Preface

This text is the first part of a two-parter on software, written by Robin Goodfellow, the pseudonym of a group that split from Communism or Civilization. It was published a little over a year after the case relating to Microsoft’s monopoly of the operating systems market was judged. This text offers a marxist perspective on the reasons why the United States government decided against breaking up the company, along with setting up a bare-bones framework from which to understand software in the context of marxist economics.

The claims of planned obsolescence certainly rang less true at that time. Particularly, during the era this was written, a fast turnover of hardware releases in consumer computing and the creation of electronic trash was more “justified” from a technical standpoint, since this was a time of fast development in baseline video and audio technology. However, we believe the point is nowadays closer to reality, as we have pretty much mastered consumer video and audio reproduction and word processing.

Any text between double brackets (“[[ ]]”) is a translator’s note.

Software, monopoly and production costs, and the Microsoft Case (December 2002)

Necessity makes its way through an infinite number of coincidences. When the giant American computer manufacturer IBM, which then found itself in a virtual monopoly position on the major computer systems market, created the de-facto standard for microcomputers by launching a PC (Personal Computer) which, alas, is now more famous than our Communist Party [[PC]], little did they know that this was a Trojan horse, that would on the one hand cause them to lose their arch-dominant position in relation to their manufacturing competitors, and on the other hand open the road to monopoly and fortune to a young company headed by a young man in sneakers named Bill Gates.

To expose the basic functions of a computer, it needs an operating system (OS). IBM had a choice, and opted for the operating system from the small company Microsoft. And so, at the same time as the PC, the Microsoft operating system (MS-DOS, MS for Microsoft and DOS for Disk Operating System) was promoted. As the PC became a standard, the operating system became even more so, since it ensured compatibility between the various computers competing within the PC standard.

Today, Microsoft is in an even better position than IBM was in its heyday. 90% of the 500 million computers are equipped with its operating systems, and this supremacy is the object of admiration and jealousy from its competitors, and of complaints from various users confronted with unfinished products sold at monopoly prices. The US administration, sometimes anxious to optimize the equalization of profit rates and thus best promote the exploitation of the proletariat, proves to be a champion of free competition against monopoly. Of course, the bourgeoisie has long since forgotten that:

“In practical life, we find not only competition, monopoly and their antagonism, but also their synthesis, which is not a formula, but a movement. Monopoly produces competition, competition produces monopoly. Monopolists compete, competitors become monopolists. If monopolists restrict competition between themselves by partial associations, competition increases among the workers; and the more the mass of proletarians increases vis-à-vis the monopolists of one nation, the more unbridled competition becomes between the monopolists of different nations. The synthesis is such that monopoly can only be maintained by continually going through the struggle of competition.” (Poverty of Philosophy)

But the more precise aim of this text is to show that, in this particular case, the removal of Microsoft’s monopoly and the restoration of a more competitive market would do nothing to improve the situation for other capitalist clients of the software industry or for individual consumers.

If “Le Monde” is to be believed, there is a Microsoft bug in the fact that the US administration has given up on creating a competitive situation by dismantling Microsoft. And it cites the example of AT&T and its supposed impact on the development of the telecommunications sector.

Let’s go back to the data provided by the same newspaper. Microsoft’s sales are in the region of $25 billion. This is well below that of the world’s major computer manufacturers (IBM and Hewlett Packard are well above this figure). On the other hand, Microsoft’s profit is 7 billion dollars, or around 30% of sales, and in other years it has been around 40%.

Such a profit effectively reflects a monopoly position, with profits well above the social average for comparable companies. Part of Microsoft’s profits are based on its quasi-monopoly position, on its ability to impose a price level which, in relation to the mass of software sold, generates high profits. If we assume that Microsoft pays 25% income tax, we obtain a gross margin of around $10 billion and a production cost of around $15 billion.

If we were to apply to this production cost a profit rate more in line with the social average for companies in the sector, say 10%, we’d get sales of around $16.5 billion.

One of the characteristics of the software product is that its reproduction cost is almost zero. It takes thousands of man-years to create, to produce the first version, the software code - at least for large-scale systems and application software - but the time required to reproduce it is derisory compared to the time spent on production. From this point of view, it can be likened to scientific work. Newton may have spent a lifetime developing the theory of universal gravitation, but then thousands of students learn it in a matter of hours. Consequently, the more widespread the software, the lower its social cost [1].

So what would a Microsoft competitor bring to the table?

To produce and distribute software with equivalent functionality to Microsoft’s, a competing company would have to employ the same amount of labor. Substantially equivalent manpower must be employed to produce substantially equivalent software. Consequently, a competitor would have to spend, in both variable and constant capital, amounts roughly equal to those we have recalculated for Microsoft. Microsoft would therefore spend $15 billion in production, and so would the competing company. If we assume that the two companies are on an equal footing and achieve a profit rate of 10%. Each company would then have sales of $16.5 billion. But for the company as a whole, the cost of satisfying the need for software would be twice $16.5 billion, i.e. $33 billion (compared with Microsoft’s $25 billion). In other words, the price of software would be higher than the current price. But this price would no longer be a monopoly price, but a “free competition” price. Of course, it could be argued that competition would have other effects that would contribute to lowering production costs.

Microsoft employs around 45,000 people worldwide, including 30,000 in the United States. It’s common knowledge that Microsoft employees generally enjoy above-average salaries and, at least at the Redmond headquarters, particularly favorable working conditions (spacious premises, pleasant working environment, relaxation rooms, etc.), which also go hand in hand with long working hours.

On the one hand, Microsoft’s employees benefit from the company’s monopoly, in a way that communist theorists describe in terms of the labor aristocracy. Assuming that competition forces Microsoft employees to settle for an average wage corresponding to the market price of labor, and that favorable working conditions are reduced to the average, the cost of production would fall.

On the other hand, not all Microsoft employees are involved in software development. Some jobs are proportional to sales, insofar as they are linked to software sales and distribution, technical support and so on. If Microsoft were to share more of its market, the number of employees would fall, and with it the cost of production. With fewer employees, some of the administrative work would become unnecessary, and so production costs would fall again. Finally, increased competition could lead to a further drop in margins (which we have already largely taken into account).

Let’s assume that the cost of production is lowered by 20% of the cost of production, i.e. $3 billion - a reduction greater than the average gap between Microsoft employees and the market wage [2] -. As a result, production costs are reduced to $12 billion. By reducing Microsoft’s margin to 5% of production costs, we obtain sales of $12.6 billion [3].

If we go back to our previous reasoning, the Company would pay $25.2 billion to meet its software requirements, i.e. roughly the same as before ($25 billion).

If we could scrape away the layer of costs, we might just be able to shoehorn in a second company. Two companies is not really free competition, it’s an oligopoly, with a high risk of price fixing. If there’s virtually no room for a second company, there’s even less room for n companies. Restoring free competition would therefore bring virtually no benefit to the other fractions of the capitalist class, while at the same time driving down labor productivity, since it would require at least twice as much labor power to achieve the same result.

Thus, the bourgeois response against the Microsoft monopoly - the restoration of free competition - would have virtually no impact on the price of software, would drive down labor productivity in this sector, and would undermine one of the fundamental advantages of the Microsoft monopoly, namely the existence of a de-facto standard, the existence of common tools known to all. As a general rule, the cost of training in software is much higher than the price of the software – which serves to make it relatively easier to exchange documents and information. As a result, given the economic characteristics of the software product, we are faced with a situation where the monopoly price is potentially equivalent to, or even lower than, the “free-competition price”.

At this point, if society wants to push forward the development of productive forces [[i.e enact a programmatic move towards socialism]], it has only one rational solution: to transfer production into the hands of associated producers and distribute software free of charge, so as to rapidly bring the entire user base up to the same level, and create common standards. Turn private monopoly into a social monopoly. The means of production pass into the hands of associate producers. That’s why, even if it makes some people who hardly understand the first line of socialism smile, Lenin pointed to the post office as an example for socialism. Communism does not consist in placing the enterprise under the control of shapeless “workers’ councils”, but in breaking down the limits of the enterprise, the basic economic cell of bourgeois society. What the mechanism of capitalist production tends to do spontaneously, socialism takes up, rationalizes, rids it of unproductive labor, eliminates all mercantilism from its midst, and pushes it to the limit by creating vast branches of industry that plan world production and no longer produce for the market. The enemy [[original term: bête noire, that which is disliked]] of communism is the small business, whose multitude, multiform and mercantile, a guarantee of all the dissipations of social energy and reservoir of counter-revolution, constitutes a living obstacle to the socialization of production.

This is why Raoul searches in vain for the “seeds” of communism in today’s society. The expression is a misnomer, and he himself reminds us in precise and accurate terms why communist theory has never accepted this hypothesis, in contrast to earlier modes of production. The means of production do not develop within themselves “germs” of future society that would only wait for communism to grow, it contributes to bringing human society to the threshold of communism, which is not the same thing. The more it develops the productive forces, the more it centralizes and concentrates the means of production, the more it devalues capital, and the more it creates the conditions for an upheaval of society, all the while entangling itself in insoluble contradictions. To cross the threshold in question requires a complete overthrow, which is nothing other than revolution.

Bourgeois society only achieves this common IT standard by paying a monopoly surprofit [[extremely large profit]] to Microsoft, and also a tribute to the various players in the IT industry, some of whom have collusive interests with Microsoft.

Few sectors have experienced such powerful and rapid technical progress as the world of information technology. To better capture the imagination, the mediocre lauders of technical progress like to draw a comparison with the automobile. If, they say, the automobile had made such progress, we’d have Rolls-Royces going 1,000 kph for a euro. This considerable technological evolution is rapidly making equipment obsolete. But being obsolete often doesn’t prevent them from fulfilling the need for which they were purchased. Microsoft’s software solutions are also part of this obsolescence planning, which they accelerate and reinforce. Take, for example, XP, Microsoft’s latest operating system. To run it properly, you need the latest technological developments in terms of microprocessor, RAM, and storage size. Compared with the previous operating system, program size has more than doubled. In view of technological developments, software designers have long since given up optimizing the size of their programs, which cover a growing mass of needs and require ever greater hardware resources. Both programming logic and the collusion of interests between software manufacturers and publishers encourage the rapid renewal of both hardware and software - application software, such as word processors, must also be compatible with the operating system - and thus increase the weight of the IT sector for society.

Far from the jeremiads of the advocates of liberalism and a return to free competition, we saw that the only real solution could only lie in passing the means of production into the hands of associated labor, and that the competing branch of the alternative - the classic bourgeois solution via the restoration of competition - had no reality in this particular case, due to the very nature of price formation in the software world. However, in the absence of socialist perspectives, other reactions to Microsoft’s monopoly took place. In addition to the institutional response dictated by liberal and competitive ideology, we now need to analyze a completely different reaction: the one symbolized by Linux and, more generally, by “libre” software, or “open-source” software, both of which are not the same thing.

NOTES:

[1] To a certain extent, this is the case for all fixed capital. An extra passenger on the metro or an extra visitor to a museum costs practically nothing.

[2] Doing the same thing twice in different companies ipso facto generates a greater mass of personnel assigned to fixed tasks. One of the characteristics of capital concentration and centralization is that it enables what bourgeois economists call “economies of scale”.

[3] For an equivalent market, the average price of software could therefore be halved. Even so, a drop in price could undoubtedly lead to an increase in market share, if only by reducing software copy fraud (estimated by Microsoft at 40% of sales).

(Unlabeled Footnote): At the same time, by selling its software at twice the production price, resulting from production costs and a profit rate more in line with the social average, Microsoft legitimizes the fact that every other piece of software can be copied. The recent modification of Microsoft’s licensing policy, with a form of registration that implies greater control, boosted sales and profits in 2002.

[4] Or even less. One of the difficulties encountered in the IT world is the compatibility of systems, file formats and so on. A new Tower of Babel in the IT world would be a further obstacle. The example of Le Réseau is instructive. Max, which has to use different systems and software from the world of PCs and Microsoft, distributes files that we ourselves are regularly unable to read.