Software: And the Winner Is . . .

Bill Gates wasn't on any ballot this November, but he may have been the biggest winner.
Joseph RadiganNovember 16, 2000

Rarely are a huge corporation’s fortunes tied to the results of a general election, but even as Florida’s crucial 25 electoral votes teeter between the Gore and Bush column, perhaps the one figure who can most justifiably declare victory is none other than the world’s richest man, William H. Gates.

No, Gates himself wasn’t running for office. But consider that his favorite Senator, Republican Slade Gorton of Washington, is hanging on to a narrow lead in his bid for re- election as the final absentee ballots are tallied in a real heartstopper. Even if Democrat Maria Cantwell noses ahead of Gorton before final count, Gates still comes out on top. (Cantwell pledged her fealty to Microsoft while campaigning.)

Granted, the result of the presidential election is not certain, but should Texas Gov. George Bush ultimately be declared the winner, that would almost certainly bring not only a new Attorney General but a new chief of the Justice Department’s antitrust division, as well. Given the Republicans’ ideological antipathy toward regulation, there’s a strong possibility that the government’s landmark antitrust case against Microsoft will be wound down.

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Even if a recount in Florida hands the election over to Vice President Al Gore, there’s no guarantee that a Gore Justice Department will be as aggressive in antitrust enforcement as was the Clinton Administration.

Finally, even if the Microsoft case is pursued aggressively by either Gore or Bush appointees, the judicial winds have been blowing in Microsoft’s favor. Keep in mind that the Supreme Court kicked the case back to the Court of Appeals in Washington, D.C., a venue that is seen as far more favorable to the software giant. The appellate court has already limited Microsoft’s opponents’ options for filing friend-of-the-court briefs against Microsoft.

That’s not to say that Microsoft is home free. The European Commission is pursuing its own antitrust case against the company. Moreover, the company is fending off legal assaults on other fronts, too.

For example, last month, in a preliminary ruling, a federal court in California ruled that Microsoft infringed upon Sun Microsystems’ Java trademark. In addition, the Federal Trade Commission has sanctioned Microsoft for using deceptive advertising for its WebTV Internet service.

October also saw the company fail in its attempt to gain a tax break for its software exports to overseas affiliates. A year ago, the company lost an unfair trade practices case brought by Bristol Technologies, a software developer based in Danbury, Conn. Recently, the judge in the case ordered Microsoft to pay $3.7 million to cover Bristol’s legal costs.

In the last few weeks, the software giant has also revealed that it’s been victimized by computer hackers who have made an extended series of unauthorized break-ins into its computers.

Such a string of woes would bring a lesser company to its knees, but this is Microsoft we’re talking about. Consider that until mid- October, the company’s stock had the worst performance this year of all the 30 components in the Dow Jones Industrial Average.

But Microsoft’s shares have staged a remarkable recovery of late. After the stock bottomed out just below $50 in mid-October, the company announced that during the first fiscal quarter of 2001, which ended Sept. 30, its income jumped 18 percent to $2.6 billion and its sales rose 13 percent to $5.8 billion. The results were way ahead of Street forecasts.

In the weeks since the earnings were announced, the stock has been trading closer to $70.

“There’s an attractive valuation argument to be made for the stock, which is trading at a slight premium to the S&P,” says Alan Loewenstein, the co-portfolio manager for the John Hancock Technology Fund. “What you’re seeing is people are getting more nervous about the higher multiple tech stocks. Plus, they are going into a very strong product cycle.”

Does any of this mean Mister Softee will reestablish its presence as the one technology company without a peer? Don’t jump to conclusions, said Robert Becker, a securities analyst with Argus Research.

“Certainly if Bush is elected, it’s fair to say that’s good news,” he said. “But it’s just one element in a complex valuation equation. There are a lot of other factors.”

How about corporate users of Microsoft products? Should they let the company’s legal fortunes affect their dealings with the company?

“Generally they don’t, nor should they,” says David Smith, an analyst with market research firm, The Gartner Group.

Still, Microsoft is embarking on several ambitious product fronts, all of which are important to the company’s future. This year, it rolled out the latest upgrade to its flagship Windows operating system, Windows 2000. Initial reports suggested sales of the system were sluggish, but by at least one account, the product is gaining some traction in the marketplace.

“Our forecast of Windows 2000 adoption was very conservative,” says Dan Kusnetzky, vice president of system software research with International Data Corp. “Because of the complexity, it requires very careful planning and execution. But we are finding in our surveys that our conservative estimates are being beaten.”

“Surveys have shown us that almost every size organization, if they were using Win NT, they also planned to use Win 2000,” he adds. “But people who were using other operating environments were less likely to change unless they added new applications.”

Even as sales of Windows 2000 accelerate, Microsoft is still faced with some daunting challenges.

  • The growth of the global PC market is generally understood to be slowing down, which suggests that Windows ME, the desktop version of the product, will not grow as rapidly as in prior years.
  • Second, with Windows already an established presence in most corporate environments, Microsoft will be hard pressed to see its sales of Windows 2000 outpace the overall growth in the corporate technology market.
  • Finally, despite Microsoft’s determination to build its presence on the Internet, it is facing far more competition there than in the desktop market it has controlled for years.

“Microsoft’s business model is based upon selling a commodity type product and then coming back in 15 months and selling upgrades as an annuity type business,” Kusnetzky says. “Microsoft is faced with an extreme challenge to its business model and its control of its customer base. So it had to come up with something that would require Microsoft software on both sides of the equation. That’s what Microsoft.Net is all about.”

But not everybody is sold on Microsoft.Net, and even if Microsoft’s Internet strategy starts to click, it may be a year or more before signs of that become clear. Microsoft, too, may be hampering the strategy by not being clear about its goals.

The Microsoft.Net strategy is “very nebulous,” contends Gartner Group’s Smith. “It used to mean so many different things. Anything and everything that comes out, they articulate in terms of Microsoft.Net. Is it a floor wax or a desert topping?”

If there’s any lesson in the latest developments from Microsoft, it may not be time to bet the farm on the company’s behalf, but the time to bet against it may have passed.