Monday, May 1, 2000 6:00 am Eastern Time
In order to understand the effect of a Microsoft breakup, one need only visit Office Depot, a top notch discount office supply firm. The cost for a new premium copy of Microsoft Office with Frontpage is $799. Without Frontpage the cost is $599. Microsoft will argue that an upgrade is only $450 yet to a small business hoping to add new employees the cost is $799. This of course does not include the cost of Windows 2000 which could add another $200. Also not considered are excessive, redundant and inefficient hardware peripherals needed to support Windows that would otherwise not be needed. Another huge cost is the inefficiency of Windows itself given that Windows 98 takes a full 2 minutes to complete its start up procedure. As one would expect, sales are slow and this correspondingly dampens potential economic growth a customers decide the cost is too high and thereby delay expansion plans.
Ten years ago the cost of 4MB of RAM was more than $1,000, today the cost is less than $20. Similar dramatic improvements in both cost and efficiency are standard in the computer hardware industry with disk storage now even possible on a device no larger than a stick of chewing gum. Intel has been a major catalyst in achieving these cost reductions and efficiency improvements and they should be applauded for there efforts.
The most obvious and direct impact of dividing up Microsoft will be a "gold rush" as innovators return to working in the PC software industry and unleash a flurry of innovation similar to what has occurred in the telecommunications industry. Let's do the math and assume that competition reduces the cost of Windows to $10 per copy and the cost of Office with Frontpage to $200. This would yield a total cost of $210 compared to the current cost of $1,000 and unlock $1000-$210 or $790 of purchasing power per PC. Such an amount could then be dedicated to new innovations, whether they be hardware or software. This could include video editing software, on line storage services, a portable laptop computer rather than a desktop, a DSL router, flat panel display, color printer, wireless internet access and many products not yet conceived. Another popular choice might be an annual support agreement with companies supporting competing systems such as Linux.
The potential new market created under this scenario, assuming only 100 million computer users, would be $790 times 100 million or $79 billion. What this also means is that many leading engineers at large technology firms, including Microsoft, would probably resign to start there own companies. It should be clear that the real risk to breaking up Microsoft would not be an economic decline but rather strong economic growth and the return of inflation as the Federal Reserve aggressively raises interest rates to cool an overheated economy.
Microsoft also wants us to believe that consumers will be harmed and confused by non-compatible product choices yet they do not mention that the Internet did not begin accelerating until 1996. Those problems that existed prior to 1996 are now resolved in the back office at the server level by leading web sites and data farm companies including Exodus Communications. One can also look to new handheld devices including the Palm Organizer to see that a similar simplification would occur.
What Microsoft is really battling is not the DOJ but rather the free market forces of the Internet itself and this is why the company should be broken into three, rather than two, companies. Only by separating the Internet Browser and MSN from the Office Suite of Applications and Windows Operating System will competition be successfully restored. Microsoft's ability to force a certain type of Internet access from specific products, whether from an operating system or suite of applications, must be eliminated for at least 5 years.. The company should also be required to divest itself from transaction processing, including WebMD and Checkfree for reasons outlined in a February 2000 press release available in the archive at www.billparish.com.
Most remarkable about the Department of Justice case is the publicly stated concern regarding not wanting to hurt Microsoft's stock price even though more than half the stock is still held by management and employees and the company is effectively running a financial pyramid like Ponzi scheme that is pilfering the public retirement system (see Financial Pyramid Summary in Archive at www.billparish.com). The DOJ has also failed to disclose to the American public that the company no longer pays any federal income tax on current income due to this brilliant financial pyramid scheme in which 75 percent of employees wages are paid with stock certificates printed on a photo copy machine in the back office rather than being paid in cash wages. Stock options are an excellent benefit for small and mid sized companies yet there use has been corrupted by Microsoft.
It is not unusual for large firms to not pay much in income tax due to various loopholes and many would applaud these firms due to the jobs created. These companies are paying there employees real cash wages while Microsoft is simply printing stock certificates on a photo copy machine. Last week Steve Ballmer announced that 70 million new shares would be issued to employees with an exercise price of $66 per share. With the stock now at $74 that would imply a cost of $560 million and the Chief Financial Officer, John O'Connor, publicly stated that these new shares would have a "de minimus" impact on earnings. De minimus is of course Latin and means negligible. This is remarkable statement for a Chief Financial Officer of a publicly traded company regulated by the SEC.
Also not disclosed is Microsoft's influence on the media, including supposedly independent wire services such as Reuters, who now has strategic agreements with Microsoft and plans to standardize on Windows 2000. Reuters owns the after hours trading system known as Instinet and benefits greatly as trading volumes increase. This effectively makes Reuters a market maker in Microsoft stock. This morning Reuters issued three highly favorable stories regarding Microsoft within a span of 15 minutes prior to the market opening. Sadly, most Internet readers do not know the extent of Reuters relationship with Microsoft and still read Reuters press releases as if they were high quality and independent sources.
Perhaps it is time that the SEC open a file on Reuters, a UK based company traded on the Nasdaq with gross annual revenues of $4.9 billion and a market value of its stock of $24 billion according to the profile at yahoo.com, ticker rtrsy. At a minimum, all Reuters financial press releases should disclose that they are a market maker in Microsoft stock. This disclosure will add value to other mainstream news sources that are more independent including Bloomberg, AP, USA Today and the New York Times.
Splitting Microsoft into three companies will also help resolve consumer's on-line privacy concerns. These concerns are slowing the development of key on-line services such as Internet based bill payment. Microsoft is now able to leverage bartering agreements by exchanging advertising on MSN for the right to sensitive consumer information such as health records in exchange for prescription subsidies. This is what was done with WebMD and Microsoft is now WebMD's largest shareholder and positioned to dominate Internet based health care.
Perhaps Pam Edstrom, Microsoft's brilliant public relations director, said it best when asked what a good public relations firm can do for you. At a breakfast speech in Portland, Oregon in 1999 she replied, "guarantee you 6 pages in the old testament." By that she meant that she could effectively rewrite the Bible and dedicate 6 pages to your firm. It is this same level of confidence that probably encouraged Microsoft to enter the options market and aggressively bet that its stock would not decline below $78. With the stock's recent decline they have incurred massive losses not yet disclosed to the public. What the public does also not realize is that they are prohibited from buying back there own stock due to the use of the widely criticized "pooling" technique for acquisitions, as disclosed in the New York Times on 4/30/2000.
For this reason it is very important for the DOJ, free market advocates and the media to tell the American people clear things they can understand, for example, the price of Microsoft Windows and Office in relation to other technology products in addition to the fact that Microsoft no longer pays federal income tax based upon current earnings. Highlighting Microsoft's influence on various media organizations, exchange of detailed health care records for advertising on MSN, etc. should also be disclosed.
With Microsoft's brilliant public relations machine trying to rewrite the Old Testament, a much more aggressive public relations policy on behalf of the DOJ, free market advocates and its competitors is desperately needed.
An extended study regarding Microsoft's financial practices is available at http://www.billparish.com/msftfraudfacts.html and explains how Microsoft is pilfering the retirement system just as Charles Keating plundered the Savings and Loan System. The upcoming book, "Microsoft's Class War On America," will also summarize many yet to be disclosed areas regarding what some may consider the greatest financial fraud this century.
Bill Parish, President of Parish & Company, has been quoted extensively in a variety of major news publications, as well as The Tech Review, a Canadian investment journal, Bild, the largest paper in Germany, The Fleet Street Letter, a prestigious investment publication, The Spotlight, a conservative newspaper and free market advocate and The Independent, a major British newspaper. He has been interviewed by the New York Times, Infoworld, ZD Net, Wall Street Journal, Newsweek and USA Today in addition to appearing on ABC news and various radio stations including KUIK in Portland, KIRO in Seattle and Aspen Public Radio in Colorado.
Mr. Parish is a Registered Investment Advisor and former CPA providing fee based investment management services in addition to assisting companies structure their 401k plans to meet their fiduciary obligations and provide top quality well diversified investment choices at the lowest cost. Please consider hiring Bill to be a permanent member of your 401K committee and thereby utilize the services of a top investment professional in order to clearly communicate your commitment to managing your employeesÂ’ 401K plan or what can now be called there "Mutual Savings Bank."