1. Software is unusual as a product in having almost zero production cost. There is a cost in developing the product, but this is fixed and does not depend on how many copies are sold. The rule of thumb is that if you make big efforts to keep your costs down, you can make a modest profit by developing and selling 10,000 copies of a piece of software and a substantial profit by developing and selling 100,000 copies. If you can sell a million, or ten million copies, then you will make quite extraordinary profits unless your selling price is constrained by competition (or regulatory action) to
be far below the price you would charge when selling 100,000 copies.
2. Just run the numbers. A typical selling price for a major piece of software might be £100. So 100,000 copies makes you £10 million. Selling and marketing, and miscellaneous overhead might be 30%. Your development cost might be £5 million, so you have £2 million pre-tax which is fairly good. But if you sell a million, your revenues are £100 million, and you make £65 million (not £20 million, because your development cost is still £5 million - it does not increase to £50 million, so you get a 45 million bonus). Of course, in practice you will be unable to avoid wasteful expenditure with that type of revenue and profits, but you might still make £50 million, which is extraordinarily high on £100 million of revenue.
3. But now think about selling 10 million units. Even with a huge lot of waste and a vast budget for lobbying, corporate PR, charitable works etc, you will make well over £500 million.
4. Of course, capitalism depends upon accepting such profits. Theory says that the desire for those profits will lead to innovation and all the other good things. And, competitors will rapidly enter the market and force prices down from £100 to £50 and then to £10. For example, if two competitors emerge and the price drops to £10, then the three companies are sharing £100 million of revenues for the 10 million items sold, with costs of £50 million, or maybe rather more, and the consumer is back to getting a good deal. Indeed, that is usually what happens, more or less.
5. But in Microsoft’s case it didn’t. It turned out that Microsoft was able to lock out the competitors from all but a tiny share of the market and to maintain its prices.
6. There were several reasons for that. In the case of operating systems (DOS, then Windows), where it got started, it turned out that vanishingly few people could change operating system, because of the cost and hassle of making the change.
7. But the main reason was that Microsoft grasped the key importance of avoiding open standards. If its software complied with an open standard, then someone else could produce a competing product with an almost seamless switchover. That is why Microsoft has had such difficulty in dominating internet software - which has got open standards, controlled by bodies such as IETF and W3C (which have proved highly resistant to Microsoft lobbying).
8. Of course, standards are a worse eye-glazer than computer geekery. So few who mattered caught on to what Microsoft was up to in the standards area.