Eva Pascoe | Digital Retailer
  • Feb 17, 1998
  • Eva Pascoe
  • Comments Off on After years of watching Microsoft eating away smaller UK competitors, the City simply gave up trying to keep the local IT industry going
  • The Independent

February 17th, 1998
After years of watching Microsoft eating away smaller UK competitors, the City simply gave up trying to keep the local IT industry going

Last week was a joyful time for all of us in the technology industry in the UK. Despite the Prime Minister’s love affair with Rupert Murdoch, it looks as if, thanks to the House of Lords, we will eventually get a Competition Bill worth its name. By voting to outlaw predatory pricing, the Lords gave a clear signal that jungle capitalism which attempts to kill off competition by persistent marketing of a product (ie, The Times) at a price well below marginal costs of production is coming to an end.

The McNally/ Astor amendment, approved against the Government’s wishes, would bring the UK in line with US anti-trust legislation. The Competition Bill will help to address many imbalances in the British software and hardware market. For many years now we have suffered from predatory pricing practised by large, US-based companies. With their massive, technology-hungry home market, they have been pricing their products below marginal costs in the UK to get market share and destroy the local IT industry. Their sheer size in the US has always allowed them to subsidise certain products and price them below cost in order to squeeze smaller UK players.

The list of culprits is long, starting with Microsoft, the great master of predatory pricing. Able to subsidise products in long battles for world domination, the big M has developed the ultimate predatory pricing strategy: distributing products free of charge. Despite almost missing the boat and denying the Internet’s importance for years, Bill Gates eventually woke up and realised that the best way to kill off his rival, Netscape, was to use predatory pricing. Consumers can count, and every pound off the price of Microsoft’s Internet Explorer Web browser means a converted Netscape user.

For more than two years now Microsoft has been dispensing death by a thousand cuts to its competitor, smug in the knowledge that Netscape, a newborn Internet pioneer, has pockets many times smaller than those of Mr Moneybags from Seattle. Once the battle is over (and it looks as if this will be soon, as Netscape in its swansong has announced that it, too, will distribute its Web browser free), we are likely to see Internet Explorer’s features frozen, charges for future upgrades and Bill saying goodbye to the massive development costs that are accepted today as a part of his war budget.

Microsoft argues that incremental costs of browser distribution are minimal, but this is simply not the case. Take the costs of huge development teams, add the costs of running and maintaining Web servers from which you can download the supposedly cost-free software, then add the cost of producing CD-Roms to distribute it, add the hefty marketing budgets, the massive support infrastructure (growing daily with the number of users) and before you can say ‘ever-increasing returns’, you end up with a huge figure reflecting costs that are at present subsidised by the sales of other Microsoft products.

Many of us will remember all too well the recent electronic commerce campaign, when Microsoft was pushing its e-commerce solutions and virtually giving them away at prices that, compared with those offered by ICL and other UK-based suppliers, looked a lot like predatory pricing. If that was not compelling enough, there were sweeteners in the form of ‘helpful’ marketing budgets thrown in with the solution.

The really sad story, though, and the one that caused most grief in the UK, is of the small, innovative company based in Oxford that had the misfortune to develop a cool animation tool, which competed with Microsoft’s own technically incomplete solution (ignoring Mac users was one of its shortcomings). Microsoft, realising that the competition was on to something good, simply gave away its own solution free, thus destroying a promising, innovative UK company and eventually killing the market altogether, as developers became disillusioned with the low-quality Microsoft solution.

However, this is not just about Microsoft, so I will skip many other examples, but all in all US-based software companies have had a big hand in turning a booming, talented and innovative software development culture in the UK (as it was in Eighties and, for a brief moment, in 1994-96, in the early Internet era) into a bunch of frightened ‘CV-application development’ slaves.

Now UK developers will work only on Microsoft solutions, as they have no confidence that anything home-grown will survive long enough to pay their rent or to merit investment in new skills. After many glorious moments, such as giving birth to the games industry, coming out with tons of hip stuff for Spectrum and many successes in 3D rendering engines, this is an unfortunate turn of events.

Another result of predatory pricing’s effect on the UK industry was the withdrawal of the City from IT investments. After years of watching Microsoft eating away smaller UK competitors, the City simply gave up trying to keep the local IT industry going. The money that fuelled the phenomenal growth of Silicon Valley would likely come back to IT stocks in the UK if predatory pricing of software and hardware products were eliminated. This would also encourage talented programmers and developers to reconsider the decision to up sticks to California in search of interesting work, and stop the brain drain that has been dogging UK companies for a long time.

I hope there is still time to reverse the decline, and that the UK is not going to end up following the French company Bull, which last week admitted defeat and announced that its head office and development team would move to California. Bull was the last of the French IT companies of any significant standing, and with Bull going, the future of the French software and hardware market looks seriously grim.

The long-term well-being of the manufacturing, retail and service industry needs a strong, innovative local IT infrastructure. All that needs to be done is to set up a regulatory watchdog to keep an eye on over-enthusiastic American IT competitors and, hey presto, we may end up with a new Silicon Valley springing up on Soho Square.

Meanwhile, if you know of any examples of predatory pricing in IT, please write to eva@never.com

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