Whilst a new version of Windows may make the headlines, it’s not Windows that is the main source of profit for Microsoft: it’s Office, with it’s suite of appplications – Word for word processing, Excel for spreadsheets, PowerPoint for presentations, Access for databases, FrontPage for web pages and Outlook for e-mail. But Office is under threat from two sources.
First, despite that fact that Microsoft’s share of the office applications market has remained fairly constant at around 94%, it is facing increased competition from free alternatives, such as Google docs and Google Apps, and OpenOffice from Oracle (see also).
Second, the demands of users are changing. With the growing use of social networking and file sharing, and with a more mobile and dispersed workforce, Microsoft Office needs to adapt to this new environment.
With the launch of Office 2010, these issues are being addressed. The following articles examine what Microsoft has done and whether it is a good business model
Microsoft Office 2010 takes aim at Google Docs BBC News (11/5/10)
Office 2010: banking on Apps Sydney Morning Herald, David Flynn (11/5/10)
Microsoft’s two-pronged strategy for Office 2010 BBC News, Tim Weber (12/5/10)
Revamped Microsoft Office Will Be Free on the Web New York Times, Ashlee Vance (11/5/10)
Microsoft Predicts Fastest-Ever Adoption of New Office Software Bloomberg Businessweek, Dina Bass (12/5/10)
Questions
- Discuss the business logic of giving away products free.
- Discuss the likely success of Microsoft’s response to the changing market conditions for office applications software.
- Explain what is meant by ‘cloud computing’. What opportunities does this provide to Microsoft and what are the threats?
- What is meant by ‘network economies’? How do these benefit Microsoft? How is Sharepoint relevant here?
- Are network economies likely to increase or decrease for Microsoft in the future?
In the past few days, the euro has been under immense speculative pressure. The trigger for this has been the growing concern about whether Greece would be able to force through austerity measures and cut its huge deficit and debt. Also there has been the concern that much of Greece’s debt is in the form of relatively short-term bonds, many of which are coming up for maturity and thus have to be replaced by new bonds. For example, on 19 May, Greece needs to repay €8.5 billion of maturing bonds. But with Greek bonds having been given a ‘junk’ status by one of the three global rating agencies, Standard and Poor’s, Greece would find it difficult to raise the finance and would have to pay very high interest on bonds it did manage to sell – all of which would compound the problem of the deficit.
Also there have been deep concerns about a possible domino effect. If Greece’s debt is perceived to be unsustainable at 13.5% of GDP (in 2009), then speculators are likely to turn their attention to other countries in the eurozone with large deficits: countries such as Portugal (9.4%), Ireland (14.3%) and Spain (11.2%). With such worries, people were asking whether the euro would survive without massive international support, both from within and outside the eurozone. At the beginning of 2010, the euro was trading at $1.444. By 7 May, it was trading at $1.265, a depreciation of 12.4% (see the Bank of England’s Statistical Interactive Database – interest & exchange rates data
If the euro were in trouble, then shock waves would go around the world. Worries about such contagion have already been seen in plummeting stock markets. Between 16 April and 7 May, the FTSE100 index in London fell from 5834 to 5045 (a fall of 13.5%). In New York, the Dow Jones index fell by 8.6% over the same period and in Tokyo, the Nikkei fell by 7.6%. By 5 May, these declines were gathering pace as worries mounted.
Crisis talks took place over the weekend of the 8/9 May between European finance ministers and, to the surprise of many, a major package of measures was announced. This involves setting aside €750bn to support the eurozone. The package had two major elements: (a) €60bn from EU funds (to which all 27 EU countries contribute) to be used for loans to eurozone countries in trouble; (b) a European Financial Stabilisation Mechanism (a ‘Special Purpose Vehicle (SPV)’), which would be funded partly by eurozone countries which would provide €440bn and partly by the IMF which would provide a further €250bn. The SPV would be used to give loans or loan guarantees to eurozone countries, such as Greece, which were having difficulty in raising finance because of worries by investors. The effect would also be to support the euro through a return of confidence in the single currency.
In addition to these measures, the European Central Bank announced that it would embark on a ‘Securities Markets Programme’ involving the purchase of government bonds issued by eurozone countries in difficulties. According to the ECB, it would be used to:
.. conduct interventions in the euro area public and private debt securities markets to ensure depth and liquidity in those market segments which are dysfunctional. The objective of this programme is to address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism.
Does this amount to quantitative easing, as conducted by the US Federal Reserve Bank and the Bank of England? The intention is that it would not do so, as the ECB would remove liquidity from other areas of the market to balance the increased liquidity provided to countries in difficulties. This would be achived by selling securities of stronger eurozone countries, such as Germany and France.
In order to sterilise the impact of the above interventions, specific operations will be conducted to re-absorb the liquidity injected through the Securities Markets Programme. This will ensure that the monetary policy stance will not be affected.
So will the measures solve the problems? Or are they merely a means of buying time while the much tougher problem is addressed: that of getting deficits down?
Webcasts and podcasts
Rescue plan bolsters the euro BBC News, Gavin Hewitt (10/5/10)
The EU rescue plan explained Financial Times, Chris Giles, Emily Cadman, Helen Warrell and Steve Bernard (10/5/10)
Peston: ‘Crisis is not over’ BBC Today Programme (10/5/10)
Greece ‘will get into even more deep water’ BBC Today Programme (11/5/10)
Articles
EU ministers offer 750bn-euro plan to support currency (including video) BBC News (10/5/10)
EU sets up crisis fund to protect euro from market ‘wolves’ Independent, Vanessa Mock (10/5/10)
Euro strikes back with biggest gamble in its 11-year history Guardian, Ian Traynor (10/5/10)
Debt crisis: £645bn rescue package for euro reassures markets … for now Guardian, Ian Traynor (10/5/10)
The E.U.’s $950 Billion Rescue: Just the Beginning Time, Leo Cendrowicz (10/5/10)
Eurozone bail-out (portal) Financial Times
Bailout does not address Europe’s deep-rooted woes: Experts moneycontrol.com (11/5/10)
An ever-closer Union? BBC News blogs: Stephanomics, Stephanie Flanders (10/5/10)
Eurozone crisis is ‘postponed’ BBC News blogs: Peston’s Picks, Robert Peston (10/5/10)
Multi-billion euro rescue buys time but no solution BBC News, Lucy Hooker (11/5/10)
No going back The Economist (13/5/10)
It is not Greece that worries EURO: It is China that teeters on a collapse Investing Contrarian, Shaily (11/5/10)
Data and official sources
For deficit and debt data see sections 16.3 and 18.1 in:
Ameco Online European Commision, Economic and Financial Affairs DG
For the ECB statement see:
10 May 2010 – ECB decides on measures to address severe tensions in financial markets ECB Press Release
Questions
- Why should the measures announced by the European finance ministers help to support the euro in the short term?
- Why should the ECB’s Securities Markets Programme not result in quantitative easing?
- Explain what is meant by sterlisation in the context of open market operations.
- What will determine whether the measures are a long-term success?
- Explain why there may be a moral hazard in coming to the rescue of ailing economies in the eurozone. How might such a moral hazard be minimised?
- Why should concerns about Greece lead to stock market declines around the world?
- What is the significance of China in the current context?
Two of America’s airlines have agreed to merge to form the world’s largest carrier. The deal between United and Continental Airlines is worth £2.1 billion and the management of the two companies hope that the new airline, to be called United Airlines, will bring cost savings of some £800 million per year. Last year, the two companies lost a total of £900 million. It is also hoped to increase revenues by providing more routes and more effective competition against rivals, such as Delta Air Lines.
But just how significant will any economies of scale be and to what extent will they involve job losses? Certainly the merger has been greeted with caution by the Air Line Pilots Association and unions such as the International Association of Machinists and Aerospace Workers. Also, will the larger company be able to compete more effectively to the benefit of consumers, or will the increased market power see a rise in fares?
And this is not the only airline merger. In April, British Airways and Iberia of Spain signed a deal to merge, thereby creating one of the world’s biggest airlines. Other mergers are expected as airlines battle to cope with rising costs and lower passenger numbers in the wake of the global recession. So will such mergers benefit passengers, or will it simply result in less choice and higher fares? The following articles look at the issues
Articles
1st priority for new United-Continental combo: Keep customers, workers happy Chicago Tribune, Julie Johnsson (3/5/10)
Debating future of US Airways Philadelphia Business Today, Linda Loyd (4/5/10)
Arpey points out good, bad of United-Continental deal The Dallas Morning News, Terry Maxon (3/5/10)
US airline merger creates world’s biggest carrier Independent, Nick Clark (4/5/10)
We can’t fix fares, says chief of merging US airlines Telegraph, James Quinn (3/5/10)
United and Continental Airlines to merge BBC News (3/5/10)
British Airways and Iberia sign merger agreement BBC News (8/4/10)
Are mergers good for airlines? BBC News, Edwin Lane (4/5/10)
United boss Glenn Tilton on Continental merger BBC News (3/5/10)
United and Continental bosses’ press conference on merger BBC News (3/5/10)
Data
Aviation Data & Statistics Federal Aviation Administration
TransStats RITA, Bureau of Transportation Statistics
Airline and Airport Statistics European Regions Airline Association
Questions
- What type of merger is the one between United and Continental: horizontal, vertical, conglomerate or a mixture?
- What types of economies of scale can be achieved by a merger of airlines?
- For what reasons may a merger of airlines result in higher revenues?
- To what extent will passengers (a) gain and (b) lose from airline mergers? What determines the size of these gains and losses?
- Is the airline industry an oligopoly? To what extent is there collusion between the various airlines?
- What should be the attitude of regulatory authorities across the world to airline mergers?
Below you will find links to the manifestos of the three main UK-wide parties for the general election on May 6. It’s not our role to suggest to those of you living in the UK with the right to vote how you should vote. The one thing we would suggest is that you consider carefully what the parties are proposing.
What is clear is that the state of the economy and the policies necessary to tackle economic problems are central to all the manifestos. As a student of economics, you should be able to assess the manifestos in terms of how the parties set out the economic problems facing the UK and what they propose doing about them.
So look through the manifestos below and then answer the questions we’ve posed about the UK economy and about the economic policies being proposed. If you are uncertain about how to answer them, then ask yourself what extra information would I need to enable me to give a good answer.
The manifestos (in alphabetical order)
The Conservative Party manifesto
The Labour Party manifesto
The Liberal Democrat Party manifesto
Other sources
We are reluctant to recommend newspaper articles, as all newspapers at election time tend to be highly partisan and are therefore likely to give you a very specific ‘spin’ on the parties’ proposals. Perhaps the two best independent sources are the BBC and the Institute for Fiscal Studies. See:
Election analysis 2010 Institute for Fiscal Studies
Election 2010 BBC News
Stephanomics Stephanie Flanders’ blog (this links to the archive).
Questions
- How do the analyses of the economic problems facing the UK differ between the three manifestos?
- Compare the policies of the three parties for cutting the public-sector deficit. Consider the following issues: the size and nature of any cuts in government expenditure; the size and nature of any tax increases; the timing of the meaures.
- What assumptions are being made about the determinants of aggregate demand over the coming months and the role of fiscal policy in this?
- Compare the policies of the three parties towards the distribution of income. To what extent have the parties taken into account possible incentive/disincentive effects of policies of redistribution?
- To what extent are the parties proposing using the tax system to tackle problems of externalities? Give examples and assess how effective the policies are likely to be.
- To what extent do each of the manifestos leave you with unanswered questions about the economy and how their proposed policies will tackle economic problems?
In 2003, the Office of Fair Trading launched an investigation into possible collusion between tobacco manufacturers and retailers to fix prices. The investigation sought to establish whether the firms had breached the Chapter I prohibition of the Competition Act 1998. Chapter I is concerned with Restrictive Practices.
The allegation was that two tobacco manufacturers, Imperial Tobacco and Gallaher, had colluded with 11 retailers to fix the retail prices and thereby reduce competition. The details of the allegations are given in a 2008 press release.
As a result of its investigations, the OFT has decided to impose fines of £225m. “The OFT has concluded that each manufacturer had a series of individual arrangements with each retailer whereby the retail price of a tobacco brand was linked to that of a competing manufacturer’s brand. These arrangements restricted the ability of these retailers to determine their selling prices independently and breached the Competition Act 1998.” As the Times Online article states:
The OFT said that the companies were guilty of “price-linking” or “price matching”. It said that Imps and Gallaher had come to an arrangement with each retailer that if one or other manufacturer increased or decreased prices the retailer would alter the price of the competitor brand in line, up or down accordingly – a practice known in competition law circles as “vertical price collusion”.
Articles
‘Unlawful’ tobacco pricing leads to £225m fine by OFT BBC News (16/4/10)
OFT levies £225m fine for cigarette price fixing Guardian, Richard Wray (17/4/10)
Tobacco giants face £225m fine for price-fixing Independent, Alistair Dawber
(17/4/10)
OFT case will send smoke signals Financial Times, Michael Peel, Elizabeth Rigby and Pan Kwan Yuk (16/4/10)
Imperial and Morrison set to appeal OFT fine Financial Times, Michael Peel, Pan Kwan Yuk and Elizabeth Rigby (16/4/10)
OFT faces challenge to £225m price-fixing ruling Times Online, Robert Lea (17/4/10)
OFT gets tough on tobacco as price-fixing net is cast wider Independent, Nick Clark (26/4/08)
OFT Press Release
OFT imposes £225m fine against certain tobacco manufacturers and retailers over retail pricing practices OFT Press Release (16/4/10)
Questions
- What are the allegations against the tobacco manufacturers and retailers?
- Why has the OFT judged that such behaviour is in breach of the 1988 Competition Act, and hence against the public interest?
- What are the arguments put by the tobacco companies and retailers in their defence?
- Is giving companies an amnesty if they alert the OFT an example of a prisoners’ dilemma game? What credible threats or promises may the companies have in such a situation?