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Technology Stocks : How high will Microsoft fly? -- Ignore unavailable to you. Want to Upgrade?

To: Valley Girl who wrote (38638)	2/27/2000 1:32:00 AM
From: rudedog	Read Replies (1) \| Respond to of 74651

VG - I think MSFT is clear on the particular issue you mentioned. I also think that they set the bar for hardball play, in an industry where hardball is the norm... but few of the areas where I thought MSFT was out of line got into the trial. Perhaps the reason for that is that MSFT was doing business the same way that the other players were, and the DOJ just did not want to open that can of worms - that would be escalating from conventional arms to nuclear weapons. Oracle, Sun, IBM, Intel, and a host of other large and aspiring "gorillas" routinely used whatever pressure they could bring on suppliers and distributors to press every advantage they could. But those guys hardly invented the game - I think "Screw the Vendor" was a required course at GMI (General Motors Institute) going back to the 30s, and anyone who followed GM's shenannigans like buying up urban light rail so they could shut it down and ensure a bigger market for cars would regard these tech guys as pretty tame... As far as any "cut off your oxygen" threats from MSFT, I can pretty much guarantee that those never happened, and not because I don't think MSFT would have wanted to do it, but because they were not in a position to do it. Let me take you through a hypothetical case and show you what I mean. As I pointed out in a previous post, there are LOTS of ways to get MSFT bits onto a piece of hardware and only a few of them involve buying the bits through an OEM deal directly with MSFT. For example, virtually every large customer has a SELECT agreement with MSFT - they can buy hardware with no bits at all and install MSFT bits from their own distribution, all they have to do is tell MSFT how many they installed. And there are at least 4 programs that I know about that provide the bits from third parties at various levels of discount. Now lets look at the situation you proposed. We can assume that the OEM is fairly large, say one of the top 10 - otherwise, why would MSFT even bother trying to sway them, since the top 10 provide something like 70% of the market, and "white box" most of the rest (and "white box" is thousands of mom and pop shops who have no OEM agreements...). In our little story, MSFT wants to sway this particular top 10 OEM not to make an NC for Larry Ellison. They go in and say "We'll pull the plug on your ability to ship Windows through your OEM deal" - the "cut of the oxygen" threat. Let's further assume (and this is the one that takes the most imagination) that the vendor actually wants to produce an NC. We are in 1996, or 1997, or maybe even 1998, and the OEM is selling desktops at an ASP of about $2,200 at a gross margin of 20%, so his cost is about $1,800, $50 of which is his OEM cost for Windows. He can buy the product from a third party distributor for $70 and there's not a thing MSFT can say about it - they're not going to shut down their whole distribution network to punish one company, that would hurt MSFT a lot worse than the OEM and be highly visible. But if the OEM is a channel based vendor, and at any time before 1999 that was a very likely assumption, the OEM doesn't even have that problem - he can just ship vanilla boxes into the channel and let the channel partner add the OS. At the end of the day there is maybe $20 that someone has to eat, and those products routinely see cost of goods fluctuations 10 times that large as OEMs work off obsolete inventory, run promotions to gain share, or provide incentives to increase sales at the end of the quarter. In the scene we were painting, I would bet the OEM goes back to Mr. Ellison and asks for a little something to make up for the shortfall anyway... So this notion of "cutting off the air supply" has always struck me as a little silly. MSFT's lack of ability to effectively use that ploy is so well known by the big OEMs that it would never even come up, and discussions in the press have caused many a chuckle among those who know how that part of the business works. One knowledgeable procurement guy at a big OEM almost fell off his chair laughing about it - he said it would be like MSFT threatening to come into his office and ruin his carpet and making a big mess by cutting off their own arms. Not too scary, and not too likely, except maybe in a Monty Python skit. It did provide Mr. Ellison with a face saving way to explain why nobody built any NCs... but more rational observers would suspect that the OEMs ignored the NC because it was a dumb idea with no market.