Should we fret when Microsoft takes a hit?
by Carol M. Ostrom
Seattle Times staff reporter
All it took was one big drop in Microsoft stock to start the state's chief economist clicking away on a new equation.
Just for fun, Chang Mook Sohn created an equation about the local economy: How many Boeing layoffs does it take to exact the same toll on the Puget Sound economy as a $15 drop in Microsoft stock?
That's the amount the stock fell Monday, after U.S. District Judge Thomas Penfield Jackson ruled that Microsoft had illegally used its monopoly power. Microsoft has vowed to appeal.
If the company's legal battle creates a prolonged free fall in the stock price, could that mean the end of $400 restaurant meals, waterfront mansions, Range Rovers and BMWs? The demise of catered parties, custom-built kitchens and the "angel" capital that has funded many a start-up?
In the past few years, such have become part of the region's economy and culture, thanks largely to the wealth created by Microsoft.
Of course, it's early to draw conclusions. And Seattle is not a one-company town the way it was in the 1970s, when the "Boeing bust" sent the regional economy into a tailspin some called worse than the Great Depression.
Thirty years ago, Boeing employed nearly 10 percent of the state's work force. The recession that followed Boeing's laying off more than 60 percent of its workers found stunned engineers waiting their turn for a brick of cheese in food-bank lines, spacious Laurelhurst homes for sale for peanuts, families fleeing the state in station wagons like Oklahoma farmers from the Dust Bowl of the '30s.
And there was the billboard, put up as a joke but taken very seriously: "Will the last person leaving Seattle please turn out the lights."
What if . . .?
If "something" happened to Microsoft, worriers worry, could the Puget Sound area be looking at this bleak picture again? Another bust - a Microsoft Meltdown, say?
Sohn stresses Microsoft is strong and the economy healthy. And a stock drop, at least for now, is largely just on paper.
Still, his calculations are revealing: That $15 drop in stock, translated according to its effect on the economy, equals the layoff of 19,000 Boeing workers.
While Sohn and others insist that doesn't mean a "bust" or a crash, they talk of a a slowdown, a "rationalizing."
Some believe cooling off the superheated local economy could be a great idea. Not everyone likes to engage in house-buying bidding wars, watch their property taxes skyrocket, or worry they'll never be able to afford a vacation home.
Economists are just now realizing the astounding power unleashed over the last few years as droves of employees cashed in their stock options, that stealth wealth driven sky-high by Microsoft's jet-propelled stock prices in 1998 and 1999.
Last year, software industry stock options - mostly from Microsoft - pumped an estimated $7 billion into the local economy. That amounted to 14 percent of King County's total wages, according to Roberta Pauer, regional economist with the state's Employment Security Department.
"This is critical for Puget Sound and Washington State - just enormous," says Pauer.
Signs of a change
Some say they're already feeling a change.
"There used to be a lot of buoyant enthusiasm in the economy, and it's like there's a slow leak in the balloon," says Nada Sundermeyer, a John L. Scott real-estate agent who is one of the top home sellers on the Eastside. "Buyers are being more cautious, taking a wait-and-see attitude."
Of course, it's not just Microsoft, she says. The Nasdaq stock index's fall in recent weeks left one potential buyer couple $300,000 poorer on paper, Sundermeyer says. "Those people were counting on that; you take it away from them, they get cranky!"
And more to the point, she says, instead of buying a $1.6 million house, they start looking at $999,000.
Under way now, too, is a Boeing layoff cycle that's cut more than 20,000 jobs in Puget Sound since mid-1998. Dual downturns, say economists, are never a good idea.
Historically, Puget Sound has long ridden a boom-and-bust bronco, from the Klondike gold rush to World War II aircraft.
In the past few years, though, the familiar up-and-down curve tracking Puget Sound's economy has morphed into a skyward-bound rocket, fueled in large part by Microsoft's exponential growth, its fertilizing effect on the software industry generally, and those fat stock options.
Like Boeing at the time of the bust, Microsoft is big - very, very big.
Although the software giant employs far fewer people in the state than does the aerospace giant - 18,500 at the end of 1999 versus 78,900 at Boeing - the potential economic impact from Microsoft employees could be much larger that that of Boeing employees, state economists believe.
That's because they make more.
A lot more.
Last year, employees in the aircraft industry - read Boeing - made, on average, about $54,000.
Employees in the software industry - read Microsoft - made on average an estimated $350,000 to $400,000. That's excluding Microsoft's top five earners.
Stock options are key
Wages alone account for only about 15 percent of that number. Eighty-five percent of it, says Sohn, is exercised stock options. Options give employees the right to buy stock in the future at today's price; exercising that right gives them possession of the stock.
In 1990, wages were just wages. But in 1998, a steep rise in average state wages - nearly 8 percent - tipped off state economists that something was happening, says Dennis Fusco, chief economist for the state Employment Security office.
Oddly, the huge rise in wages seemed to echo the huge rise in Microsoft stock, and economists began to unravel the mystery: Software industry wages - mostly stock options - had driven up all wages nearly 3 percent.
It's clear that over the past several years, Microsoft employees and their new-found wealth have fueled changes in the local economy, business culture and social structure.
When a whole lot of Microsoft employees - or former employees - got into philanthropy, the whole picture for local charities changed. For some, manna fell from the heavens, and well-funded ventures popped up out of nowhere. Fund raisers for others had to start answering the question: "Why don't you just ask Bill (Gates) or Paul (Allen) for the money?"
When stock optioners decided they wanted stylish woodwork in their new kitchens, suddenly the field boomed, and formerly struggling remodelers could afford new pickups and vacations in Tuscany.
When Microsofties found they didn't have time to leave work to run errands, a new category of helper appeared: the concierge service. Event planners, "household managers" and caterers emerged as growth industries.
"I kid you not, I kiss the ground that Bill Gates walks on," says Lisa Dupar of Lisa Dupar Catering in Redmond, a single mom whose company has tripled in size in the last four years. Half the company's income, she estimates, is directly or indirectly tied to Microsoft, and her company has grown from nearly nothing to 130 employees.
Paul Mackay, part owner of El Gaucho, the Flying Fish and The Waterfront, soon to open on Pier 70, says he's well aware of how much venture capital the "new wealth" has pumped into the restaurant industry, typically scorned by traditional lenders.
"It's fun to be part owner of a restaurant, be treated nicely, and own part of a sexy business," says Mackay, who says he hasn't had any slowdown in the nearly nightly $300-$400-a-person dinner parties that have been his staple for the past couple of years.
But Mackay worries about the Justice Department somehow putting the clamp on Microsoft. "Deep down inside, I worry if I want to keep expanding, money might be a little tight."
Pauer thinks his worries are realistic.
"If Microsoft stock is flat or down, people aren't going to exercise their stock options this year. People are going to wait until the stock price stabilizes or recovers."
$5 billion at stake
If that happened, more than $5 billion could vanish from King County's economy for the rest of this year - about 10 percent of total wages, Pauer says.
About $69 billion of stock options not exercised are outstanding, the company says.
Microsoft stock has fallen more than 25 percent from its high of about $119 earlier this year, more than 14 percent of it after Monday's ruling.
At a closing price of about $89 Friday, the stock dropped back to its November range but remained well above the $75.50 of a year ago.
Everyone in the economic-forecasting business anticipated some adjusting, if not slowing down, in the software sector, says Pauer. And it was no surprise that Microsoft and the government didn't settle the federal antitrust lawsuit against the company.
"But I think we all failed to anticipate what really did happen - which is that Microsoft stock price would range between two levels: flat and down. And that it will stay within the flat-to-down range until this whole thing is settled."
Pauer doesn't believe there's a recession in sight.
But Microsoft's new stock prices, she predicts, will prove to be "the economic event of the year" for Puget Sound and the state.
Microsoft's new, lower stock price is just one of the many signals people are now getting, says Sundermeyer at John L. Scott.
"People are worried about the price of raw materials, and the price of oil is rising," she says; fears of inflation, too, are troubling.
"I think everybody thinks Microsoft will land on its feet, but I think it causes everybody to pull in their horns a little - wait to buy. It's definitely more cautionary."
Cautionary, but not run-for-cover. Wait-and-see, but not dig-a-foxhole.
Many observers say Puget Sounders are old hands at coping with boom-and-bust cycles and this blip, termed by some a "hiccup," hardly scares them.
In part, that's because Seattle is no longer a company town.
Today, aircraft employees (most working for Boeing) make up only 3.5 percent of the state's work force. Other super-employers have emerged.
Software industry employees - the vast majority Microsoft's - number about 24,000, about 2 percent of the state work force.
And other big employers - the University of Washington, health, biotechnology and research firms - now claim a larger share.
In fact, it was likely those Microsoft stock options that insulated the economy from the effects of the most recent Boeing layoffs. Even with the cuts, unemployment stayed low.
"Why? Microsoft stock prices and the exercised stock options, that's why," Pauer says. "It's been a completely successful counterbalance to Boeing."
That Boeing was no longer the only game in town caught politicians and state budget leaders by surprise in 1993, when Boeing announced that it expected to lay off as many as 19,000 workers.
The state-revenue forecast nose-dived by $610 million, the largest single drop since the last aerospace crash, in the early '80s. Working for then-Gov. Mike Lowry, Len McComb, former state budget director, rammed through the legislature a controversial tax increase of $717 million to offset the expected crash.
Ultimately, though, the hike was unnecessary, McComb says, because other areas of the economy took up the slack.
Now a bit wiser, McComb advises cautious optimism regarding Microsoft and predicts the stock will come back slowly.
Bill Beyers, a University of Washington geography professor who has studied the high-tech economy here, says the state has had a computer-industry collapse before.
But the downturn, in the early '80s, evened out quickly as the mainframe-based industry morphed to one based on the personal computer.
"It teaches us that there can be these dramatic technological changes in these industries," he says. In this realm, little companies have a "tendency to grow and take off - and they're not dependent on Microsoft."
Regarding Microsoft, he poses and answers his own question: "If the government breaks it up, and the company becomes a limp nothing, will the economy go? My reading is no."
`Little hiccup won't slow party'
Maybe it's home-town boosterism, but there seems to be a cheering squad out there for Microsoft.
In part, it's celebrating creativity; in part, sticking up for the entrepreneur. Maybe it's self-interest, enlightened or otherwise. In national polls, too, most people oppose breaking up the company.
Locally, perhaps the support is not surprising. A 1996 study found that for each new Microsoft hire, nearly 3 1/2 jobs were created.
If Microsoft is crippled by the antitrust case, it could hurt Washington's reputation as a good place for high-tech business, says Kriss Sjoblom, vice president for research of the Washington Research Council. Curbs on the way Microsoft does business could blunt the kind of competition that leads to rapid technical change, he says.
When Boeing slumped, what was at risk was current employment, Sjoblom says. "With Microsoft, what's at risk is our future and future growth."
There was a breathless half hour on Tuesday when he thought the market might be heading for a free fall, admits Scott McAdams, president of McAdams Wright Ragen, a regional investment firm managing $2 billion for clients.
But the fall slowed, and so did the phone calls from anxious investors.
"For good or worse, many investors have weathered a lot of these hiccups. They know in the past they haven't led to protracted downturns. They haven't been harbingers of disaster," McAdams says. "A little hiccup is not going to slow the party."
And even if the dreaded "something" were to happen to Microsoft, he believes, "there's an enormous demand for technology employees - they'd be scooped up in a minute."
Even "with one arm tied behind their back," Microsoft will be strong, he believes.
In fact, says Lisa Dupar, the caterer, problems hardly scare the "change agents" who make up Microsoft's work force.
"Their whole culture," Dupar says, "is to say, `OK, this is a problem, now what? To solve it.'
"I see it more as them doubling back and coming back even stronger." |
