Scale Economies at Microsoft?

[charles mueller <cmueller@metrolink.net>]

          I have a private communication advising me that the software
  industry, in its entirety, is inherently monopolistic because of scale
  economies.  There are 2 costs, I'm told, (1) development, and (2)
  reproduction and distribution.  Only the first is expensive.  The second,
  reproduction and distribution, is virtually costless.  The industry is
  divided into a series of "niche" markets, all of which "rapidly evolve
  toward monopoly," since the leaders in all of the niches "can defend their
  market share by reducing their prices to practically nothing, making price
  competition SUICIDAL for newcomers."  The goal of all firms in the software
  industry is the same--"to gain a dominant position in a NEW niche market.
  There is essentially no new investment in EXISTING niche markets, since it
  is impossible to compete with an established dominant player on the basis of
  lower costs...."  
  
          Accordingly, antitrust is powerless to make the software industry
  competitive. Monopoly is its nature.  One niche, one monopoly.  OS, Bill Gates.
  
          Scale economies--the savings (in unit costs) that come with higher
  volumes of output--are typically exhausted rather rapidly in most
  industries.  The common estimate in the auto industry, for example, is that
  there are no cost savings beyond 7.5% of the U.S. car market.  At that
  volume, unit costs are as low as they can be driven with the existing
  technology.  There are virtually no industries in which a market share
  greater than 10% of the U.S. market is required to exhaust all scale
  economies--to reach the lowest (technologically) attainable cost per unit.
  
          In addition, those unit cost savings, even when real, are often
  trivial beyond some modest output level.  If a widget costs $1.00 when made
  by a firm with sales of 1 million units per year--versus $1.01 when produced
  in a volume of only 1,000--the competitive significance of that 1%
  difference is likely to be close to zilch.  In U.S. industries, the
  lowest-cost firm--the one the others freely acknowledge as their industry's
  most efficient--is typically one of its smallest (and newest), with a market
  share of 5% or less.  (See my Web site, below.)
  
          Is the computer software industry an exception?  My understanding is
  that the costly part (development) culminates in a "master" disk of some
  sort.  For example, computer manufacturers such as Compaq and IBM, after
  paying Bill Gates' high "licensing" fee, receive such a "master," from which
  they can, in turn, produce the number of copies needed for the millions of
  machines they will be shipping to consumers.  So there are no significant
  software scale economies at the computer manufacturing level.  The latest
  reported figures I've seen, for example, put Compaq at the top with a market
  share of some 12%, hardly a figure reflecting heavy scale economies.  
  
          Where, then, are the big efficiencies in the software industry that
  condemn it to only 1 firm in each of its various "niches," e.g.,  Bill (and
  Bill alone) in OS?  How big are the savings, if any, to the consuming public
  from Bill's monopoly?  How large are the extra per-unit costs, if any, where
  a 2nd, 3rd, and 9th firm appear?   What are Bill's total costs for a copy of
  the "master" he sells to, say, Compaq, et al?  How many of those "masters"
  does he sell?  How much does he charge for each?  What do they cost him?
  How much does his per-unit cost differ as between, say, 5,000,  50,000, and
  100,00 units?
  
          My correspondent describes a software world in which all "price
  competition is suicidal for newcomers."  With essentially zero unit costs,
  the dominant firm in each "niche" market can easily wipe out any newcomer
  "by reducing their prices to practically nothing."  
  
          Once upon a time, that was called predatory pricing--selling below
  cost to destroy a competitor.
  
          Can the group help us out here?
  
          Charles Mueller, Editor
          ANTITRUST LAW & ECONOMICS REVIEW
          http://webpages.metrolink.net/~cmueller
  
  
          Charles Mueller, Editor
          ANTITRUST LAW & ECONOMICS REVIEW
          http://webpages.metrolink.net/~cmueller