Americans, from the average consumer to the federal government, have begun reconsidering their relationship with Silicon Valley.
Over the past few decades computers have cemented their place at the center of personal and professional lives. Most readers under the age of 40 probably don't know what people would do during the workday without a PC, nor would most of us know how to cook a meal or find a dentist without checking the internet. Companies and individuals have made record-shattering fortunes providing these services, but at a cost.
Personal data has become ever more insecure and we've come to depend on sources of information that turn out to be little more than infotainment in disguise. Cities have degraded their infrastructure in reliance on companies that then set record-shattering losses, while other companies have created a new era of monopoly by quietly acquiring every potential competitor.
If the last 40 years have been the story of computers blowing open access to information, the next decade might tell the story of what Americans choose to do about that. To understand how that happened and where it's going, a good place to start is with the history of Microsoft (MSFT - Get Report) .
The Founding of Microsoft
Americans love the inventor working out of their garage. From Ben Franklin puttering in his living room to Thomas Edison inventing the modern world out of Menlo Park, this is a story that people tell over and over again. It's the common-man-makes-good story. In the case of Microsoft it's also somewhat true.
Neither Bill Gates nor co-founder Paul Allen were laymen when they founded Microsoft on April 4, 1975. Allen had worked as a programmer for the company Honeywell while Gates studied at mathematics and computer science at Harvard. Nevertheless, they did launch their company out of a garage in Albuquerque, N.M.
Microsoft was originally founded to write code for a company called MITS which produced the Altair computer. Specifically, their company sold an interpreter for the popular BASIC programming language that would run on the Altair. (An "interpreter" is a piece of software which lets users write and execute code on the computer.)
They named their company Microsoft for Microcomputer Software, a nod to the era of miniaturization that changed computing forever.
This proved wildly successful. Over the next five years, Gates and Allen continued to develop both their version of BASIC and other programming languages, selling interpreter software to manufacturers. The company made its first $1 million in sales by 1978 and relocated to Gates and Allen's hometown of Bellevue, Wash., by 1979. However, the real fortunes of Microsoft didn't start until 1980, when IBM (IBM - Get Report) asked the company to build an operating system for its line of personal computers. This led Microsoft to create MS-DOS, the Microsoft Disk Operating System.
The operating system market created Microsoft as most people think of the company today.
Shortly after its launch most personal computer companies adopted MS-DOS as their operating system. Most notably, this displaced IBM's OS 2 operating system as the main competitor in the PC operating system market. UNIX and its related software LINUX remained as the other major operating systems that users could install if they chose, as they do today, but neither have ever received mainstream consumer adoption.
This happened at the same time as Apple (AAPL - Get Report) entered the consumer computer market but the two companies never competed directly. Although over time Apple and Microsoft came to dominate the personal computer market, each took a very different approach. Until it entered the tablet market, Microsoft never had a relationship with the hardware running its operating system. It simply licensed DOS (and later Windows) to manufacturers. Apple, on the other hand, was and is a company that controls every step of the process. It doesn't license its operating system. It builds devices to run Apple software natively.
While Apple's approach has, arguably, led to more advanced, stable and efficient computers, it also left the company with a decided disadvantage in the market. Microsoft's licensing model let it access far more consumers at a cheaper price point, leading its operating system to dominate the market. By 1985, when the company released its first version of Windows, MS-DOS had become the industry standard with Apple in second place and falling behind. Windows trailed MS-DOS in popularity until its third version, Windows 3.0 and then 3.1, released in 1993.
In 1986 the company relocated to its current home of Redmond, Wash., and went public. In 1995 the company released Windows 95, a redesign of its Windows OS which used the basic design template that it would rely on (arguably) to this day. That same year Microsoft also released its web browser Internet Explorer, a product that would lead to troubles that might seem very familiar to technology CEOs today.
The Problem With Microsoft
By 1995 approximately 90% of the world's personal computers (that is, desktop style machines) ran Microsoft's operating systems and its popular Office products. This was a one-party market dominance not seen since the Justice Department broke up the Bell System telephone monopoly, and one never before allowed since the U.S. adopted its antitrust laws.
Microsoft's one-party rule was different, though, in a way that regulators and lawyers continue to struggle with today. Antitrust law assumes that a monopoly will harm consumers not only because it will stifle competition, preventing new ideas and products from improving the market in the long run, but also because it will harm consumers immediately. Monopolies have historically led to rising costs and declining product quality as companies leverage their position to maximize profits.
While Microsoft certainly made enormous profits over the 1990's, computer technology introduced the element of network effects into antitrust concerns. For the first time, regulators faced a product that actually worked better as a monopoly spread. The nature of computer technology is such that standardization improves efficiency and communication. The more people who used Microsoft's Windows operating system, the easier it was for companies to build networks and link up far-flung offices. The more people who bought its Office suite, the easier it became for users to share documents.
How should regulators address an industry where widespread adoption makes a product work better?
It wasn't that users had no other choice. Productivity shoppers, for example, could have used office packages such as Lotus and WordPerfect if they chose. But that would have made life harder for the user, who would be unable to share files with Office users. The Justice Department began to consider, for the first time, an industry that didn't just naturally lend itself to monopolies, but one which arguably improves under a monopoly.
This issue has not gone away. Readers might recognize this language from the current debates over platforms such as Facebook (FB - Get Report) , Google (GOOGL - Get Report) , Amazon (AMZN - Get Report) and Airbnb, all companies which currently dominate their individual markets in part because their services organically grow more efficient the larger the company grows. The more people on Facebook, the more likely it is that a new user will subscribe to Facebook instead of another service.
Nevertheless, the government took action.
In 1998 the Justice Department and attorneys general from 20 states filed an antitrust action against Microsoft. They accused the company of abusing its position in the market by:
• Directly driving competitors out of business and,
• By integrating its own products into the Windows Operating System in such a way that no one could effectively compete.
One of the most notable aspects of this case was a charge related to OEM (Original Equipment Manufacturer) licenses. Under this practice, Microsoft required any company wanting to use its products to sign an agreement agreeing to pay Microsoft a royalty for each computer the company shipped regardless of whether that computer ran a Microsoft operating system. This created, in the words of the Justice Department filing, a "tax" on every computer shipped without using a Microsoft product.
This antitrust action was significant in another way as well: It showcased how complicated the legal field would become regarding technology oversight.
In reality, the Microsoft antitrust action was a series of actions spanning 1994 - 2004. Most significantly they involved a 1994 agreement signed with the Justice Department and the case United States vs. Microsoft Corp. settled in 2004.
The 1994 agreement ultimately led the company to stop integrating Internet Explorer into its Windows operating system, allowing rival browsers to run equally on a user's computer. (Reader Note - While IE had not yet been released at the time Microsoft signed this agreement, it was the basis for the Justice Department's enforcement action.)
The Justice Department later used that as a key element of its claims in the case United States vs. Microsoft, which led to no significant financial fines. The main outcome of that settlement was that Microsoft had to allow third parties access to coding tools which would allow them to build competing software to run on the company's own Windows operating system.
Many legal observers consider the Microsoft settlement minor, if not outright trivial. Others have argued that the Justice Department's arguments were based on little more than consumer preference. This issue continues to this day.
Microsoft still makes a plurality of its cash from the company's Windows operating system and its Office products, including its Outlook and PowerPoint software. It also has a massive revenue source in the SQL database product, which many other companies rely on for internet infrastructure.
In 2001 the company launched one of its most successful product lines to this date, the Xbox. This has grown to become one of the three dominant video game systems in the market (alongside Sony's (SNE - Get Report) PlayStation and Nintendo (NTDOY) ).
Arguably, however, the 2000s marked the first, and to date biggest, period of missed opportunity for Microsoft. This was the era in which Apple largely redefined the market for personal computers, first by introducing the iPod and later through the iPhone. Both of these products changed how consumers interact with technology fundamentally and, most likely, permanently. While smart devices had existed before, most notably in the Blackberry and Palm Pilot, no company had pushed them into the mass consumer market.
Apple did, and consumers quickly came to expect the power and services of a laptop accessible from their pocket. Microsoft was slow to adapt, with one of its major attempts (the Zune) an industry punchline to this day. This came around the same time of several high profile failures in the Windows operating system line such as Vista and ME, the latter of which has been jokingly called "the most expensive virus ever."
And then there was Bing, a search service which still cannot find its user base.
Today Microsoft has seemingly recovered from the missteps of the 2000s. Over the 2010s the company entered the smartphone and then tablet markets, releasing a version of Windows 8 and then Windows 10 dedicated to those platforms. It has also released the Microsoft Surface, a highly popular alternative to the iPad which has earned significant success due to its lower price point and broader range of functionality. The company has in many ways re-established its dynamic relative to Apple from the 1980s, offering cheaper and more widespread products relative to its competitor's elite products.
Leadership at Microsoft has changed hands several times in that same period of time. In 2000 Gates stepped down as CEO, handing the office to Steve Ballmer but remaining significantly involved in software and product development at the company. He formally withdrew from the day-to-day operations completely in 2008.
Ballmer stepped aside as well in 2014, handing the CEO position to Satya Nadella who remains the chief executive of the company to this day.
• 1975 - Gates and Allen officially found Microsoft
• 1978 - The company makes its first $1 million
• 1979 - Microsoft moves from Albuquerque to Bellevue, Wash.
• 1981 - Microsoft launches MS-DOS, its first operating system, on IBM's personal computers
• 1983 - MS-DOS is released on a Compaq PC, beginning Microsoft's strategy of licensing its operating systems to manufacturers at large
• 1985 - Microsoft launches its first graphical operating system, Windows 1.0
• 1986 - Microsoft moves from Bellevue, Wash., to its current location of Redmond, Wash.
• 1990 - Microsoft releases Microsoft Office and Windows 3.0, two of its most popular pieces of software in history
• 1994 - Microsoft makes a deal with the Justice Department to forestall antitrust actions. This is the beginning of the company's legal troubles
• 1995 - Microsoft releases Windows 95, creating the Start Bar design that it still uses to this day
• 1995 - Microsoft releases Internet Explorer
• 1998 - Proceedings begin in United States vs. Microsoft
• 2000 - Gates steps down as CEO in favor of Steve Ballmer
• 2001 - Microsoft launches the Xbox
• 2001 - Microsoft releases Windows XP, arguably the most popular operating system in history
• 2004 - United States vs. Microsoft settled
• 2010 - Microsoft releases the modern version of its Windows Phone operating system
• 2012 - Microsoft enters the tablet market with the Surface
• 2014 - Ballmer steps down as CEO in favor of Satya Nadella
• 2015 - Microsoft releases Windows 10, the current version of the operating system at time of writing
Microsoft StockMicrosoft ( MSFT - Get Report) stock has long been considered a sound investment. At time of writing the company traded at $137.08, almost a 40% increase from its position at the beginning of 2019.
Despite going public in 1986, the company's stock didn't take off for another 10 years. Until 1995 Microsoft traded below $5 a share, rising quickly over the 1990s and 2000s. In the year 2000 the company's stock hit a high point, trading in the mid-$50s range. It quickly declined and stabilized, trading within a range of $20 - $30 per share for most of the following 15 years.
In the past five years is when Microsoft's stock has truly taken over. Between 2014 and today Microsoft's stock price has nearly tripled, rising from $40 a share to its current price. This growth is unmatched in the company's history. Much of the success can be attributed to the company finding its footing in the device market. After losing significant ground to Apple (which largely invented the modern concept of the smartphone and tablet), Microsoft's Surface products and mobile Windows operating system have gained steady adoption.
In particular, the company appears to be replicating its success from the 1980s when it faced a largely comparable situation relative to its rival. While Apple has cornered the high-end, high-price point market for smartphones and tablets, Microsoft's products have gained widespread adoption as a more affordable, more accessible alternative.
As our writer Jonas Elmerraji notes in his stock forecast for the company, "[t]here's nothing subtle about the nonstop rally that shares of Microsoft have been enjoying this year. In fact, for much of 2019, the price action has been about as straightforward as it gets: Microsoft has marched higher in a well-defined uptrending channel that's provided clear-cut buying opportunities on every test of support."