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Krugman: The dramatic rise and fall of e-empires

  • FILE - Microsoft CEO Steve Ballmer speaks at a Microsoft event in San Francisco, Wednesday, June 26, 2013. Ballmer, who helped build Microsoft into a technology empire and then struggled to prevent it from crumbling under his own leadership, will retire within the next 12 months. The world’s biggest software company did not name a successor. Microsoft Corp.’s stock shot up 9 percent in premarket trading following the news. (AP Photo/Jeff Chiu, File)

Steve Ballmer's surprise announcement that he will be resigning as Microsoft's CEO has set off a huge flood of commentary. Being neither a tech geek nor a management guru, I can't add much on those fronts. I do, however, think I know a bit about economics, and I also read a lot of history. So the Ballmer announcement has me thinking about network externalities and Ibn Khaldun. And thinking about these things, I'd argue, can help ensure that we draw the right lessons from this particular corporate upheaval.

First, about network externalities: Consider the state of the computer industry circa 2000, when Microsoft's share price hit its peak and the company seemed utterly dominant. Remember the T-shirts depicting Bill Gates as a Borg (part of the hive mind from "Star Trek"), with the legend, "Resistance is futile. Prepare to be assimilated"? Remember when Microsoft was at the center of concerns about antitrust enforcement?

The odd thing was that nobody seemed to like Microsoft's products. By all accounts, Apple computers were better than PCs using Windows as their operating system. Yet the vast majority of desktop and laptop computers ran Windows. Why?

The answer, basically, is that everyone used Windows because everyone used Windows. If you had a Windows PC and wanted help, you could ask the guy in the next cubicle, or the tech people downstairs, and have a very good chance of getting the answer you needed. Software was designed to run on PCs; peripheral devices were designed to work with PCs.

That's network externalities in action, and it made Microsoft a monopolist.

The story of how that state of affairs arose is tangled, but I don't think it's too unfair to say that Apple mistakenly believed that ordinary buyers would value its superior quality as much as its own people did. So it charged premium prices, and by the time it realized how many people were choosing cheaper machines that weren't insanely great but did the job, Microsoft's dominance was locked in.

Now, any such discussion brings out the Apple faithful, who insist that anything Windows can do Apple can do better and that only idiots buy PCs. They may be right. But it doesn't matter, because there are many such idiots, myself included. And Windows still dominates the personal computer market.

The trouble for Microsoft came with the rise of new devices whose importance it famously failed to grasp. "There's no chance," Ballmer declared in 2007, "that the iPhone is going to get any significant market share."

How could Microsoft have been so blind? Here's where Ibn Khaldun comes in. He was a 14th-century Islamic philosopher who basically invented what we would now call the social sciences. And one insight he had, based on the history of his native North Africa, was that there was a rhythm to the rise and fall of dynasties.

Desert tribesmen, he argued, always have more courage and social cohesion than settled, civilized folk, so every once in a while they will sweep in and conquer lands whose rulers have become corrupt and complacent. They create a new dynasty — and, over time, become corrupt and complacent themselves, ready to be overrun by a new set of barbarians.


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