FOOL ON THE HILL
An Investment Opinion
Microsoft: Why the Market Loves Judge Jackson Bill Barker (TMF Max)
November 18, 1999
I was at a friend's house two weeks ago on the Friday night that Judge Jackson's Findings of Fact in United States v. Microsoft were handed down. My friend asked if I agreed with the pundits out there who thought that the Judge's Findings could cause an end to the bull market, and that on the following Monday the market could head seriously south.
I hate to disappoint people when they ask me to predict the market's direction, but I always do. I really don't see any point in those guessing games, especially in relation to something I hadn't even read at the time. (Obviously, I'm not exactly in the majority on that.) Although I didn't personally hear any commentary predicting that there would be some huge market hissy-fit over the Microsoft ruling, I don't doubt that it was available in abundance for anybody who subjected him or herself to that weekend's media coverage.
As far as I can make it out, the doom and gloomers' argument was that the stock market so hates any interference in the free market economy by the government that it would read the Microsoft decision as some precursor of massive government regulation into the beloved technology sector. Since, as the argument goes, everybody involved in our Federal Government is too old, stupid, poor and/or power-crazy to understand technology (or the free market), this could only mean disaster.
Fast forward two weeks.
The market absolutely loves Judge Jackson's Findings of Fact.
Since the Findings of Fact came out, the market in general, and the Nasdaq in particular, have shot up, with the Nasdaq setting record highs on a near daily basis. The Nasdaq is up over 10% since Judge Jackson issued his ruling, and is up about 25% since the Judge announced that he was shortly going to be announcing his decision. This strong surge is in spite of the fact that Microsoft itself, which makes up a very large chunk of the Nasdaq index, is down about 8% since the ruling.
It's easy to play around with numbers and make them tell stories that they really don't. If I were inclined to, I could take these numbers, waive away all the other items of news that make up a market, ascribe the whole rise over the past month to the Microsoft decision, and pretend that Judge Jackson's ruling, on an absolute dollars basis, makes for the single biggest wealth creator in the history of mankind. Of course that's silly. There are millions of other pieces of information that also factor in. The Microsoft decision, however, is almost certainly the very biggest of those millions of pieces of data that have been introduced in the last two weeks, and, well, if the market weren't genuinely in support, then the market wouldn't be up nearly as much as it is. What the market is telling us is that the Department of Justice's "interference" in the free market is arguably one of the great moments of free market history. But, why?
If you really look at what went into the case, Microsoft being brought to heel can only be construed as a net benefit to consumer choice, and by extension to free market capitalism. People have argued in various places that there is some free market principle that Microsoft is sticking up for in this litigation, but that's demonstrably false. When there is a profound, deeply held underlying principle involved, a defendant in a lawsuit does not feel a need to resort to dishonesty as the crux of his or its legal defense -- which is precisely what happened here. Let's check it out.
The main witness, of course, was Bill Gates. The Economist, no bastion of left-leaning pro-Government commentary, referred to Bill Gates' videotaped deposition testimony as "appalling." I read over some of the testimony, and this characterization is spot on. Don't take my word for it though -- just look at some of the commentary of Slate, which followed the trial from the beginning.
-- "I doubt any sane and reasonable man could come away from today thinking anything but that Microsoft is guilty of many awful things, and if those things aren't strictly illegal they should be. On top of it, he would probably decide that Bill Gates had perjured himself." Slate, Oct. 19, 1998
-- "A similar, and more important, question can be raised about Bill Gates' video testimony, a little of which was also shown this morning. Gates surely seemed, through his manner of speech and body movements, not to have been entirely candid." Slate, Nov. 10, 1998
-- "Until today, I thought the Microsoft lawyers should call Gates anyway, because he couldn't possibly create a worse impression than that left by the snippets of video depositions that Boies and company keep showing at the trial. But then they showed more snippets of Gates' video depositions today, and I realized that there are indeed gradations of badness in Gates' performance....Watching Gates on the two big black monitors in the courtroom (with a transcript helpfully scrolling just beneath the video image) you just wanted to slap the guy." Slate, Dec. 15, 1998
I could go on and on, but you get the picture. These reactions are supplied by three different writers, and importantly if they had any bias it would have been pro-Microsoft as Slate is a Microsoft publication. Kudos to Slate's editor, Michael Kinsley, for its trial coverage. (Gates testimony is available for all to read here. This one is a favorite, with the line "I have no idea what you're talking about when you say 'ask' " standing out as a particularly good moment.)
The point here is that Microsoft/Gates decided to go with a transparently dishonest strategy as their defense, and when you do that in litigation, it's because you've analyzed the other strategies (i.e., the honest ones) and decided that those are definite losers.
None of this is offered, by the way, to demonize Gates. I don't really understand that pastime. Gates is a hardworking, creative, smart guy, who also has made among the very biggest philanthropic donations in history. I don't see any reason to be cynical about those donations either. As far as I'm concerned, all those Silicon Valley competitors that hold themselves out to be Gates' moral superiors have got a pretty tough act to follow when it comes to philanthropy -- and I definitely think that factors in to judging Gates as an individual. But so does the fact that nobody thinks that, under oath, Gates figured that being honest was his top priority. My guess is that the number of times that that strategy works once the judge is onto your act is pretty close to zero -- and Jackson was certainly on to Microsoft's act quite early. Heck, from what I can tell, everyone was.
Microsoft's staunchest defenders are pretty willing to concede that Microsoft isn't the nicest kid in the playground, but that of course is not the issue. The issue, once you've decided whether Microsoft is a monopoly, is whether that monopoly power was used anti-competitively, and/or in a way that harmed consumers. In this respect, Microsoft's own internal e-mail words are instructive, and probably decisive. Judge for yourself how consumer choice was affected from a small selection of what was offered to the court:
-- "Do we have a clear plan on what we want Apple to do to undermine Sun?"
-- "Do you agree that Apple should be meeting the spirit of our cross-license agreement, and that MacOffice is the perfect club to use on them?"
-- "The threat to cancel MacOffice 97 is certainly the strongest bargaining point we have, as doing so will do a great deal of harm to Apple immediately."
-- "If we had a choice of another supplier, based on your actions in this area, I assure you you would not be our supplier of choice." (Hewlett-Packard in letter to Microsoft.)
-- "Gates delivered a characteristically blunt query: 'How much do we need to pay you to screw Netscape??' " (America Online internal memo of meeting with Gates. Jan. 21, 1996.)
Even given all that, the Microsoft defenders argue that there has been no harm to the consumer. While that is certainly the best argument for Microsoft on appeal (an appeal I think will never materialize -- this case should settle), there is at least one neutral observer and weigher of whether the consumer has been harmed. The market every day gives a completely neutral analysis as to how companies should be valued, an estimate which is ultimately an extension of how much value companies are likely to be able to deliver to their customers.
The market is looking over all the information relevant to that analysis, and today it sees companies as a whole being able to deliver significantly more value to their customers in the future than it looked like they could a couple of weeks ago.
The market loves this governmental "intervention" in the market.
I've got to agree.