How Microsoft Caused the DotCom Bubble and why their Skype ‘Hail Mary’ is irrelevant

Since the mid-nineties, I have nurtured a thesis about the dotcom bubble, tech bust, and the role Microsoft played in it. The opportunity to discuss it has never came up.

That is, until Microsoft’s purchase of Skype yesterday.

I have long argued that while Microsoft might have begun life as a software firm, it long ago morphed into something that was more a very clever IP/marketing firm with a huge tactical legal advantage that gave rise to a monopoly, rather than a true technology company.

Microsoft remains hugely profitable today, but increasingly irrelevant. Their purchase of Skype is an attempt to buy back some relevance. They are the rich, uncool fat kid at school, trying desperately to buy their way into some popularity. On a spectrum of relevance, where would you place MSFT: Are they closer to Google or Apple or Facebook or Twitter, or are they more comparable to the Maytag repairman of the tech world?

Let’s back up a bit, and look at Microsoft’s history, including the impact they had on other technology in the 1990s.

The first PC was given to the world in 1980 by IBM. The mainframe giant looked down upon the idea of a personal computer for home or even business use. The PC was insignificant, never to replace the big iron they made. In 1981, they happily outsourced the operating system to Gates’ geeks, who themselves outsourced the OS code writing. By 1982, MS-DOS was released.

Embedded within that original IBM deal was the seed of Microsoft’s vast fortunes. Microsoft’s true genius was in their license agreements of MS-DOS (and Windows) to computer manufacturers. They offered a variety of different licenses, but the version that charged the least per copy included a clever kicker: Microsoft had to be paid for every machine sold, regardless of whether MS-DOS was the operating system.

Of course, the PC makers gravitated to the cheapest option. Hence, that clever licensing trick led to both a monopoly in Operating Systems and an eventual FTC and Justice department Anti-Trust lawsuit.

Thus, Microsoft had their deal with the devil: Their lightning in a bottle was not some awesome technology or brilliant breakthrough – it was a legal clause that led to enormous monopoly power. That was the prime basis of their success. They pre-installed Office in Windows, creating a second near monopoly and billions more in profits. They also had all sorts of dirty tricks, like undisclosed APIs that other software developers did not know of and could not use. They bullied competitors and friends alike. But that is another discussion entirely.

The monopoly profits they accrued were ginormous, but it made Mister Softee fat and fuzzy headed. True innovation was not to be their strength; they may have been competitive, but they were not hungry. Theirs was a one shot, never-to- be-repeated, decade-long “moment” of glory.

Throughout the 1980s and even more so in the early ‘90s, all manner of potentially competitive software products were conceived elsewhere. yet many of these were stillborn. Why? They had a very difficult time getting funding or venture investments. One question — “The Question” — was a perennial problem. In Silicon Valley, in Venture Capital conference rooms, in garages, in the offices of potential start ups, “The Question” resonated again and again:

“What about Microsoft?”

Or asked in greater detail: “What is there to stop Microsoft from putting out their own version of this idea, integrating it into DOS or Windows, or giving it away for free?”

The answer was usually, “Nothing.” There was nothing that prevented the Redmond behemoth from copying the basic concept, making it part of Windows. If that happened, how you could you possibly sell something MSFT was giving away free with every PC?

Handshakes all around, thanks for coming by, sorry, wish we could do something, but we just cannot help you.

Countless ideas, apps, utilities, programs, businesses, start ups were thwarted . . . That was, until the rise of the internet. Freed from the oppressive Microsoft monopoly, it became a viable competitor to the desktop. Microsoft had neither strategic nor tactical advantages there. As soon as an opportunity arose to get out from under Bill Gates’ thumb, tech companies leaped at it.

A million flowers bloomed.

Entrepreneurs, geeks, VCs, coders, two guys in a garage – suddenly, it was possible to develop a web-based product or site without the beast from Redmond breathing down your neck.

Early stage investors, angels, VCs threw billions of dollars at tens of thousands of companies. A Cambrian explosion of life took place once firms could develop without the threat of Microsoft hovering over them. The enormity of the potential, the vast amounts of start up money was no longer oppressed by the shadow of Gates & Co.

Freed from the tyranny of their OS overlord, a massive outpouring of technological innovation and creativity occurred. More than a growth spurt, this was the modern equivalent of the Industrial Revolution: Mobile Telecom, Gaming, Storage, Web Sites, Broadband, e-commerce, Microprocessor Development, and all manners of related technologies flourished once “The Question” was no longer an impediment.

At the same time, Microsoft had grown fat and wealthy and complacent: They became a Wall Street darling and founder Bill Gates became the wealthiest man in the world. But, the company lost its drive and whatever creativity it had. The history of Microsoft is not one of innovation – most of its major products were purchased, copied or stolen – but it quickly became a utility, with Windows and subsequent replacements a necessary evil to maker computers operate.

And what of their Innovation today? Microsoft has missed just about every major trend in computing over the past decade. They missed Search, they missed MP3 players, had to buy webmail, missed user generated content, maps,blogging, online video, cloud computing, location sensitive apps,  smart phones, Apps, texting, social networking, tablets, micro-blogging (ie, Twitter). On and on goes the list of latest and greatest technologies, with MSFT nowhere to be seen.

The list of recent Microsoft innovations is astonishingly short. They were always better copiers than they were innovators; even now, they seem to have forgotten how to steal effectively. They may have bought their way into gaming, dropping several billion dollars to become competitive, develop the X-Box and buying Bungie — but all in, it is hardly a winner for them.

And now their latest ill-advised, wildly over-priced, $8.6 billion purchase of Skype. It is their attempt to buy their way into the Smart Phones, yet another innovation they missed. It is their attempt once again to purchase relevancy.

The rich fat kid just wants to be cool . . .

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