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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: LindyBill who wrote (217)	2/20/1999 5:05:00 PM
From: Uncle Frank	Respond to of 54805

Interesting comments on my favorite Silverback from Dvorak: For Microsoft, A Tough But Not Deadly Road Ahead By John C. Dvorak Insiders at Microsoft say that over the past few weeks President Steve Ballmer has been pumping up the troops with premature claims of victory over the U.S. Department of Justice. The sincerity of these assertions may be in doubt, as people who are higher up the food chain say that Microsoft executives are all convinced they've lost the case and now are simply worried about the edicts. The Justice Department seems to feel it has the upper hand, too -- especially after a series of botched testimonies by pro-Microsoft witnesses, along with Bill Gates's mediocre deposition. So, what can possibly happen to Microsoft? My guess: Not much that will affect the stock price over the long term. Unlike the AT&T breakup, which in hindsight did little more than muddy the waters, there is no way Microsoft can be broken up into "Baby Bills" based on region. Most people like to think that the company must be chopped up into a few pieces, such as operating systems, languages/tools and applications. While this looks simple and obvious on the surface, it's not: Unified manufacturing, support, sales and clerical operations make it next to impossible to split up a company along divisional lines when those lines are completely intertwined. It would take a re-organization unlike anything the company has ever attempted. Also, if the company were to be split up, how would the ownership change? Would Bill Gates own the same percentage of the new companies? How would three such companies not act as one under his ownership? Would he be forced to sell his interest in all the segments except one? Which one would he keep or want? This gambit may force Gates to take a potful of cash, which would then be subject to taxation, making the Justice Department look like an agent for the IRS -- not the best thing for DOJ's image. If Microsoft is told to split into two or three companies, we can also assume that it will appeal the decision as best it can, to buy time. If it eventually has to split up, we can assume that it will be over, say, three to five years, during which time it can continue to stall. I'm told that management has been establishing channels of intracompany communication between executives and programmers, which would continue if such a split-up should occur. Although this eventually could become another point of controversy for the courts, Microsoft is already fighting any split-up. What other possibilities are there for penalizing Microsoft? None that will necessarily resolve the underlying complaints against the company -- that Microsoft leverages its monopoly position in operating systems to thwart competition across the board. For instance, what would a large fine actually be in this case? A billion dollars? For a company that has nearly $20 billion in cash? And how would that not simply be passed on to the consumer in some way? On the other hand, while a large fine doesn't guarantee compliance, it does send a message to executives inside and outside the company, creating peer pressure. Employees also would realize that the company "lost" and was "wrong." This itself may be important in light of the current situation at Microsoft, whereby the company's management is righteously defending itself to its own employees, as if they did nothing wrong. Microsoft is notoriously arrogant, and some of that puffed-up sense of superiority may be deflated, to the benefit of all. The only other possible penalty is for Microsoft to be simply kept out of a few of the businesses that it is in. But which ones? It's totally entrenched in the operating system business, and there's no other real competition. Linux is a long shot at best. (See "Linux Really Could Threaten Microsoft," December 16, 1998. ) Microsoft makes a fortune on applications, and owns the market for common applications like spreadsheets and word processing. Finally, since the primary case against it is that it tried to use its dominance in operating systems to squeeze Netscape Communications out of the browser market, Microsoft could be ordered to cut its Internet Explorer browser out of Windows and leave it out. But with the only other viable browser company now owned by America Online -- a dominant player in another market -- where would that leave users? No, the only practical thing to do is to fine the company and tell it to stop many of its anticompetitive practices. The court will outline the practices, impose the fine and threaten Microsoft with something it should begin to fear: a return to court for another expensive and embarrassing drawn-out legal battle. The government can do this forever, and Microsoft executives must hate the experience by now. This alone should be a deterrent. But it sure won't ruin the company or drive its stock price down dramatically, which is the only thing investors -- and probably Microsoft's top executives -- really care about, when it comes down to it. --------------------------------------------------------------------------------