There is an interesting economic theory that was all the rage when the government was attacking Microsoft during the anti-trust era in the 1990s. It is called the law of increasing returns. Ronald Bailey, writing for the Cato Institute, describes it:

In fact, increasing, rather than diminishing, returns characterize many economic activities. For example, it may cost $150 million to develop the first vial of a new vaccine to prevent Lyme disease. Yet every vial after that is essentially free. The same is true for computer programs: it may cost Microsoft $500 million for the first copy of Windows 98, but each subsequent copy is merely the cost of the disk on which it is stored. Or in the case of telecommunications, laying a fiber optic network may cost billions of dollars, but once operational it can transmit millions of messages at virtually no added cost. And the low costs of each of these inventions make it possible for the people who buy them to be even more productive in their own activities—by avoiding illness, expediting word processing, and drastically increasing the tempo of information exchanges.

The theory, which evolved from the works of William Arthur and others, finally managed to explain various economic phenomena in the high tech scene, including how a single OS, for example, could dominate the business.


Microsoft hated this theory because it did not help its case against the government. The company contracted a slew of economists to penetrate the media and tell everyone that the theory was bogus. The company did manage to muddy the water, but the theory held up and is now considered gospel.

The theory explains why Microsoft is the dominant OS player and, much to its chagrin, also explains the dominance of the Android and iOS as mobile operating systems—a space that Microsoft is now unable to penetrate.

Once a product like the iPad gets the foothold and begins to blossom, the results of the theory's vicious cycle begin to take effect and cannot be stopped. The cycle goes something like this: A lot of people buy the product from the outset to create a critical mass of owners. Developers see this critical mass as a source of income and they flock to the device, writing cool programs and hoping to make millions. More people see the cool programs and jump on board, also buying the product and expanding the user base. This, in turn, attracts more developers and the cycle continues until competition flatlines.

This has already happened with the iPad and it's all over except the shouting. A similar situation happened with the iPhone but the Android alternative got started soon enough to remain competitive. Microsoft missed both boats and cannot get the vicious cycle of success to trigger. It's too late.

Microsoft has done the smart thing and tried to bribe developers to write code for its devices, but that just amounts to one-time fees as opposed to a steady income. Microsoft could do in-house development but it pales by comparison to the muscle of the totality of third party forces. I've been waiting for Microsoft to complain about the situation by arguing that the law of increasing returns is unfair and something should be done. Now that would be funny, considering its stance in the past.

That's probably all it can do in these markets because the theory says Microsoft is toast insofar as tablets and phones are concerned. I see nothing to contradict that observation.

You can Follow John C. Dvorak on Twitter @therealdvorak.

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