Microsoft

November 15, 1998

Friday's close: Dow 8919, S&P500 1125, NASDAQ 1847
November 7:     Dow 8975, S&P500 1141, NASDAQ 1856
July peak:      Dow 9337, S&P500 1186, NASDAQ 2014

The market was more or less flat this week, with the Dow off less than a percent.
The big news was skyrocketing prices for Internet stocks, especially the hot IPO
for theGlobe.com which rose from an offering price of 9 to as high as 97.
These stocks have such a small float and high interest among the general public
that they are incredibly volatile - on the downside as well as the upside.  I'm
waiting for a good stiff secondary decline to occur, after which there will
be some bargains.

The Microsoft antitrust case is also prominent in the news.  As a former employee
(1989 to 1996) of Microsoft, and as someone who still holds quite a bit of
Microsoft stock, a stock that I've followed since its IPO in 1986, it's time
to put in my 2 cents worth on this hot potato.  Now you can see that I'm not
exactly a disinterested bystander here, so draw your own conclusions (as
always!).

The antitrust laws are broadly drawn and vague.  They don't define when a monopoly
exists, nor what is not allowed if one does exist, nor what the punishment should
be for violating the law.  Conceivably, an antitrust suit could be made against
any sizeable company.  The Justice Department has limited resources, so they
pick a few to attempt each year.  It's a field day for lawyers and politicians.
When I was at Microsoft, I never saw any kind of illegal activity; in fact, they
were scrupulous in obeying all laws.  However, Microsoft has always competed
vigorously in the marketplace, which is good for the shareholders and for the
customers, not so good for the competing companies.  Since they couldn't beat
Microsoft in the market, they have moved into the political arena.  The antitrust
laws are wonderfully political - everyone is guilty, but the administration gets
to choose who to prosecute.

Although they do have a good legal team, it's unlikely that Microsoft will escape
punishment altogether. The question is what punishment and when?  The case is bound
to drag on in appeals for years.  Breaking up the company could actually be good for
MSFT shareholders - the smaller pieces would be able to address smaller markets that
it doesn't make sense for the larger Microsoft to attack, thus adding to their
aggregate size.  Requiring Internet Explorer to be unbundled from Windows does nothing;
people will still choose it if it's the "better" browser from the consumer point of
view.  And "better" can include things like price, ease of getting the program,
having popular web sites require IE, including a free pizza coupon, etc etc etc -
it is not limited to "technical excellence" by any means, which techies will often
blindly assert.  The government is unlikely to ask for sterner measures like shutting
down the company or a massive fine, since that would hurt consumers and/or MSFT
shareholders - voters all.  There is plenty of room to compromise on some token
punishment that won't hurt Microsoft but will make the Justice Department look
good in the press.

In short, I think Microsoft has little to fear from the suit per se.  The negative
publicity of the trial is keeping a lid on the MSFT share price.  The surprises are
likely to be on the upside.  The danger to Microsoft, like IBM before them, is that
they will divert too much energy to the trial and become paranoid in their business
dealings.  Back in the 80's you couldn't have a meeting with IBM without signing a
waiver and they'd still bring a lawyer to the (purely technical) meeting.  A company
can't avoid antitrust suits by changing its behavior; it must either decline in the
marketplace or improve its public image.

The real story here is the continuing ineptness of Microsoft's competitors.  Everyone
knows the story about how Lotus blew it with 1-2-3 and how Apple blew it with the
Macintosh - either one of which could have wiped out Microsoft, should have too - and
now we're seeing the story of how Netscape blew it.  They had a "must have" new user
interface, a six month development lead, and a pile of cash from their IPO.  If they
had played their cards right, they could have destroyed Windows, and Microsoft with
it.  But that's a story for another day.

Richard Gillmann (richard@nwfolk.com)
Back