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In Praise Of A Closed Market


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It's an article of faith in the tech industry that competition is a good thing for everyone. Without the freedom to create companies with novel products in competitive markets, we might never have seen some of the innovations that have transformed our lives -- PCs, e-mail, iPods, and the rest. Still, for consumers, there definitely can be too much of a good thing.

The history of the PC provides a good illustration of where competition works for consumers and where it doesn't. Saying this won't win me friends in competition-crazed Silicon Valley, but I think dominance by an Intel (INTC) hardware design and Microsoft (MSFT) software has been good for both business and home users.

Standardization, which limits competition on features and turns it into a fight for the lowest price, led to rapid economies of scale and plunging costs. Buyers of PCs didn't have to deal with baffling choices about "platforms," which unrestrained competition usually spawns. So consumers could buy complex products with more confidence than they would have had in a wide-open market.

Of course, there is a downside. Had Microsoft been subject to real competitive pressure -- something stronger than the single-digit market share that Apple Computer (AAPL) has been able to muster for the past decade or so -- it might have been forced to make Windows better, faster. There is no doubt that after crushing Netscape in the late 1990s, Microsoft let its Web browser, Internet Explorer, languish until the growing popularity of Mozilla's Firefox forced it to make long-overdue improvements. But other than that, I don't think anyone would be better off if businesses and consumers had to choose from among several competing software systems.

THE COMPETITIVE INSTINCTS of consumer-electronics companies have led to a different result in high-definition televisions. Manufacturers refused to go for simplicity and standardization, and this has slowed the transition to HDTV. Faced with confusing options, incompatibilities, and poor information, consumers fear they'll make an expensive mistake, so they hold back. This market will not realize its potential until the industry makes the choices less risky.

There is one jarring irony in this argument. The standardization that allowed computers to show up in practically every home has unleashed a variety of price competition that doesn't benefit consumers in every sense. True, the use of commodity components and standard designs has taken the cost of PCs ridiculously low; you can buy a usable desktop for $300 and a laptop for $500, and no one ever complains about having to pay too little. But the race to the bottom has had two baleful effects. One is that while there are dozens of products, choice is mostly an illusion. Once you decide on specifications, the offerings within any class are essentially identical. The pressure to squeeze out every penny of cost yields PCs as commoditized as wheat or cement.

Second, cost pressures have all but wiped out after-sale customer service. It's no accident that Apple, isolated in its market niche, enjoys both the best reputation for customer service and the fattest margins on computers. Dell (DELL), by contrast, fell into a vicious cycle of cost-cutting that led to cutbacks on warranties and service.

I am not arguing that hot-blooded competition is bad. On the contrary, it beats any alternative. Telephone and cable have proved that with limited competition, you get high prices and terrible service. But it's important to remember that, despite glowing testimonials from technologists and economists, competition is likely to hurt as well as help.

For past columns and online-only reviews, go to Technology & You at businessweek.com/go/techmaven/

By Stephen H. Wildstrom


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