Operating Systems as Natural Monopolies: Think Apple iOS

A computer operating system is very close to a natural monopoly. Controlling the dysfunctional effects of such monpolies has proven very difficult. A simple monopoly occurs when one supplier provides 60% or more of the product in a marketplace. Monopolies do not have to be dysfunctional. However, in profit maximizing markets there is a strong tendency to do so. Natural monopolies occur when market conditions tend to favor monopoly formations as in the following:

1)The fixed or capital costs of creating, delivering and/or maintaining the product or service are very high – this creates a barrier to entry into the market by competitors. For example, the expertise and cost of developing and maintaining the 55 millions lines of code that comprises Windows 7 is very high;
2)In contrast, the marginal cost [or operating expenses]of producing and delivering one more instance of the product and/or service is very low. For example the marginal cost of producing one more Windows 7 disk+packaging is very low;
3)the consumer of the product and/or service perceives it as being uniform and undifferentiated – water, salt, electricity or the cost of switching to a substitute product or service is very high. In the case of operating systems, the services among Windows, Mac OS, and Linux are very similar but the cost of switching operating system is high because a)the time and effort to make the transition can be very onerous, b)the time and cost of replacing programs and apps between the operating systems is very high and c)the relearning curve for the differences in how the OS and programs operate in the new OS environ are variable but can be disconcertingly expensive.
4)Both businesses and individual consumers do not want to learn and support a second product and its support system if they can avoid it. The transition expense can be very high as the time, effort, and extra learning expense are costs many would prefer to avoid.
In sum almost all the major factors in computing tend to support a natural monopoly for operating systems.

The move to a natural monopoly would appear to be self propelled; but in fact two additional conditions determine the rate of monopolization. Foremost, being first to market often confers advantages as the vendors can set prices, secure supply chains and control their margins more effectively than later entrants into the market. Second, many of the operating standards, distribution methods, and pricing deals can be set and maintained by the first entrant. Reading the following account of the actions taken by Microsoft to establish and the preserve its monopoly shows the Machiavellian intrigue resorted to by Redmond to maintain market dominance.

Thus, the computing industry has tended to form natural monopolies around operating systems in which only compelling changes in hardware or mode of delivery starts to break up the natural monopoly. Observe the number of years these natural monopolies lasted:

IBM 360 for mainframes – displaced by lower cost and more precisely sizable minicomputers and local area networks – 25 years;
DEC VAX for minicomputers – displaced by local area networks and low cost PC servers; – 10 years;
Novell LAN Servers – displaced by Client Server systems using Linux Apache or Windows IIS based Web services – 8 years;
Microsoft Windows PCs – displaced by proliferating client computing devices like smartphones and tablets using Apple iOS or Google Android – 20 years.

Some monopolies lasted longer because of the way they managed their leadership position. Joseph Schumpeter’s Creative Destruction describes how monpolies sew the seeds of their own destruction as monopolists cling to power by deferring innovation and destroying competitors with predatory pricing. By the very nature, natural monpolies often have more effective defenses against the engines of innovation and change because they pose significant entry barriers and are protected by individual consumers reluctance to making the transition to new technologies or services.

Efforts by government to control such natural monopolies through antitrust and other regulatory means has been mixed at best. IBM back in the early 1970’s had to open up OS/360 software development and distribution to outside developers with more public APIs and equitable terms of distribution.But IBM mainframes prospered well into the 1980s. Also, after winning the antitrust case against Microsoft Windows, the US Department of Justice did nothing under the new Bush administration. Such ideas as spinning off the Web division as separate competing company or having the OS become opensource were simply not tried. Also prosecuting OS monopolies has been difficult; but administering effective remedies or regulation for OS monopolies has been almost impossible.

The Cost of Operating System Monopolies

The cost of monopolies are high, wide and persistent. High in that Windows 7Professional the Microsoft operating system costs $299 – as much as Amazon’s Kindle Fire tablet with Google Android operating system and effectively more than half the price of the PC  hardware . The operating profit of Microsoft is 45 cents of every dollar in the  $70Billion in sales for the last year which has accumulated to $62B in cash and investments after dividends and acquisitions. Wide means that Microsoft has been able to promote through its Windows monopoly other of its programs to monopoly position such as Internet Explorer and Microsoft Office which come as default installations on every copy of Windows installed or as partial freebie giveaways. So an operating system monopoly begets many program monopolies large and small.

Persistent because monopoly vendors like Microsoft grant access to evolving APIs and new developments first to their own program developers and then favored external development teams before the public API and new specs are reveal . Of course, there are prohibitions against this, but there are many workarounds. In talks with dozens of developers this was spoken of as “an under cover fact of life” while developing for not just Microsoft but other market segment leaders.

The Latest Move to OS Monopoly : Apple iOS

Apple with iOS for its mobile client iDevices like iPod, iPad, and iPhone is racing towards achieving a monopoly in PostPC client computing. And it has a number of the natural monopoly advantages: 1)substantial [but not overwhelming] costs for developing the new iOS; 2)extremely low costs of delivery and updating of iOS on customers mobile devices; 3)first entrant advantage in standards setting, supply chain priorities, and gaining market share leads. All of these achievements are well deserved. However, in the latest tactics undertaken by Apple regarding iOS are distinctly anti-competitive.

1)All software and apps used on iOS devices must be approved by Apple.. This is done ostensibly to filter out duplications and security hazards; but is controversial because some app developers complain of arbitrary rejection decisions. See the sidebar on Adobe Flash for an example;
2)All software for iOS devices store must be sold through the Apple AppStore and Apple takes 30% of the price sold;
3)All software developed for iOS must use one of two development languages – Objective C or HTML5+JavaScript – most cross platform development languages and tools such as Java, Flash, C/C++ have been banned from use on iOS development.
4)Because Google’s Android has gained a dominant market share in smartphones while powering dozens of innovative tablets. Apple has unleashed a thermonuclear patent war against Android for its “copying” of Apple’s ideas. But as this presentation of 75 innovative tablet which are dominated by Android designs show, the Android tablet space is alive with unique innovations. .

These patent attacks are an example of the worst of the petulant side of Steve Jobs. There is no doubt Steve Jobs was a great innovator. But this same Steve Jobs was also a blatant imitator and copier. It was Steve who copied Xerox Palo Alto’s GUI and mouse interface for the Lisa and Mac, Apple copied the ideas of Adobe’s Type 1 fonts with Apple Truetype to gain DTP leadership, the iPod and iPhone copies many design ideas from Palm and Nokia , and Apple’s touchscreen innovations had nearly 40 years of prior art to imitate. The whole idea of innovation being 2 parts copying is summed up in these explicit word:s ” ‘Good artists copy, great artists steal’. We have, you know, always, ah, been shameless about stealing great ideas” as enunciated by Steve Jobs in 1996 In sum, Steve is allowed to steal others ideas; but lo and behold the Emperor’s wrath if anybody should even come close to ‘imitating’ Steve Jobs “adopted” ideas.

Even in the PostPC era in which Apple endeavors to replace the Windows monopoly in client computing with the Apple iOS monopoly, Steve Jobs has imitated Microsoft’s Windows monopoly practices but gone one better:
1)Develop iOS operating systems that runs exclusively on Apple hardware and iDevices. This is like Microsoft which only supported one among a dozen competing chip technologies[ Intel x86]but goes two better because Microsoft a) only developed limited hardware [mainly mice] and b) allowed many hardware vendors to develop computers and peripherals for MSDos and then Windows operating systems.
2)Develop proprietary OS software and be the first entrant in client computing markets. Just as Microsoft had its seal of approval sticker while Apple enforces approval of all software that runs on iOS. But Apple does Microsoft one better by requiring all apps to be sold  exclusively through the Apple AppStore where vendors pay a 30% fee for the right to run in iOS on iPod, iPhone, iPad and any other Apple iDevices;
3)Develop Apple’s own apps in key software segments like GarageBand and iWorks that run only in Apple iOS and/or Mac systems. Like Microsoft, Apple competes with its own app vendors; but it is not clear whether Apple developer get first dibs on new iOS iAPI extensions and innovations as Redmonds developers did;
4)Like Microsoft, Apple restricts cross platform development of program and apps by suppressing cross platform tools like Java and integrated platform generation tools. Apple went Microsoft one better by restricting development on iOS to two languages – Objective C and HTML5+ JavaScript until October 2010. Since then it has opened up languages for development on iOS considerably but Java, Flash and most cross platform generation tools remain banned.
In sum the Apple iOS ecosystem is proprietary and closely controlled in which arbitrary bans on software can and have been made- see the sidebar, Steve Jobs Darkside.

Controlling OS Natural Monopolies

As previously noted, regulators have tried to control OS monopolies with decidedly mixed success. However, in the case of Apple iOS, a potential solution has emerged – an open source OS, in this case Android. Because Android is open source any hardware developer can use it with their hardware. Likewise any vendor can develop software for the OS. But Google now maintains a ticketing system similar to iOS for allowing apps to be distributed. The Google App Store also takes 30% 0f any app sales but it is divided between the carrier and payment processor – not Google. Also from the outset, Android has has a rich set of development language from NDK powered C/C++, Java, Flash, and a host of scripting languages. In stark contrast to Apple iOS Android is cross platform agnostic; but because of the Dalvik virtual machines differences with the Sun JVM – Android development and languages are not “write once run anywhere”.

But because Android is open source and has a manageable service fee, literally dozens of hardware vendors have flocked to the Android smartphone and tablet markets with many innovative designs. The result has been that Android smartphones now have a 46% market share of the US Smartphone market compared to Apple’s 28% according to Comscore at the end of October 2011. Hence, Apple is retaliating not in features or innovative development but with a thermonuclear patent war against Android.

These market results point to a simple 3 point solution to the OS natural monopoly situation:
1)OS suppliers that provide open source code for their OS at nominal fees to all hardware and software vendors can have unlimited numbers of their own apps developed for profit[or free] on their open source OS. Those apps can be proprietary or open source but would be subject to standard 60% monopoly restrictions if third parties asked for relief;
2)For vendors that make their OS proprietary, their apps for their own OS would be subject to divestiture restriction if their share of the market exceeds 40% regardless if their product is free. The one exception would be an open source app but it would be subject to the usual 60% monopoly restrictions if third parties asked for relief.
3)Finally both proprietary and open source OS vendors could not ban apps or other software on their OS without due cause such as security risk, persistent reliability problems or other legal norms . But the measure of such risk or persistent unreliability or legal norms would be a performance comparison with other comparable apps or software running on the OS. This would likely have prevented the banning of Flash on iOS.
These three simple provisions would inhibit OS natural monopolies from occurring and prevent organizations from being held hostage to monopoly prices or unfair and inequitable treatment in the ever growing software and computing markets.

Summary

As embedded computing becomes ever more prevalent, control of the natural monopolies associated with operating systems and the guarantee of equitable treatment to all hardware and software vendors will become ever more important. Open Source points the way to simple yet compelling solutions to the excesses which have already occurred in Ground Hog Day repeat fashion in computing markets over OS dominance in the last 50 years. Operating Systems are conducive to forming natural monpolies. Those monopolies inevitably result in sub optimal development. Witness-IBM had to be compelled to release its development APIs and on a timely basis. Microsoft was subject to antitrust action in which its “starve competitors of oxygen actions” resulted in  multi-billion dollar fines and seven years of antitrust watchdog reviews by the DOJ. And now, to secure its monopoly position for its iDevices,  Apple is a)restricting arbitrarily cross platform development tools and b) engaging in thermonuclear and ultimately futile patent wars with Google Android and other computing vendors.The one positive outcome of all this wasted effort – the illumination of how effective open source can be in controlling operating system markets from becoming “unnatural” monopolies. Google’s Open Source Android is the barrier to Apple iOS becoming a Windows-like monopoly in mobile computing.