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Hard times... at Microsoft?
By Rob Landley
AUSTIN, TX (March 19, 1999) -- Microsoft (Nasdaq: MSFT) made a positive move recently. Despite the software giant's continuous refusal to officially acknowledge just how badly it's done in its antitrust trial, Microsoft has decided to break itself up before the Department of Justice (DOJ) does.
Even before I read Salon Magazine's excellent article "Fortress Microsoft," I thought the company was too far gone in denial to effectively respond to the antitrust trial -- but I was wrong. News recently leaked of Microsoft's plans to reorganize into four distinct divisions. Even the Software and Information Industry Association (formerly the Software Publisher's Association, the largest industry trade group of which even Microsoft is a member) has formally recommended breaking Microsoft up. In addition, a breakup has also emerged as the 19 state attorney generals' favorite option. Microsoft would be foolish (lower-case "f") not to prepare for it. Rather than waiting for the trustbusters to come in with a hacksaw, Microsoft has given them dotted lines along which to cut.
The reason a breakup looks extremely likely is that Microsoft's defense could not have done more damage if the Department of Justice had been able to script it. Faked videotapes, witnesses contradicting their own sworn testimony, witnesses recanting their testimony under cross examination, dozens of "gotcha" moments straight out of Perry Mason, and a visibly incredulous judge who on at least one occasion yelled "shut up" to an argumentative Microsoft witness (for defending an untenable position even after questioning had ended) all speak to the likelihood of the company's coming defeat.
Fortune magazine's daily Microsoft trial diary is probably the most interesting coverage. ZDNet's coverage is more detailed, while the BBC's weekly summaries are shorter. There are dozens of other news organizations covering the trial, and antitrust experts almost unanimously predict defeat for Microsoft. The only participant who DOESN'T seem to think Microsoft has had its head handed to it is Microsoft (link to The New York Times -- requires free registration).
While a breakup of the company could actually be beneficial to investors who get to keep all the pieces, fallout from the trial elsewhere is rapidly building. Intel's (Nasdaq: INTC) decision to settle its antitrust suit was not motivated by penalties it expected the Justice Department to impose. Rather, Intel agreed to those penalties up front to avoid the overwhelming collateral damage seen in the Microsoft case.
Any penalty the DOJ imposes pales in comparison to the civil actions waiting to be unleashed as soon as the DOJ declares Microsoft a monopoly. The recent "Windows Refund Day" was merely the opening shot in a class action lawsuit filed shortly afterwards in a California court, seeking monetary damages from Microsoft for its monopoly pricing. If Microsoft is declared a monopoly in the DOJ trial, the civil courts don't have to prove it again.
The damage done to Microsoft's public image is incalculable. Not just to customers, but most acutely with the rest of the industry, which now has documented evidence that a partnership with Microsoft generally only benefits Microsoft. Many of them are actively seeking alternatives.
The alternative they have been turning to is the Linux operating system, which has seen a meteoric rise in official support from dozens of companies. IBM (NYSE: IBM) is now installing and supporting Linux across its product lines. Recently, the company put together its own Beowulf cluster supercomputer that matched a Cray's performance using $150,000 of off-the-shelf hardware and an off-the-shelf copy of Red Hat Linux they bought at Barnes & Noble the day before the demonstration. At the other end of the scale, Caldera (Nasdaq: CLDF) has a stripped down version of Linux. In addition, German software giant Siemens has ported its SAP R/3 software to Linux. Hewlett-Packard, Dell, and Compaq are now all pre-installing Linux as well. These are just a few of the announcements that came from the recent LinuxWorld Expo.
A breakup of Microsoft would allow its application software to migrate to other platforms, and allow portions of the company to remain successful even without a monopoly. Rumors of Microsoft's Office being ported to Linux have been circulating recently, all denied by Microsoft, of course.
The increasingly likely breakup of the Windows monopoly does not necessarily spell the end of Microsoft's financial success. Like Cobol, Windows software will probably be around forever in some form. But to get to the light at the end, the company must first go through the tunnel. Meanwhile, Microsoft is still biting and clawing resistance every step along the way.
So, what do you think, Fool? Is Mr. Softy preparing for its own demise? Come share your thoughts on the Strategy message board. And as always, if you're a Rule Maker novice, come check out the discussion on the Rule Maker Beginners board.
Finally, be sure to pipe up this weekend with your opinion of which of our two pharmaceutical giants -- Pfizer or Schering-Plough -- is better. Does Pfizer's cavalier attitude toward its balance sheet give you pause? Which company's product pipeline offers more promise? Once again, we'll be awarding a prize (this week, a Fool T-shirt) for the best response. Post your response on the Strategy board, subject "PFE vs SGP." Good luck!
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Stock Change Bid AXP -4 1/2 123.13 CHV +1 87.50 CSCO -2 3/8 104.50 KO - 3/4 67.50 GPS - 9/16 67.44 EK -1 66.75 XON -1 5/8 73.06 GM + 1/4 89.75 INTC -2 13/16 119.00 MSFT -1 1/4 171.19 PFE -2 9/16 140.44 SGP - 1/4 58.38 TROW -1 5/8 36.75 YHOO -5 5/16 170.00
Day Month Year History R-MAKER -1.67% 8.03% 12.61% 42.49% S&P: -1.31% 4.92% 6.02% 31.18% NASDAQ: -1.68% 5.83% 10.43% 46.50% Rule Maker Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 171.19 118.72% 5/1/98 55 Gap Inc. 34.37 67.44 96.21% 6/23/98 34 Cisco Syst 58.41 104.50 78.91% 2/3/98 22 Pfizer 82.30 140.44 70.64% 2/13/98 22 Intel 84.67 119.00 40.54% 2/17/99 16 Yahoo Inc. 126.31 170.00 34.59% 8/21/98 44 Schering-P 47.99 58.38 21.63% 5/26/98 18 AmExpress 104.07 123.13 18.31% 2/6/98 56 T. Rowe Pr 33.67 36.75 9.14% 2/27/98 27 Coca-Cola 69.11 67.50 -2.33% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 17 General Mo 72.41 89.75 23.96% 3/12/98 20 Exxon 64.34 73.06 13.57% 3/12/98 20 Eastman Ko 63.15 66.75 5.70% 3/12/98 15 Chevron 83.34 87.50 4.99% Rule Maker Stocks Rec'd # Security In At Value Change 2/3/98 24 Microsoft 1878.45 4108.50 $2230.05 5/1/98 55 Gap Inc. 1890.33 3709.06 $1818.73 6/23/98 34 Cisco Syst 1985.95 3553.00 $1567.05 2/3/98 22 Pfizer 1810.58 3089.63 $1279.05 2/13/98 22 Intel 1862.83 2618.00 $755.17 2/17/99 16 Yahoo Inc. 2020.95 2720.00 $699.05 8/21/98 44 Schering-P 2111.7 2568.50 $456.80 5/26/98 18 AmExpress 1873.20 2216.25 $343.05 2/6/98 56 T. Rowe Pr 1885.70 2058.00 $172.30 2/27/98 27 Coca-Cola 1865.89 1822.50 -$43.39 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 17 General Mo 1230.89 1525.75 $294.86 3/12/98 20 Exxon 1286.70 1461.25 $174.55 3/12/98 20 Eastman Ko 1262.95 1335.00 $72.05 3/12/98 15 Chevron 1250.14 1312.50 $62.36 CASH $185.03 TOTAL $34282.97
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