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A Microsoft Monopoly

by Rob Landley
(landley@flash.net)

Austin, TX (June 26, 1998) -- Hi, everybody. In the spirit of calm, even-handed, objective journalism, I thought I'd use my final column this week to vent my spleen about Microsoft (Nasdaq: MSFT).

Get ready.

In case anybody missed it, the Fools did a double-barreled Foolish Feature about old Mr. Softy (click here for the Microsoft Battle): two articles for and two against. I thought it was excellent. Elsewhere, Microsoft has been in the news several times recently, with the overturn of that preliminary injunction to bar them from bundling their Internet Explorer into Windows 95. And we have Microsoft releasing Windows 98 to consumers (and Bill Gates clearly overstating the importance of 98 to Microsoft's future and that of the computer industry -- in defending his right to "innovate"!).

Finally, Microsoft is battling for the #1 spot in our portfolio so far, getting close to beating out even Pfizer's Viagra-induced surge. Softy's on a roll, up more than 30% for us in less than five months. They're rolling cash; they've got their fingers all over the growing Internet; some even say they're the spider spinning this whole derned Web. What a power position. But ya know what? I still don't like them. And here's why:

Basically, although the other Cash-King managers all disagree with me, I don't think it's healthy for a Cash-King to have an actual monopoly (legal or illegal). Coke, for example, is powerful and dominant, but Pepsi, Royal Crown, Dr. Pepper, Cadbury Schweppes, and dozens of smaller cola companies prevent it from being an actual monopoly. Coke largely invented the soft-drink industry, yet it only introduced Diet Coke (a monstrously successful product) to compete with Pepsi's Diet Pepsi. When the two companies hold an advertising war, the sales of both go up.

Intel really isn't a monopoly either, or the same sort that Microsoft is. Intel customers have the option to buy compatible CPUs from AMD, Cyrix, IBM, and WinChip, and incompatible ones from Motorola, IBM, and Alpha Processor. Intel introduced MMX multimedia extensions to its new processors to give its chips a competitive edge. While most of the design ideas for its Pentium and Pentium II processors were copied from competing chips, they faced fierce competition to get there. Cray invented pipelining, and Intel bought the entire "Alpha" design from Digital Equipment Corporation to get them to stop suing Intel over patent infringements. In many ways, Intel's competition has benefited Intel enormously.

Yes, most of our Cash-Kings are #1 in their industry. But most also have healthy competition. This competition is good. Competitors in these industries believe (rightly or wrongly) that they can fairly compete and possibly expect to win serious gains in the next decade. And customers like to know they have choices, even if they return to the same product time and again.

The Justice Department also likes customers to have choices. Those choices are disappearing in the world of software because, let's face it, Microsoft has won. Anyone who, for example, believed that the Internet seriously threatened their position hasn't learned how to read a balance sheet. The hoopla over Netscape's ability to unseat this king was pure silliness.

Microsoft has won.

They'd won five years ago. Their patient, persevering approach to integrating new features into their products is unbeatable now. They taught a lot of great business lessons along the way. Sound the bells, strap on the party caps, and start dancing. Because the game ended a long time ago, and is definitely over now. Microsoft has won.

But... what have they won?

In my opinion, to dominate an industry for more than a short period of time, to really win for your shareholders, you need competition. Microsoft now needs healthy competition much more than ever before. As Intel's strength is manufacturing, Microsoft's strength is marketing. They've never been particularly technically innovative. Not that there's anything inherently wrong with focusing on marketing; the approach has worked wonders for Mr Softy.

But where will they get new ideas from when no one wants to square off in this industry? Microsoft needs competitors for their ideas and in order to stay relevant over the next 20 years. The relevance of PCs linking to the Internet a decade from now is not a foregone conclusion. If new ideas don't meet with substantial, enduring rewards for entrepreneurs, the world will move elsewhere. Microsoft needs healthy competition.

Remember that Microsoft purchased the DOS operating system from a company called "Seattle Computer Products." Windows was based on research from Xerox and extended by copying the Macintosh. And Microsoft only put disk caching in Windows because of Peter Norton's (the guy behind "Nornton Anti-virus") successful disk cache product. And they later licensed their disk defragmentation software from his company (Symantec).

There's more...

Disk compression? They copied it from Stac Electronics (and ended up paying $120 million for it... because they copied it a bit too closely to be what we'd call LEGAL). There's more. Today, no matter which browser you use you have to admit Microsoft Internet Explorer is quite clearly a direct copy of Netscape. Funny, though... did you see The Motley Fool's online poll about Web browsers last week? Out of 4,000 respondents, over 60% said they prefer Netscape's browser. Yet it's almost certain that Netscape will be driven out of this business. No?

Even Microsoft's much-touted next new thing -- voice recognition -- was already shipped as a built-in to IBM's OS/2 Version 4.0 back in 1996. And both Byte Magazine and PC World found Windows 98 to be an upgrade you could put off as long as you wanted to. Nothing more than a bug fix to Windows 95, which computers users are paying for. They must be laughing about this in Redmond. As a programmer, I'm laughing too. I personally find Microsoft's "we must be free to innovate" legal defense in the current DOJ action to be absolutely hilarious.

Innovate? Bah.

Duplicate. Yah.

You see, $12 billion in cash can't buy Microsoft a creative instinct. In monopolistic fashion, they've wrung all the risk out of their business model. That $2 billion or so in R&D being spent this year -- there's no research in there. It's all observation of the industry, and duplicative development.

Is that progress?

I believe that Microsoft's actions in trying to retain its monopoly position have gone against the best interests of the industry on several occasions, from originally positioning The Microsoft Network as an "Internet-killer" to fighting tooth and nail against Java: a way of writing programs that can (in theory) run unmodified on any computer, from Macintoshes to Mainframes. It's a development that directly threatens the Windows monopoly. It's one of the reasons that Microsoft has more Java programmers than the rest of the world.

Now... having said all this, I can't entirely agree with TMF Seymor's article entitled "Bill Gates and His Evil Empire." Why? Because his underlying complaint is that Bill Gates is "simply too rich." As I see it, Microsoft may be selfish, arrogant, cheat whenever it can for as long as it can, and delight in picking on anyone smaller than it is, but the creation of wealth is not the problem here. It's fundamental to the success of the United States of America that nobody can "earn too much money"... not even Bill Gates.

Wealth creation isn't the concern. What is? The closing down of creative problem solving, the discouragement of young, thoughtful, service-driven entrepreneurs, the now near impossibility of building a consumer software company that enduringly creates market-beating value for shareholders, and the general end to development and progress. I'm sure it seems I'm calling this early. But the nature of this game almost requires Microsoft to methodically match and destroy their competitors -- and at least some of those competitors are good people who have to fight against money being swept in from all different developments at Mr. Softy, to crush it undertoe.

So, the main argument for breaking up Microsoft, as with historical monopolies like Standard Oil, American Tobacco, and AT&T, is that the current state of its particular industry has reached a point of stagnation, at least relative to what it would be if competition was introduced between the various components of the monolith currently filling the niche.

History has pretty much agreed with this: America is now the international leader in Oil, Tobacco (darn!), and Telecommunications, all industries broken up by anti-trust. Industries challenged by anti-trust and not broken up (Steel, Automobiles) historically went into decline shortly after anyway, and were overtaken by foreign competition, despite their seemingly unassailable domestic position at the time. The problem is, the ideal point to break up a monopoly is generally while it's still wildly dominant and successful -- which makes it very difficult to support at that time.

I hope the Department of Justice eventually does break up Microsoft because, among other things, I think it'll prove a far more wonderful thing for Microsoft investors -- a far more wonderful thing for the Cash-King Portfolio. After such a breakup, even I'd add money to a holding. And Bill Gates' wealth would continue to grow, at probably a faster rate. When Standard Oil was split into 34 companies, Rockefeller's personal wealth tripled over the next decade.

So there you have it. I know my fellow C-K managers don't agree, and maybe many of you don't either. But I had to go into this weekend feeling light, having aired out my feelings, believing all that I wrote yet recognizing that it's a fascinating debate. And Tom Gardner should have calmed down enough by Monday to respond calmly to my attack on his pet stock. But he has to do the week in review first. Hey, all right! I'm enjoying this!

Have a great weekend, and if you have a toddler and they're not thinking about investing yet, check out Today's Fribble. Amazing.

- Rob Landley


06/26/98 Close
Stock  Change    Bid 
 ---------------- 
 AXP   +1 3/8   110.50 
 CHV   -  9/16  83.63 
 CSCO  +2 15/16 89.88 
 KO    +1 1/16  85.81 
 GPS   -  5/16  61.00 
 EK    +  11/16 70.13 
 XON   -  5/16  72.25 
 GM    -1       66.88 
 INTC  +  7/8   76.38 
 MSFT  +2 13/16 104.38 
 PFE   +1 7/16  111.94 
 TROW  +1 1/8   36.69 
 

                  Day   Month    Year  History 
         C-K      +1.22%   6.95%  13.11%  13.11% 
         S&P:     +0.35%   3.89%  13.17%  13.17% 
         NASDAQ:  +0.34%   5.10%  13.11%  13.11% 
  
 Cash-King Stocks 
  
     Rec'd    #  Security     In At       Now    Change 
     2/3/98   22 Pfizer        82.30    111.94    36.01% 
     2/3/98   24 Microsoft     78.27    104.38    33.35% 
    2/27/98   27 Coca-Cola     69.11     85.81    24.17% 
     5/1/98   37 Gap Inc.      51.09     61.00    19.40% 
     2/6/98   56 T. Rowe Pr    33.67     36.69     8.95% 
    5/26/98   18 American E   104.07    110.50     6.18% 
    6/23/98   23 Cisco Syst    86.35     89.88     4.09% 
    2/13/98   22 Intel         84.67     76.38    -9.80% 
  
 Foolish Four Stocks 
  
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Exxon         64.34     72.25    12.30% 
    3/12/98   20 Eastman Ko    63.15     70.13    11.05% 
    3/12/98   15 Chevron       83.34     83.63     0.34% 
    3/12/98   17 General Mo    72.41     66.88    -7.64% 
  
 Cash-King Stocks 
  
     Rec'd    #  Security     In At     Value    Change 
    5/26/98   18 American E  1873.20   1989.00   $115.80 
     2/3/98   22 Pfizer      1810.58   2462.63   $652.05 
     2/3/98   24 Microsoft   1878.45   2505.00   $626.55 
    2/27/98   27 Coca-Cola   1865.89   2316.94   $451.05 
     5/1/98   37 Gap Inc.    1890.33   2257.00   $366.67 
     2/6/98   56 T. Rowe Pr  1885.70   2054.50   $168.80 
    6/23/98   23 Cisco Syst  1985.95   2067.13    $81.18 
    2/13/98   22 Intel       1862.83   1680.25  -$182.58 
  
 Foolish Four Stocks 
  
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   15 Chevron     1250.14   1254.38     $4.23 
    3/12/98   20 Exxon       1286.70   1445.00   $158.30 
    3/12/98   20 Eastman Ko  1262.95   1402.50   $139.55 
    3/12/98   17 General Mo  1230.89   1136.88   -$94.02 
  
                               CASH     $51.68 
                              TOTAL  $22622.87 
   
 *The year for the S&P and Nasdaq will be as of 02/03/98 
       

</THE CASH-KING PORTFOLIO>

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