Microsoft heralded as an innovator – it always has been

Steve Jobs is quoted in his eponymous biography by Walter Isaacson as saying, “Microsoft simply ripped off what other people did.” It’s a persistent myth, espoused by many, that Microsoft won so many software battles with little or no product innovation. It’s all the more interesting to re-examine it at a time when headlines are regularly being published such as “Sorry, Apple: Microsoft is now the braver and more innovative company” and “Microsoft is killing Apple in every corner”.

One of the key arguments supporting the myth that Microsoft didn’t innovate its way to success and just “ripped off” other companies was that network effects, not a superior product, enabled it to take market share from its competitors. (Full disclosure: I’ve worked for the company in various capacities for the past decade.)

Shortly after it was published in 1999, a business school professor assigned our class the fascinating book “Winners, Losers and Microsoft”. Written by Liebowitz and Margolis (L&M), it looks at the idea of path dependence, in which consumers are locked into an inefficient or inferior technology. Often path dependence is attributed to network effects, where a natural monopoly is created because of not just the value of the product itself, but also how many other users have adopted the product.

In the event that such a monopoly resulted in an inferior commodity dominating a market where a superior one was available, this would be a market failure. L&M’s fascinating book studies not only the markets in which Microsoft displaced competitors, but also looks at other more mundane commodities often cited as being examples of inferior products dominating a market, such as the QWERTY keyboard or the VHS tape. What they find might be surprising to those who have repeatedly heard that the Dvorak keyboard and the Beta videotape were far superior to the products that consumers got “locked” into.

The case often cited for the Dvorak keyboard is that it was designed to be the most efficient for touch typing, whereas the QWERTY keyboard came from the era of typewriters and was designed to minimize the jamming of type bars. Although the Dvorak is more efficient than QWERTY and can dramatically increase speed, the argument goes, it hasn’t been adopted because the keyboards are hard to find and not enough people are trained on them. L&M look at the studies and evidence cited for these claims and find them lacking.

Advocates for the Dvorak keyboard have used unscientific experiments to support their claims or misinterpreted scientific ones. They’ve also ignored other landmark studies, such as one from 1956 by the General Services Administration, which at the time was relied on by federal agencies and major firms. In the study, typists were trained on the Dvorak keyboard until they caught up to their QWERTY speed. They then continued their training, while in parallel a group of QWERTY typists received additional training to improve their skills. In this second phase, the Dvorak typists improved less than the QWERTY typists. The obvious conclusion of the study was that if you want to improve typing productivity, your best strategy isn’t to switch to Dvorak, it’s to invest in additional QWERTY training.

A similar battle alleged to be an example of market failure is that of VHS vs. Beta. L&M review the history and surveys to demonstrate that far from network effects resulting in the triumph of the VHS standard, what really happened was two companies made bets on different features. Sony, which developed Beta, chose a paperback-sized cassette thinking portability was crucial, perhaps because of its success with the Walkman and other devices. The maker of VHS, Matsushita, built a larger cassette and focused on recording length.

There was a perception that Beta’s picture quality was superior, but L&M cite multiple Consumer Reports reviews giving a slight edge overall to VHS. They also list the various specifications of the two standards and note that the “only real technical differences between Beta and VHS were the manner in which the tape was threaded and the size of the cassettes.” Consumers could also improve the picture quality of their tapes by slowing the recording speed.

Although Sony got to market first and faced little competition for two years, Matsushita consistently won the battle of tape length. It was the first to offer a two hour cassette enabling consumers to record a movie. When Sony figured out how to increase Beta cassette length to two hours with the Beta II, Matshushita’s partner RCA suggested they respond with a machine that could record a football game. Matsushita was able to use Sony’s techniques for the Beta II in order to do so. RCA began selling the Selectavision in 1977 using the marketing tagline, “Four hours. $1,000. Selectavision.”

Consumers voted for tape length and Sony was never able to get ahead of VHS. Whenever it caught VHS, Matsushita was able to respond quickly with an even longer playing time. By mid-1979, VHS was being chosen by a factor of more than two to one over Beta in the US, and by 1983 the latter’s world share was only 12 percent.

Markets that Microsoft competes in, such as spreadsheet and word processing software, were also come-from-behind stories. But like the tale of Beta vs. VHS, it was features and innovations that won the day for the company, not network effects.

In the early days of spreadsheets, Lotus 1-2-3 quickly gained dominance after it was introduced in 1983, outselling VisiCalc, the incumbent that had debuted on the Apple II. Excel didn’t arrive until 1985 and was, due to an agreement with Steve Jobs and Apple, initially only available for the Macintosh. While some have questioned that decision, it did mean that Excel was the first spreadsheet developed for a graphical user interface (GUI), which set itself up well for the launch of Windows 3, the first PC GUI operating system.

It also had several innovative features that customers loved. As reported in Geekwire marking the recent 30th anniversary of the product, an important and incredibly complex feature a brilliant developer created was “intelligent recalc”. This meant Excel only recalculated cells affected by changes made by a user, rather than recalculating all the cells in the spreadsheet. This was very valuable for consumers, especially then. Because early computers lacked memory and processing power, it saved time and resources. Excel was also the first spreadsheet to feature a more mundane, but also extremely popular feature, “print preview”. Interestingly, many on the Excel team were skeptical of the value of this, but as Geekwire reports, one person championed it and prevailed.

L&M document that Excel quickly began to dominate consumer ratings of spreadsheet software, but not initially sales as it was still limited to the Mac. However, the latter took off after it was released for the PC and skyrocketed when Windows 3 came out. Lotus was being handily outsold and made some strategic blunders during the same period. It was slow to make its spreadsheet available for Windows 2 and later Windows 3, and version 3 of Lotus 1-2-3 was delayed by more than a year. Reviews of the two spreadsheet rivals consistently rated Excel higher than 1-2-3 during this time. L&M tell a similar story about how Microsoft Word came out on top of the previous incumbent WordPerfect.

In other words, Microsoft has been innovating throughout its history, not just recently. Indeed, in Isaacson’s book Steve Jobs admits as much when discussing the period before he returned as CEO of Apple, “After I left, [Apple] didn’t invent anything new. The Mac hardly improved. It was a sitting duck for Microsoft.” In other words, as it has always done, Microsoft released new products with new features, while Apple stood still.

Far from being locked into products, consumers made rational choices between Apple and Microsoft, Beta and VHS, Dvorak and QWERTY, and more. So long as companies continue to innovate and make strategic bets on technologies and features, consumers will continue to pick winners in the marketplace and benefit accordingly.