Date: Fri, 22 May 1998 09:58:05 +0100
From: Antagonism <mrnobody-AT-geocities.com>
Subject: AUT: Microsofts monopoly (Times article)


Here's an article from The Times (London), on the Microsoft anti-trust
action. I think its fascinating, in the way it connects, law, economy,
state action, planning and crisis. The US legal authorities' zeal for
attacking Microsoft didn't make much sense to me, but this puts it into
some perspective.....
-----------------------
Microsoft's monopoly must be broken - even at a price

The case brought against Microsoft by the US Government is perhaps the
most important business event of the decade, so it scarcely seems
necessary to apologise for devoting this space to it for a second day
running. Three questions raised by the case deserve closer examination.
Will it alter the future course of technological change and of computer
development? Will it affect financial markets and, in particular, will
it hurt the boom in stock markets around the world fuelled by the
bullish sentiment on Wall Street? Could it even have a short-term
macroeconomic impact on US and world employment,  inflation and economic
growth?

The answer to all these questions is "almost certainly yes". Much has
already been said about the first issue. To me it seems obvious that
Microsoft's products are unreliable, excessively complex and
deliberately designed to become rapidly obsolete. This is an issue I
have discussed several times in the past few years in the main part of
the paper. The never-ending cycle of "upgrades" which makes previous
software obsolescent and forces users to buy new more powerful computers
is a textbook example of the way monopolists typically try to abuse
their monopoly power. The same is, of course, true of the more obvious
abuses such as predatory pricing and exclusionary contracts which are at
the heart of the Justice Department's suit against Microsoft.

Protected from these abuses, the world computer industry would grow even
faster and prove far more successful in developing cheap and reliable
new technologies that served genuine business and consumer needs. As the
case against Microsoft evolves and these issues are exposed to debate,
they may call for further comment. Suffice it to say at this point that
many analysts seem to underestimate the strength of the economic
arguments behind the Justice Department case and the groundswell of
opinion against Microsoft among general computer users and in the
business community.

The broader questions about the economic and market impact have been
much less discussed. Microsoft has claimed that the anti-trust attack
would destroy jobs and undermine US competitiveness, but in truth the
macroeconomic impact will depend primarily on what happens in financial
markets, and the net effects of a strong and successful campaign against
the company are likely to be benign. Loosening Microsoft's grip on
software technology should, in time, reduce substantially the costs of
computer technology by eliminating the planned obsolescence at the heart
of Microsoft's strategy.

This is exactly what happened after the forced introduction of
competition into other monopolised technologies, from mainframe
computers and telephones to electricity supply and gas exploration.
There is every reason to expect similar effects in software. For
example, the simpler, cheaper and more reliable computers that could
develop outside Microsoft's sphere of influence would probably
accelerate the adoption of computers and Internet technologies in
everyday life.

But such benefits would be felt, if at all, only in the long run. The
more immediate economic effects have less to do with technology than
with the stock market's perceptions of its spectacular financial power.
The Microsoft prosecution could be the catalyst for a long-awaited
correction on Wall Street. The fear of offending Microsoft's
increasingly wealthy shareholders has, until recently, been one of the
main political arguments against taking tough anti-trust action. In the
past few months, however, the balance of political argument has shifted
to the opposite side. If bringing the case against Microsoft helped to
precipitate a stock market correction, this would put another feather in
the the Justice Department's cap.

The Federal Reserve Board and the US Treasury are increasingly alarmed
about the possibility that the Wall Street boom will turn into a
full-scale economic bubble, embracing property and other assets,
ultimately inflating wages and threatening a Japanese-style
macroeconomic disaster when asset values crash. This bubble has not yet
grown to dangerous proportions. In relation to national income, shares
may be at record levels, but are still only 20 per cent above their
typical level in the 1960s (see top chart).

For the moment, therefore, US officials are fairly confident that the
economy could take a major correction in its stride. But if there is no
correction by the summer, asset prices could rise to Japanese-style
extremes and create a dangerously speculative situation. Alan Greenspan
highlighted "irrational exuberance" on Wall Street as long ago as
December 1996. But if the boom remains unstoppable after the summer,
warnings may no longer be deemed enough. The Fed may be forced to use
high interest rates to puncture sentiment on Wall Street. This is a
decision that the Fed badly wants to avoid, for fear of
triggering a more serious and generalised economic slowdown. If a
non-monetary factor such as Microsoft were to take some of the steam out
of stock prices, the Fed would certainly see it as a blessing in
disguise. By taking pressure off the Fed, the Microsoft case could thus
be a boon for US business.

What, then, are the chances that Microsoft could trigger a correction on
Wall Street? Its stratospheric ascent has been a big force behind the
bull market of the past ten years. Its share price has multiplied
90-fold since 1988. It is now the third most valuable company on Wall
Street, after General Electric and Coca-Cola. It is also among the most
expensive. Its shares are worth an astonishing 56 times its earnings in
the past year.

If the average valuation of shares on Wall Street is today extremely
high, it is largely because of a handful of gigantic companies such as
Microsoft (and Coca-Cola), whose profits are seen by investors as
guaranteed to rise by 20 per cent or more each year, regardless of
economic circumstances. These companies, along with the large computer
makers whose profits are closely tied to the Microsoft strategy of
constantly changing standards and
planned obsolescence, make up a corporate aristocracy that seems to live
in a different economy from the rest of American business. These
companies' shares command stratospheric stock market ratings largely
because they seem invulnerable to global competition, the business cycle
or technological change. Were it not for the spectacular outperformance
of these invulnerable glamour stocks (see middle chart), US shares would
not seem nearly as
overvalued as they do today. In fact, Wall Street would be less
expensive than many European bourses, since many world-beating
companies, such as General Motors, Travelers, Dupont, Kodak, IBM, AT&T
and Hewlett-Packard, are selling for about 20 times earnings.

It seems quite plausible, therefore, that Wall Street's exuberance would
suffer a serious blow if anything called into question the ability of
Microsoft to continue increasing its earnings without interruption, year
after year. The force of the blow could be amplified by two other
factors. First, there are so many other astronomically valued companies
whose stock market ratings depend directly on the Microsoft monopoly.
For example, Dell Computer, an eight-year-old company with no
proprietary technology, which merely assembles computer parts made by
others, now sells on a price-earnings ratio of 68 and has a stock
market value greater than General Motors. Second, the business and
accounting methods pursued by most of these companies are critically
dependent on ever-risng share prices.

Many of the companies nestling under the umbrella of Microsoft's
monopoly, have been able to boost their profits and stock market ratings
by substantially
under-reporting salaries, which are their main business cost. They have
done this by paying their employees in share options (which are not
included in business expenses) instead of cash. According to a recent
study by Smithers & Co, the London financial analyst, the top 100
American companies used this device to understate their true business
costs, and inflate their profits, by about $66 billion in 1996.
Microsoft was, the worst offender, understating its true business costs
by $13 billion. In fact, according to Smithers, had Microsoft accounted
in the fullest possible manner for the costs of issuing its stock
options, its 1996 profit of $2.8 billion would have been replaced by a
$10 billion loss.

Such calculations rest on rather extreme assumptions about accounting
transparency. But what they illustrate is the extent to which the
financial structure of Microsoft, along with many other computer groups,
is built, like a pyramid company, on the assumption of ever-rising
profits and share prices. And there is no surer basis for ever-rising
profits than monopoly market power.

If that monopoly power is ever seriously called into question, Wall
Street may be in for some interesting - and unsettling - times.

--

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