arguably) be fired. The stock market hates Apple for not lusting after what it holds most dear, an exploitative monopoly. Instead Apple pursues the false god of innovation. Which investors don’t believe in. This is precisely Krugman’s point when he asks “So how do the prospects for Apple’s reign look compared with those of Microsoft?” Krugman answers “Apple’s lock isn’t nearly as secure”.

In fact I just checked and today Apple’s stock is trading at a P/E of 12, while Microsoft is higher with a P/E of 13. Given where their respective sales are headed, and the resignation of Microsoft’s CEO, that’s completely crazy. Until you recall that Microsoft is at least playing by the rules, and continues to have monopoly power in the PC market.

We could sum up this post in the diagram below:

inno-monop

Now of course all companies try to simultaneously innovate and capture monopolies. Sometimes they manage both. But in a crisis, companies tend to pick one side or the other. Apple left. Microsoft right.

Back to Windows 8. It’s finally clear to me why Microsoft built the hybrid interface, though in retrospect it’s obvious. Business types knew exactly what Ballmer meant when he said ““I think PCs are going to continue to shift in form factor.” It meant Microsoft was attempting to replicate their destruction of Netscape by leveraging their Windows monopoly. Instead of giving away a free browser, which made sense, they tried making everyone drive hybrid car-trucks. Which to a product person is bringing the crazy. But quite sensible to business types. Hence when Windows 8 and Surface came out, the tech press and stock market gave Microsoft a pass. The dogs didn’t bark. Except for a few product people who called Windows 8 a turd. Of course now with Ballmer leaving, the tech press has rewritten their past. Barking loudly about the turd they were silent about earlier. Microsoft still has options, but only painful ones.

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