Microsoft Challenged, but Stronger Than You Think
A fast consensus arose last week that Microsoft would be road kill in the wake of an adverse antitrust ruling by a federal judge.
Predictions flew that government strictures would hobble Microsoft, perhaps even break up the company; that competitors with new technologies would leave it in the dust; and that trial lawyers would nibble it to death in civil lawsuits.
Don’t you believe it. Microsoft will do well in any circumstance, because it is an uncommonly skillful company.
Even if the government orders a breakup as a remedy for Microsoft’s anti-competitive practices--an unlikely event--many experts say that the software giant would be an even more formidable competitor split into three or four companies.
That point is debatable, however--and in fact is currently being debated in high-tech and financial circles. But shareholders would definitely benefit from a Microsoft breakup, as investors historically have from the dismantling of telephone and oil companies.
As to competitors, Microsoft is already a far more varied and complex force in information technology than critics and the antitrust case’s subject matter give it credit for.
Right now, 45% of company sales and just about half its total profit come from systems for offices and industry in which it doesn’t enjoy the dominant position of its Windows operating system.
Microsoft has won competitive battles by turning its efforts to where technology is going and by improving its product offerings until they become the market standard--as it did with Windows for desktop computers.
The company is reinventing itself today. In the two years in which the government has argued antitrust charges against it, Microsoft has geared up for a future of bringing broadband Internet services to homes and businesses. Not least among its preparations have been investments in telecommunications, cable and media companies, including $5 billion in AT&T;, $1 billion in Comcast and tens of millions in such firms as Akamai Technologies, a hot, new Cambridge, Mass.-based firm with a way to speed downloads of programming from the Internet.
As to civil lawsuits, even Microsoft critics admit there is not much in last week’s ruling that opens it to class-action suits. Microsoft is not accused of overcharging for Windows, so it would be hard for plaintiffs to show damages. Also, with $17.8 billion in ready cash and short-term investments, Microsoft can afford to fight lawsuits.
“It is an often underestimated company,” says Bharat Sastri, founder and president of HelloBrain.com, a new company in Santa Clara, Calif., that runs an Internet exchange of engineered solutions for technical problems.
“Microsoft’s people have invented basic products of computing. The company is rich in research and development,” says Sastri, a Silicon Valley veteran who has been both a competitor and a collaborator of the Redmond, Wash., firm.
To be sure, there are threats to Microsoft’s continued growth and prosperity--but they are subtle. If the aftermath of its guilty verdict includes heavy strictures on its conduct and a drawn-out legal process, Microsoft could lose its attractiveness as a place to work for bright, ambitious people.
Specifically, if legal clouds cause investors to avoid Microsoft stock, the firm’s stock options would be less appealing. And Microsoft’s 31,400 employees are renowned for being paid mostly in stock options--the firm’s employees hold vested stock options worth $36 billion at latest count. (The total stock market value of all Microsoft shares is more than $460 billion.)
“The company works by setting goals. You have very specific, enumerated goals to fulfill each year to earn the stock options,” says a three-year veteran of Microsoft’s system. “Each year the goals are set higher, so you can earn more,” he adds. Many Microsoft employees have become wealthy in the past.
But if the stock--which closed Friday at $89.06, off more than 25% from its all-time high--were to stall, the goal-oriented hard work could slow down. Bureaucracy could take root. “Cholesterol could kill them,” says Richard Shaffer, head of Technologic Partners, a New York-based consulting firm and a long-time technology expert.
There is no sign of that yet. Instead, Microsoft’s earnings are growing at a pace of more than 20% for the fiscal year ending June 30, and it is introducing new systems for office and home computing.
The company faces competitive challenges today. Computer users are making a transition from personal computers to the Internet and to wireless devices that work on open systems--as opposed to proprietary operating systems, such as Windows, that have given Microsoft market power and control.
Microsoft products are behind in several categories. Linux, the free, open operating system, now holds a leading share of the market for Internet server computers; Microsoft’s Windows NT trails. Palm computers hold the clear lead in the market for hand-held devices, ahead of computers with Windows CE systems. So Microsoft doesn’t win them all.
But it keeps coming back--”like a Japanese company,” say rueful competitors. Windows NT (for new technology) systems are gaining share in server markets as Microsoft improves the product with each new version; the firm’s Internet Explorer 5 Web browser, which was at the heart of the antitrust case, is recognized as the most capable product to support e-commerce. Explorer has evolved technologically much more than the competing Netscape browser, experts say.
Microsoft’s Office Suite, which includes word processing, spreadsheet and database control software programs, has gained steadily since it was developed in the 1980s on a Bill Gates insight that customers wanted such services in a single package.
The point is that Microsoft’s real strength lies not in monopoly but in the skills of a big company “that can bring large software projects to successful operation for vast markets,” says analyst Mark Specker of Wit Soundview Technologies, a research firm based in Stamford, Conn.
But Microsoft also has often won by bare-knuckles tactics such as differential pricing to hurt competitors, maneuvers that stepped over the antitrust line.
The law properly watches that line because it is an essential element of the U.S. system to keep markets open for newcomers for fresh ideas and innovation. It has been that way since 1807 when steamboat inventor Robert Fulton was told by a court that he couldn’t keep a competitor from shipping on New York Harbor.
Microsoft, a company with 1,200 technological patents to its credit, will bounce back from the jolt it has taken from the law. It’s not a company to underestimate, as many were doing last week.
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Profit Driver
Microsoft is a profit machine, whether in Windows operating systems for desktop computers or in software programs for office and commercial work. In consumer markets, with games and other programs, it loses money. Shown are revenues and operating income for fiscal 1999 in the three segments of the company’s business.
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Windows
1999 Revenues: $8.6 billion
Operating Income: 6.0 billion
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Office Applications
(Microsoft Office and other productivity products)
Revenue: $8.7 billion
Operating Income: 5.6 billion
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Consumer Products / WebTV
Revenues: $1.8 billion
Operating Loss: -1.07 billion
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Source: Company report
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James Flanigan can be reached at jim.flanigan@latimes.com.
