Can Microsoft Show Us the Money?
Berst, Jesse 06/01/98 Windows Sources Page 35
(COPYRIGHT 1998 Ziff-Davis Publishing Company) Copyright 1998 Information Access Company. All rights reserved.
Despite missed ship dates and the DOJ fiasco, the Microsoft empire seems safe for years to come.
A new hypothesis is making the rounds. It says Microsoft's growth will slow, causing a flight from its stock. I decided to investigate, poring over financial statements and analyst opinions.
The slowdown theory says Microsoft doesn't have enough big-product upgrades to keep its momentum. There are two problems with this. First, it doesn't matter. Microsoft has so little competition, customers can't switch to another brand. When delays occur, customers just buy Microsoft's old products. They don't have any choice. A monopoly shields you from the usual consequences of mistakes and delays.
Second, the product lineup is well timed. Windows 98 will probably ship this month, generating huge revenues, especially from the OEMs. Cheap PCs are the hardware story for 1998, and these low-end machines will sport Win 98.
The cheap PC phenomenon is great news for Microsoft. By contrast, the trend caught Intel by surprise, depressing its earnings and creating openings for its competitors. Intel makes much less on a cheap PC than it does on a high-end PC. These economics don't apply to Microsoft, which makes the same amount of money either way.
Just as the Win 98 surge tapers off--Q199--NT 5 will begin its ramp-up. In case you don't think NT has much upside, consider that it is the key to the enterprise market. A market worth $80 billion, according to Fortune magazine. "Even if the rest of Microsoft's business slowed considerably, this market alone could enable it to grow 20% or more annually for at least five years," confirms analyst Michael Kwatinetz of Deutsche Morgan Grenfell.
Then comes the update to BackOffice. E-commerce will be white-hot by then, playing into the strengths of the new BackOffice. Office 99 will be next. If Microsoft succeeds in making Office 99 "the first suite designed from the bottom up around HTML and Internet standards," it will become a huge hit.
And by fall 1999, I foresee a growth spike for Windows CE. By then, CE-based handhelds will be into their third or fourth generation and ready for the mass market. Set - top boxes should be ready to skyrocket too, assuming cable modems have reached critical mass by then.
So much for the "Microsoft doesn't have any new products" theory. What about other disaster scenarios? Java has been discredited as a platform competitor on the desktop. And it doesn't matter whether the DOJ wins its lawsuit, because the financial penalties are so small. Goldman Sachs analyst Rick Sherlund has called the DOJ matter "a sideshow," adding, "It doesn't matter to earnings."
Is The Price Too High? Despite all this good news, some analysts argue Microsoft is overvalued. Indeed, Microsoft's price/earnings ratio is often double or triple the stock market average. As The Wall Street Journal puts it, Microsoft's "market value far outstrips sales." How can it get away with this? By being the most important company in the most important industry in the world.
For years now, I've warned that the last two decades have just been the rehearsal. The real show will start around the year 2000. That's when personal computing will explode. And as it does, we'll all be paying what Forbes calls The Bill Gates Tax. Every computer-owning household now gives Bill roughly $100 a year. Businesses pay him far more, of course.
As we move forward, the Bill Gates tax will only increase. There's no real alternative. Under free-market conditions, a company can't maintain excessive profitability. "If profits are abnormally high, other companies jump in," explains professor Robert Haugen of the University of California at Irvine, "They cut prices and take away market share." But Microsoft has raised such barriers it doesn't have competition in its key markets. And it can continue to milk its monopoly for years. To quote Fortune, "few, if any, companies have so clear a path to double-digit profit growth well into the next century."
Jesse Berst is editorial director of ZDNet AnchorDesk, at www.anchordesk.com. You can contact him at on@anchordesk.com.
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Me? I'm definately accumulating... |
