November 28, 2001 6:00 am Pacific Time

SOURCE:  Parish & Company. © Copyright 2001  The purpose of this report is to help generate a dialogue regarding this most remarkable situation.   I was the first to disclose how Microsoft's scheme works, emulated by Enron, and specifically how Microsoft now pays zero federal income tax.  This included detailed discussions with leading reporters at the NY Times, Wall St. Journal  and other publications and literally training them how to analyze the financial statements in a way that unlocks the scheme.  Most were shocked by my analysis and remarkably have still not provided attribution to my work and instead are themselves on C-SPAN and other leading forums publicly plagiarizing the work and violating the most basic ethical guideline of journalism, that is, citing your sources.  This is frustrating because it makes it hard for me to participate in the reform dialogue.  Please do first examine the following report for valuable background information: http://www.billparish.com/msftfraudfacts.html  Please also send any inquiries, comments, suggestions and requests to quote this material to “little bill” at bill@billparish.com

The Billparish.com Report: Understanding Microsoft’s Circles of Influence, Enron's Collapse and a Brilliant Financial Pyramid Scheme

PORTLAND, Ore., November 28, 2001  Nurses, teachers, engineers, dentists, journalists, construction workers, dishwashers, investment advisors and even President Bush himself are all now struggling to understand powerful forces at work in our key economic, media and political institutions and the real story behind Enron's collapse.

Similar forces are also impacting England, Germany and France.  In each case the traditional democratic structure based upon executive, legislative and judicial branches is being challenged.

The business climate is also becoming somewhat dysfunctional with many leading companies now unable to adequately fund employee health benefits, retain competent and productive employees and pay adequate returns to stockholders.

Perhaps the most visible component of the “new economy” is now a powerful new informal fourth branch of government. This new branch is quietly redefining circles of influence at the pentagon and treasury departments in addition to industries ranging from health care and the media to education and energy.  I have even been told that Microsoft has now had my web site blocked in China where the company is making large investments in Chinese government controlled telecom businesses.

On November 7, 2001, one day after the Department of Justice settled its anti-trust case with Microsoft, the company announced that Paul Allen’s Charter Communications, the nations fourth largest cable company, had selected the “Microsoft TV Software Platform for 1 million Digital Set-Top boxes.”

Allen is Microsoft’s second largest shareholder yet the interaction of his various companies with Microsoft was not addressed during the department of justice anti-trust trial.  This report will clearly document many of these interactions including his interests in organizations ranging from Ticketmaster to Charter Communications.

We will see how Allen is skillfully using many of his businesses, including the Portland Trailblazers basketball team, to undermine AT&T broadband in Microsoft’s battle with AOL Time Warner for control of the nations largest cable system. AT&T Broadband developed into the nations largest cable system via mergers, in particular the purchase of TCI Cable.

Microsoft has already crippled Qwest, formerly US West, with support costs due to viruses such as the “red code virus” and has now formally taken over Qwest’s high speed DSL access and renamed it MSN Broadband.  Microsoft also has significant ownership interests in other cable systems including Rogers Cable of Canada and Cox Cable based here in the U.S.  Each is being skillfully used in a coordinated effort to proliferate its monopoly.

These issues should be particularly germane to the current deliberations regarding the appropriateness of the department of justice settlement.

New Circles of Influence

The billparish.com report will identify many of Microsoft’s new circles of influence and introduce several recommendations for helping our existing institutions and you more successfully interact with the company and lay a foundation for more genuine economic prosperity and national security. We will all benefit, including Microsoft, by helping the company return to a more win/win oriented philosophy.

Microsoft has clearly entered a phase of self destructive behavior that began with the “tissue paper campaign” in 1995.  This report will document this campaign for the first time.

When reading this report, please do note that for years I was one of Microsoft’s strongest supporters, having converted thousands of people from various operating platforms to Windows.  I also taught very popular classes at a local university including ‘Getting the Most from Windows,” “Organizational Planning Using Excel,” and “Effective Presentations Using Powerpoint.”  This support of Microsoft was prior to the complete erosion of product quality triggered by the tissue paper campaign in 1995.

My other experience includes being a Certified Public Accountant for Arthur Andersen, senior analyst for a large bank, Peace Corp Volunteer in Paraguay South America, business planner for a large Japanese firm and now an independent investment advisor.  For additional details please refer to my resume posted on this web site.

My primary objection to Microsoft's financial practices began in early 1998 when I documented their erection of an illegal financial pyramid scheme based upon pervasive financial deception.  This scheme first destabilized the global economy in late 1998.  It then destabilized the US stock market and is now collapsing the US economy itself.

While many companies, including Waste Management and Enron, have been closely scrutinized and reprimanded by the SEC, no formal actions have been launched against Microsoft.  This is not meant to be a criticism of the SEC but rather a comment to show the level of difficulty in holding Microsoft accountable.

Most government officials and political leaders are simply afraid to take an action against Microsoft due to the company's quiet and powerful influence.

Microsoft Financial Recap

Economic Power Used by Microsoft’s Founders (Estimate from Forbes 2001 List)
Bill Gates Microsoft stock -$65 per share                          $36.6 billion
Gates Non Microsoft stock                                                 17.4 billion
Paul Allen’s Microsoft stock                                                9.6 billion
Allen’s Non Microsoft stock                                              18.6 billion
Gates Foundation Microsoft stock                                      24.8 billion
Cash on Hand at Microsoft                                                 39.5 billion
   Total (Excludes partnerships, etc.)                           $146.5 billion

Overall Ownership Structure at Microsoft
Shares of Microsoft stock issued, including options                6 billion
Total Microsoft stock value - $65 per share                      $390.0 billion
Less Gates and Allen share                                                  46.2 billion
Remaining Value of Microsoft shares                              $343.8 billion
(Mostly public pensions, mutual funds linked to market indexes and other Microsoft employees)

Key Performance Data for 2 Year Period Ending 6/30/2001
Reported net income                                                       $15 billion
Wages paid but not charged to earnings                          $22 billion
Actual Net income if wages fully charged                   Significant loss
Federal income tax paid                                                   “Zero”
Estimated Damage from Products (viruses, etc.)         >$10 billion
Legal judgments paid for product liability lawsuits         “Zero”

Pyramid Scheme Player Distribution
As with all pyramid schemes, it is important to get as close to tier 1 as possible.  From a practical standpoint, usually only tiers 1 and 2 will derive significant long-term economic rewards from such schemes.

Tier 1: Microsoft Founders, Gates and Allen
Tier 2: Executive management including Ballmer and others
Tier 3: Large actively managed mutual funds including Fidelity Magellan, etc.
Tier 4: Remaining Microsoft employees
Tier 5: Non Microsoft employee individual investors
Tier 6: Public (PERS) and private pensions indexed to S&P 500

Examining Microsoft Using Circles of Influence

A circle is a powerful image and as Emerson wrote it is repeated endlessly throughout nature.  To truly understand Microsoft’s influence on health care one need only gaze into the eyes of a nurse with 20 years of experience as she counsels a student resident physician on a possible approach to helping a patient admitted to an emergency room.

In the nurses eyes we can often witness a circle of knowledge and care colliding with the residents circle of confidence, fear and potential.  If the nurse and resident communicate well, great health care can be delivered. This is a tender balance predicated upon experience meeting potential and unfortunately today large numbers of qualified nurses are abandoning the profession.

We can see a similar situation at our existing legislative, judicial and executive institutions as they attempt to support injured businesses, schools and local governments in the equivalent of an emergency room with the Microsoft Corporation seizing the role of the student resident physician.

Microsoft Pyramid Collapses Enron and Hewlett Packard

Many of Microsoft’s circles of influence are now igniting self destructive behavior across a wide range of industries as these organizations compete for needed capital.  One recent example of this involvement is Microsoft's role in the collapse of the Enron Corporation, the nations largest natural gas distributor, thereby affecting most Americans?  Enron owns various public utilities, including PGE, the largest electric utility in Oregon.

Another recent example of self-destructive behavior is Hewlett Packard’s attempt to buy Compaq computer for $25 billion.  Although the Hewlett Packard founding families are opposing the merger, it is difficult to reach them, in particular Walter Hewlett.

When I called his foundation I was told that all communications go through a public relations firm in New York.  This is fascinating because this same firm is also representing Weyerhaeuser in its hostile takeover attempt of Willamette Industries and other companies doing takeovers.

The firms principal clearly told me that "You don't talk to Walter unless I decide so."  This would be decided after reviewing my web site which of course has various reports regarding pension fraud at Weyerhaeuser, etc.  It doesn't look like I'll be getting a call from Walter so if any of you out there know him, please do let him know I have been screened.  My reason for the call is to present a simple focused plan that could quickly and quietly end this ridiculous merger attempt which would be a disaster for shareholders.

Since all public corporations compete for the same pool of capital, investment dollars that were previously going to purchase Enron stock are now being re-allocated to other companies with Microsoft taking the largest share.  The same will be true for Hewlett Packard if the Compaq merger proceeds. We will follow this “circle of investment” to see how it works and how Microsoft’s pyramid scheme is structured so that Microsoft can pocket the proceeds resulting from these conflicts and unproductive mergers.

Enron’s CEO Kenneth Lay was one of George W. Bush’s strongest supporters.  Clearly, President Bush was betrayed by Enron as the company played a key role in creating an artificial power crisis in California, left investors with significant losses, wiped out many of its own employees retirement assets and has also disrupted the national economy.

Enron tried to replicate Microsoft’s financial engineering but failed to see how it was structured.  Microsoft can lose billions speculating on its own stock in the options market, as documented in a feature story in USA Today, yet this is barely news while Enron was toppled by much less significant events.  We will examine this circle of influence and see how it has collapsed Lucent, Xerox and other major US based corporations.

In addition to Enron, President Bush has also been betrayed due to the deceptive lobbying of one individual, Ralph Reed, and one group, the Citizens for a Sound Economy.  This circle of influence using Ralph Reed, a paid Microsoft lobbyist not disclosed to Bush when he formed his opinion on Microsoft, and the Citizens for a Sound Economy will be examined and we will see a major irony in that Microsoft is indeed primarily responsible for the current economic slowdown in the United States after already having destabilized the entire global economy.

Disguising Circles of Influence, Including Paul Allen’s Role

The billparish.com report will show how Microsoft is brilliantly using partnerships and other contractual based agreements to disguise its circles of influence.  These agreements include many of Paul Allen’s enterprises which have done a stellar job of covering Microsoft’s tracks.

Allen owns two professional sports franchises, the Seattle Seahawks football team and Portland Trailblazer basketball team, and both are being used in an attempt to gain control of the AT&T broadband cable system.  Paul Allen has indeed become the equivalent of an All-Pro blocker for Microsoft.

Using Bill Gates as Our Tour Guide

Our journey examining these circles of influence will be made while seated next to Bill Gates in the economic vehicle we call Microsoft, a company that has eroused intense positive and negative feelings. Political and corporate emotions intensify regarding any discussion of Microsoft, further compounded by mean spirited attacks on both Bill Gates and myself, "little bill."  We have never spoken directly but are instead communicating on the front pages of many leading publications.

You may love Bill Gates or consider him satan himself.  You are entitled to your opinion but let’s now focus on a civil conversation while driving in this vehicle we call Microsoft and define its foundation circles of influence and, more importantly, key steps that can be taken to bolster not only our key institutions but also lend more economic stability to Microsoft itself.

Pyramid schemes are inherently unstable as we will see when we examine Microsoft’s investment circle of influence.  Gates himself has aggressively reduced his ownership of Microsoft from 34 to 11 percent during the last few years.  Who could imagine that Microsoft's employees would be prepaying their own wages?  These are smart people from many leading universities.

My personal feeling toward Bill Gates is one of empathy. After all, he spent most of his youth playing computer games, barely attended college and has since been thrust totally unprepared into a position of power and influence of immense importance.  Before criticizing Gates you might ask yourself how you would perform in such a scenario, running a company more powerful and influential that all but a few nations.

When recently asked what he wished to be remembered for Gates replied his bridge playing.  I would tell him to consider that the word bridge can also function as a verb and that if he adopted a more win/win oriented strategy he could be remembered as a great human being and a national hero rather than a short-sighted financial criminal.

Bill Gates is in a physically, mentally and emotionally demanding role. We know President Bush’s medical history and this is important due to his influence as President.  A simple thing Bill Gates could do is disclose his own medical history.  This is important given his most unusual and well documented behavior ranging from his testimony in the department of justice trial to observations made in the landmark interview in the New Yorker magazine.   He may just be frustrated, as we might also be, yet due to these new circles of influence we are entitled to know his specific health history.

Although Bill Gates is a driven and ruthless competitor, he has also showed that he is often willing to do the right thing when given the opportunity.  I am therefore confident that, after examining this report, he will rethink a few of Microsoft’s key strategies and how they are impacting the average American.  Microsoft has already made many significant changes based upon observations made in previous reports.

Why Understanding Microsoft Is Important

Understanding these circles and raising a dialogue will not only improve the economic life around you, contribute to global peace and stability yet also provide more economic resources for your children’s educations and your own retirement.  We can all benefit by stabilizing the financial markets and thereby laying a foundation for a more successful economy and investment in the future.

You won’t need to be an accountant, economist or technology person to understand the billparish.com report.  All you will need is desire, an open mind and the ability to accept the notion that we all tell who we are, all day long, whether we are an individual or an organization.

The billparish.com report will include several specific recommendations, expanded regularly, for Microsoft, its competitors, the SEC, Federal Reserve, Department of Justice and ordinary citizens.  Theses recommendations are designed to both stimulate the economy and fairly treat Microsoft. Your comments would be most appreciated and, although copyrighted, this material may be used with written email authorization.  Please send such requests to bill@billparish.com.

Let's begin by examining a few basic financial facts and business strategies at Microsoft. You may be a construction worker or a nurse and not initially see how these apply to you yet please do read the entire document and I guarantee that you will see their significance. Please do also consider sending me your stories and reflections for possible inclusion in this report.

A. Key Facts and Basic Strategies at Microsoft

1) Microsoft employs 47,000 workers.

For comparison purposes Intel employs 80,000, Ford 345,000, Caterpillar 71,000, Verizons 260,000, IBM 316,000 and Hewlett Packard 88,000   A successful economy is dependent on creating quality jobs and Microsoft should be applauded for providing 47,000 jobs.

2) Microsoft is highly leveraged since it has issued 6 billion shares of stock, including options.

This means that when it comes time to distributing dividends, none are currently paid, and capital appreciation in the stock, these gains will be divided among 6 billion shareholders.  If the stock rises $1, the market value of the company increases $6 billion.

Microsoft is therefore a highly leveraged equity. Parish & Company refers to this as “reverse equity leverage” because too many shares have been issued.  This resulted from Microsoft aggressively championing the issuance of stock options to vendors and employees in lieu of cash compensation in addition to printing up new stock to pay for mergers.

3) The market value of Microsoft stock at its peak was $700 billion.

This value was greater than the gross national product of all but a few nations even though gross annual revenues were less than $25 billion.  Both Bill Gates and Paul Allen have been aggressively selling their Microsoft stock for years with Gates now owning only 11 percent of the company.

The largest Microsoft shareholders are now public pension plans that index to the Standard and Poors Index of the 500 largest U.S. based corporations, the S&P 500, of which Microsoft has often been the largest share of the index.  Each company's share of the index is based upon its total market value in relation to the total index market value.

What this means is that the biggest source of funds to purchase Microsoft stock is now taxes remitted to the government by individuals and businesses. The government then uses these tax receipts to buy Microsoft stock for public employee pension plans in order to pay future pension obligations.  We will closely examine this tax circle of influence and show that Microsoft has become an unofficial taxing authority.

This is a good investment strategy since stocks are an important part of any pension plan.  What is controversial is the “quantity” of Microsoft stock being purchased for public pensions based upon Microsoft's overall share of the Standard and Poors 500 Index.

4) Microsoft's pays zero federal income tax even though they earned $15 billion in net income for the two year period ending in June 2001.

Microsoft was able to completely escape federal income taxes due to a masterful and legal manipulation of the tax code which they are fighting desperately to not disclose to the public.  This includes claiming a tax deduction of $22 billion for wages for this same two-year period.  These wages were printed up as new stock certificates on a photo copy machine in the accounting office and passed out to employees who later cashed them in at their brokerage company.

Even though Microsoft took a full tax deduction for these stock option wages that were never paid in cash, none of this wage expense is reflected on its earnings statement.  This has grossly inflated Microsoft’s earnings and thereby created more demand for its stock.

Companies that pay wages in cash have no chance of competing with Microsoft.  Not only do they have less cash from paying real wages yet these cash wages are also charged against earnings and greatly reduce net income while at Microsoft net income is greatly inflated.  The net impact is a lot more investors buying Microsoft stock than alternative investments. This has also severely corrupted the financial reporting system.

Even non-public companies are greatly affected as they compete for financing to expand their businesses.  Imagine how much easier it would be to get a loan if you could remove 80 percent of your expense of doing business from the income statement?

This failure by Microsoft to show its entire wage expense has created what was originally defined as a “pyramid impact.” This circle of earnings manipulation will be documented. It also explains why at one point Microsoft represented 22 percent of the entire Nasdaq 100.  At the same time many investors were buying QQQ Nasdaq 100 index shares based on the belief that they were getting a diversified Nasdaq portfolio.

We will also see how this situation has ignited a merger wave in a variety of industries as traditional companies struggled to gain more interest in their stock values and technology companies struggled to avoid being collapsed into Microsoft's financial pyramid.

Interestingly, Bill Gates does officially oppose a lower capital gains tax.  Gates would be the biggest beneficiary of such a tax reduction.  He should be commended for this stance because he is smart enough to know that such a reduction would not encourage long-term investment unless it were linked to holding the investment several years. His mentor, Warren Buffett, has coached him well here.

5) Microsoft’s largest single customer is now the Pentagon and the largest individual shareholder of defense related securities is now Bill Gates.

The Windows operating system is now installed on key defense equipment ranging from aircraft carriers to missile systems.  It is not known how many Microsoft employees and contractors now work directly full time at the Pentagon.

Although a useful commercial operating system, Windows has also become a national security risk far greater than the recent anthrax threat since it allows users to run and imbed macros using a variety of programs that could enable a wide range of terrorist actions.  Disruptions created by these viruses have also ended the economic productivity boom so often referred to by Alan Greenspan.

Already Microsoft enabled electronic viruses including the "I Love You" virus have resulted in temporarily shutting down the defense department, White House and other key agencies in addition to resulting in a related multi-billion dollar economic cost.

To Microsoft's credit, the new XP system license agreement specifically states that it is not warranted with respect to nuclear related activities, perhaps further highlighting problems here.  This does seem odd, however, given that the Pentagon is its largest customer.

Bill Gates defense related investments now include Newport News Shipping, the largest producer of Navy Ships. Clearly, such ownership interests will further accelerate the use of Windows in key defense systems as it has already from a variety of his and Paul Allen’s other investments.  This is a beautiful tie-in related monopoly strategy to accelerate the use of Windows that should be reviewed by the FTC.

The FTC's most recent ruling involved two distillers who were denied a merger request due to the concern that one would corner the rum market.  Imagine the absurdity of this while at the same time the most abusive and pervasive monopoly ever conceived, crossing a wide range of industries, is derailing the economy.  These important government officials should not fear Microsoft.

6) Microsoft is now the largest and most powerful global media company and is engaged in a brutal media war with AOL Time Warner for control of AT&T Broadband and the nations cable system.

These two companies are now battling for position in order to either purchase or indirectly gain control of the AT&T Broadband Cable System.  The billparish.com report will examine each company's specific strategy.

This media battle for control of AT&T Broadband between Microsoft and AOL is causing a severe dumbing down in the quality of the business press here in the U.S.  It is almost silly as evidenced by Gerald Levin, a most average media executive, who recently featured himself on the cover of Fortune Magazine along with Bill Joy, legendary computer scientist from Sun Microsystems.  Fortune is now owned by AOL Time Warner where Levin is boss.

Microsoft is masterfully and quietly using Paul Allen in this endeavor as they have many times in the past.  It is quite remarkable the DOJ never even reviewed the significance of Paul Allen’s activities, Microsoft’s second largest shareholder.  Microsoft and Paul Allen controlled companies are now the largest advertiser for many important media outlets and control key Internet forums including Silicon Investor and ZD Net.

Even Yahoo appears to be now controlled by Microsoft advertising dollars as its message boards are filtered to result in a more pro Microsoft perspective.  Every month I input my name into the message board search at Yahoo to see if anyone is mentioning my work and it is truly startling how many filtering techniques Yahoo is now using to prevent news articles featuring my work, whether a link to a major publication, or directly to my site, from appearing on Yahoo.

Yahoo has the right to do this but the technique is the same one Paul Allen has used to dumb down other message boards including Silicon Investor and Raging Bull.  One might ask, why will Yahoo allow repeated aggressive slang and profanity but not allow links to a site with top quality information.  Hats off to Microsoft's public relations firm!  Perhaps this would be a useful activity for the SEC to monitor.

Since Microsoft has not paid any income tax on more than $20 billion in net profits over the last few years, this cash is available for aggressive advertising campaigns.  Can yahoo afford to turn down these cash advertising dollars from Microsoft?

Few investors realize that the majority of Microsoft’s cash balance has originated from the non-payment of federal income tax, employees prepaying their own wages via the exercise price on stock options and speculations on its own stock.  Most of this cash has not come from product sales.

In addition to MSNBC, Microsoft partners with and has a direct controlling influence on CNBC and Newsweek.  One need only visit www.cnbc.com or www.newsweek.com to see this influence.  Other barely disclosed significant partnerships include Reuters, NBC, CBS, Washington Post and Dow Jones Corporation.

This media influence was not discussed during the DOJ anti-trust trial and Reuters is being masterfully used as a brilliant PR vehicle for Microsoft without readers realizing that it is no longer an independent wire service.

7) George W. Bush was elected President by the Microsoft Corporation through the efforts of one paid Microsoft lobbyist, Ralph Reed, and one lobbying group, the Citizens for a Sound Economy.  Bush should, however, express no loyalty to Microsoft.

This report will examine how this occurred and you can decide for yourself whether the Bush administration was misled when it crafted its position on Microsoft.  My sincere belief is that Bush would change his stance on Microsoft if presented new facts.  On a long-term basis, this would be good for both Microsoft and the economy.

My hope is that George W. Bush will evolve into a Theodore Roosevelt like President and back down Microsoft.  Roosevelt, a Republican like Bush, was elected by the great monopolies of his time yet he also became later known as the great “trust buster” and these efforts helped seed the economic boom of the 1920’s.

8) Microsoft's primary tools for sustaining its Windows monopoly are the consulting divisions of large public accounting or CPA firms.

These include Deloitte and Touche, PricewaterhouseCoopers and Arthur Andersen.  These same firms audit the books for key government agencies and most large public pension plans even though the majority of their revenues come from consulting associated with installing Microsoft related products at these same government agencies.

These public accounting firms have also become dominating advertisers and primary sponsors in marquee business news outlets including the Nightly Business Report on PBS.  Some have even issued publicly traded stock for these divisions.

It is important to note that, although highly qualified, these accounting firms operate as consultants rather than engineers and therefore look for service intensive solutions rather than product intensive solutions, thereby allowing for greater billing fees.  This is quickly dumbing down the Internet and unnecessarily exposing users to viruses and significant support related costs.

It surprises me that Linux users have not organized and tried to work more closely with these CPA firms.  They do not seem to understand their significance in proliferating Microsoft's monopoly.  More importantly, these CPA firms like service intensive solutions which is an ideal fit for Linux.

These same accounting firms also dominate the key accounting industry lobbying group, the AICPA, and have prevented reforms to more adequately disclose key financial facts in annual reports.  This disclosure is not costly regulation but rather an essential ingredient to market integrity.

Conflicts of interest have also become rampant as perhaps best evidenced by a former Deloitte manager, Mike Brown, who later become Chief Financial Officer at Microsoft.

While CFO at Microsoft Brown also simultaneously boasted regarding his ability to influence accounting standards in addition to being Chairman of the Nasdaq Stock Exchange at the same time.  In baseball this might be called a “triple play.”  In the business world it represents a spectacular form of corruption.  When such corruption involves Microsoft it is somehow tolerated yet not allowed in other instances.
 

9) Microsoft uses a “distribution channel” management oriented business strategy that few people understand.

Major corporations continually fail to understand the significance of being pulled into Microsoft’s distribution channel via partnerships.  All pyramid schemes have such a mechanism to help co-opt others who would otherwise attack and diffuse the pyramid.

These partners, whether media or technology companies, fail to realize how Microsoft closely manages “channel profit.”  Whether you are a media company or a reseller, your profits are being managed and your days numbered.

A prominent recent example is Compaq Computer, once a great innovator but now simply a part of this channel with no hope for the growth in profits required to satisfy shareholders.  Compaq’s solution is to give up and merge with Hewlett Packard.

HP has also fallen into this “distribution channel” and therefore there is no business logic to explain this merger other than the reality that the executives at HP are unable to innovate independently of this channel and realize the growth shareholders expect.

These executives should be dismissed rather than be allowed to undertake such a merger because it will only compound rather than resolve their difficulty.  An aggressive service oriented Linux based strategy designed to compete with CPA firms consulting divisions should be undertaken by HP.  Step one would be to hire away 6 top rainmakers at these CPA firms and get them on board at HP.

A second example regarding how closely Microsoft manages its profit channel involves the release of the Xbox video game.  Like most such games they include significant music yet even though Microsoft will spend $500 million marketing this product, they have asked all the musicians involved to contribute their music for virtually free and provide no royalties or back end fees.  You would think that Bill Gates would be ashamed and humiliated by such actions.

This is the same strategy Paul Allen has used to erect an abusive monopoly at Ticketmaster.  Ticketmaster locked up arenas around the country, a clear monopoly, and then dictated terms to bands in addition to price gouging consumers on fees.  It is so bad that several bands, most notably the Irish band U-2, have boycotted Ticketmaster.  It is again startling that the department of justice did not review Paul Allen’s activities more closely, the second largest Microsoft shareholder.

The easiest way to view how Microsoft might look in the future is to examine what Paul Allen has done at Ticketmaster.

Understanding this relationship between Microsoft and Paul Allen’s various enterprises is very important.  What one sees is a consistent effort by Allen to do the heavy blocking to destabilize a company or industry followed by Microsoft marching in and claiming the spoils.

Allen is currently using a variety of techniques, including the Portland Trailblazers professional basketball team, to try and destabilize AT&T broadband in a similar effort. Once a quality team, the Trailblazers are now fondly known around the NBA as the “jail blazers.”  The most recent player added to the team comes from the Seattle Supersonics where one prominent community member, Starbucks Coffee founder Howard Schultz, even made a public statement saying it was inappropriate for this player to be on the team based upon his actions.  By being traded to Paul Allen’s trailblazers the player avoided having to register as a sex offender in the state of Washington.

One specific example of Allen's blocking for Microsoft is packaging the Trailblazer basketball games into a new sports channel and trying to force AT&T broadband to carry this new channel.  When AT&T declined, Allen took out numerous high profile public ads condemning AT&T’s actions, trying to force his way onto the cable system.

AT&T must pay fees to content providers like ESPN and once onto the network Allen will obviously use Ticketmaster like strategies that would ultimately force AT&T to sharply raise cable rates for all users.

At the same time Bill Gates is claiming that high speed internet and cable rates must come down.  The point here is that this is a brilliant coordinated business strategy that will result in artificially high prices and a dumbing down of content if left unchecked by the Department of Justice.

10)  The Bill Gates Foundation now has $24 billion in assets, primarily Microsoft stock, and is being skillfully used to leverage growth in the Windows monopoly by targeting schools and libraries with free software and preparing them to receive education content curriculum via the Encarta Education Server Product.

A key strategy here is installing Windows in public libraries and schools ranging from pre-school to leading public and private universities all around the world.  One need only compare this foundation to the two primary Hewlett and Packard founders foundations to see how masterfully Microsoft uses it as a business rather than a true foundation.

To Gates credit, his foundation is doing good things in a wide range of areas yet its primary focus should not be installing Windows.  Would it not be interesting for the DOJ to prohibit the foundation from activities regarding the installation of Windows related products.  Such contributions could be made by the company itself, Microsoft.

Let’s be honest, who can compete with a company contributing software to a foundation, taking a full tax deduction, and then that same foundation competing with other companies for the marquee software installation sites, i.e. schools and libraries.

This is compounded by the fact that there is almost no marginal cost, perhaps 50 cents for a blank cd, to create another copy of Windows whereas the costs are significant with respect to hardware, costs that are borne by Intel, IBM, HP and others.

To Microsoft’s credit, they do contribute cash for the purchase of computers in some cases but generally their product contributions have resulted in spiraling support costs and excessive hardware requirements at many of these same institutions.
 

11)  Although Bill Gates is firmly in control of his company on a product level, from a financial perspective, Microsoft is now being corrupted by a small group of analysts and money managers on Wall Street.  Gates needs to retake control and redefine his loyalties as belonging to customers, employees and all investors.

This is not a healthy situation and probably explains why Microsoft is involved is so many lobbying efforts that make no long-term sense, for example trying to prevent consumer privacy initiatives and prohibit more adequate disclosure regarding stock option wages.

These efforts seriously discredit Bill Gates and although he is taking significant steps, for example no longer speculating on company stock in the options markets, he needs to accelerate these changes.

Gates should take a lesson from his mentor, Warren Buffett, and think longer term and emphasize financial integrity.  This could also help immunize him from any potential lawsuits or the possibility of being incarcerated for securities fraud.

It astounds me that Microsoft could, as of April 2001, have lost $8 billion speculating on its own stock and magically on June 30, 2001 issue financial statements noting the obligations had been “settled” with no direct impact on its income statement nor qualification on its audit report issued by Deloitte and Touche. If an insider like Gates or Allen were involved in these speculations, it would clearly be fraud on their auditor's part to not disclose this.  Did Paul Allen purchase these put options?

Engineering should be applied to products, not finance.  Gates does have a great business and things could work out fine for Microsoft.  Even if Microsoft does fail, Gates might ask himself, why risk going down as a financial criminal and tarnishing your family name.  His recent comment on how he would like to be remembered is interesting.  He replied, I want to be remembered for my bridge playing skills.  He is clearly disappointed to realize that the promise of Microsoft and the Internet has become a virus plagued form of oppression.  My comment to him would be that he could fix the situation and become a beloved national hero.
 

Preliminary Billparish.com Recommendations

Recommendation 1: Require that AOL Time Warner, Microsoft and other major ISP’s maintain fully portable email addresses for individuals.  This already occurs with businesses linked to domain names and is simple from a technology standpoint.

The risk here is that as Microsoft and AOL expand into providing DSL and Cable service they could then require that all outgoing mail have an email address affiliated with their own servers.  This already occurs at AOL. For example, I should be able to have a bparish@msn.com address but use America Online as my ISP and still allow users who receive my email to see bparish@msn.com as the sender. Interestingly, this problem is now concentrated at AOL, not Microsoft, due to AOL's unique browser.

Recommendation 2:  Organize a series of Product Liability Lawsuits against Microsoft for costs incurred due to viruses such as the “I Love You” virus.   Also important will be to not allow Microsoft to lobby the Bush administration for new restrictions on such judgments under the guise of litigation reform.

Contrary to popular belief, the whole DOJ anti-trust circus has been a wonderful distraction for Microsoft from its core risk, product liability lawsuits.  Whether or not a monopoly is significant yet much more frightening for the company must be product liability lawsuits.  This is after all the main argument in the anti-trust trial, lack of product quality and excessive cost due to lack of competition. The damage here is real and quantifiable

McDonalds is sued for its coffee being too hot yet Microsoft can issue products that become virus magnets and cripple many organizations, in particular telecom companies, with support costs.  This is one area where the Linux group should aggressively organize if they are serious about competing with Microsoft. An ideal place would be slashdot.org where a coordinated legal action could be mounted and a law firm engaged to handle this activity.

Public and private organizations could also join forces on many of these product liability issues. In an age where tobacco companies can be sued even though health risks are clearly identified up front, why isn’t Microsoft being sued for releasing products that become virus magnets that have crippled many organizations with staggering direct and definable costs. Why haven't AT&T, Sprint and other telecom companies joined forced in such product liability legal action against Microsoft?

How about the Pentagon and White House being shut down or the USS Yorktown, a major aircraft carrier being towed back to port due to a Windows system failure.

Cisco Systems is being sued by some of its key customers for products released with known defects that did not meet expectations yet why has Microsoft not experienced similar actions?  What about the failed dot.com companies and the potential for defining and quantifying such losses for the benefit of shareholders.

This whole are of product liability lawsuits needs a jump start that could be provided by the states and since Microsoft has $40 billion in cash, these proceeds could be most helpful to many states entering a period of deficit spending.

Recommendation 3: Support a more aggressive Securities and Exchange Commission (SEC) that requires 3 percent of all financial fraud judgments in excess of $10 million be remitted to the Securities and Exchange Commission and dedicated to pursuing fraud actions.

This would be a most practical aspect of litigation reform given that law firms involved in such lawsuits now have no incentive to fix the system.  It is easy to understand why many high tech executives hold these firms in such contempt.  Shareholders never really benefit from such actions.

These law firms now simply monitor companies for large drops in their share prices, file a suit and then negotiate a settlement with management in which the law firm usually takes one third of the judgment leaving pennies per share to investors.

These aggressive law firms could in fact earn much higher revenues if they focused on product liability actions rather than generic fraud actions based upon stock drops.
 

Recommendation 4: Require Microsoft to divest itself of Frontpage since this product is being used on both the user and ISP ends to control standards on the Internet.  The Internet is being aggressively dumbed down and positioned to be a virus magnet due to this “end to end” strategy.

Even Internet users that do not use Frontpage and have no interest in using the product may now have frontpage files loaded up onto their web site directories.  Earthlink is a good example.  One might ask, why do web sites that do not use Frontpage have such files loads in their sub directories when they will not be used. The answer is that Microsoft is collapsing Earthlink with excessive storage and support costs, viruses and other security and storage issues created by Windows based products.

It is quite amazing how disruptive an inferior product like Frontpage can be.  Here in Portland one simple MIT alumni web site using frontpage disrupted the national server due to Frontpage creating a corrupt sub directory that could not be deleted until the MIT server was rebooted.  Once a simple competing product was used, no problem.  This again highlights how Microsoft is dumbing down the Internet with inferior products that attempt to generate an unneeded dependency on Microsoft.

Recommendation 5: Support two accounting reforms that will enable the new SEC Chairman, Harvey Pitt, to achieve his goal of more simplified disclosure and thereby lay down a foundation for more investor confidence.

When George Bush Sr. was elected president the first speech he gave was on the need to address difficulty in the Savings and Loan industry.  Bush later won a monumental bitter battle with the banking industry that resulted in the adoption of a simple yet powerful rule, FASB 115.

In one stroke this rule stabilized the entire banking system and helped lay a foundation for economic prosperity.  FASB 115 required that banks mark the value of their investment portfolios to their market value on a quarterly basis.

Too many problem investments were being disguised by arcane accounting rules and bankers had become sloppy, knowing they could inflate earnings by hiding the true performance of many fixed income investments.  Even today George Bush Sr. receives almost no credit for this remarkable accomplishment.

Our current president, George W. Bush, has a similar opportunity yet he may not yet see it.  Similar to banking in the early 1990’s, the technology industry is now mired in uncertainty regarding the quality of earnings, primarily due to issues regarding wages paid in stock options and merger accounting.  My advice to George W. is to trust the free market system and adopt a simple accounting mantra “mark to market.” Let the free market mark to market system work rather than be mired in accounting corruption that impairs investor confidence.

Regarding stock options, when employees exercise non qualified stock options and pay tax on the gain, for which the company receives a tax deduction because the IRS has ruled these gains are wages, the company should be required to charge an identical amount to its earnings as wage expense.

There is no uncertainty here, the market value is captured on the day of exercise and when the company hands over a share of stock to its employee and value has been squarely determined by the market.

Combining this treatment in addition to providing the current reconciliation of options outstanding on a quarterly basis, rather than the current annual basis, should be adequate.

This mark to market adjustment will reduce the incentive to print up wages via stock options knowing full well that the cost will never be charged to earnings.

Many convoluted and politicized arguments suggest other treatments, including the Black Scholes footnote disclosure, yet a genuine mark to market for options exercised will restore credibility to the system.

It is also imperative that any discussion regarding recognizing the cost of stock options on the income statement be determined on the day of exercise, not the day of grant.  The value of the stock awarded can only be clearly determined on the day of exercise and any other method would simply introduce a serious corruption to the financial system.

Recommendation 6: Require that the Federal Reserve consider stock option wages in determining wage inflation statistics, in particular the ECI (Employment Cost Index).  Failure to do this has introduced significant dysfunction into the financial system, even causing Boeing to leave Seattle. This has also crippled many other large industrial companies including Hewlett Packard.

Microsoft paid $22 billion in stock option wages for the two year period ending June 30, 2001 and none of these wages are reflected in the wage inflation statistics. This would be easy to do since these stock option wages are included on employees W-2 wage statements and taxed at ordinary income tax rates.

In areas like Seattle the failure to include these wages in the statistics creates labor conflicts involving workers whose wages are negotiated based upon wage inflation statistics.  A good example would be nurses and teachers.  They know they are falling behind but can’t figure out that the homes, education's and other services they are competing for are being bought with wages from others that are not in the inflation statistics.  It is surprising that major unions, including the Communications Workers of America, haven't moved on this issue.

It is also startling that Alan Greenspan and the Federal Reserve have not addressed this issue.  Equally surprising is the Federal Reserves often stated position that they do not jointly collaborate with the SEC on accounting issues because they are outside their domain. Imagine such an attitude from our central bankers?  A joint statement with Harvey Pitt from the SEC would lend enormous credibility to the financial system and increase investor confidence.

Recommendation 7:  Require that Microsoft, Bill Gates and Paul Allen disclose the combined value of cash payments and bartered product and support services provided to any company in which these amounts equal more than 5 percent of the entities total revenues or in situations in which Microsoft, Gates or Allen has an equity position exceeding 5 percent.  A related requirement would be that these amounts be disclosed for the top 50 radio, top 50 television and top 50 internet based media companies no matter what their ownership level prominently on these firms web sites.

A vibrant free market system is predicated on quality news outlets and already many readers are using the Internet to gain access to foreign media sources due to a loss of confidence in the quality and independence of news here in the U.S.

This even applies for general non news related queries. I recently tried to print the libretto for Bizet’s opera the Pearl Fishers on the Internet and went to askjeeves.com and a couple of other popular search sites.  Most references led me to Microsoft Encarta sites with generic info of little value.

After a few minutes of this I typed the same request in French at www.google.com and the first site had a wonderful recap with the entire libretto.  Encarta is a good product yet its prominence on askjeeves.com probably signals that the Askjeeves.com has become part of Microsoft’s “channel.”

This may seem trivial yet it is significant because Microsoft obviously has an agreement with Askjeeves.com and is aggressively directing users to Encarta sites for purposes of marketing MSN.  That is good business for Microsoft yet in an information society we could benefit from more “product labeling.”  This labeling itself will create endless opportunities for product innovation as vendors show unique competitive qualities.

We go to the grocery store and appreciate reading the ingredients on items such as soup. Should we not also expect more product disclosure on information related products and services in an information society?

It is this disclosure or labeling, the content ingredients, that will create an enormous opportunity for many smaller content based firms.  This was the lesson of Ralph Nader, who by requiring strict labeling standards, thereby allowed more product differentiation and the end result was a significant catalyst for economic growth.

Microsoft is fighting to devalue content on the Internet because resources here will ultimately compete with its Windows monopoly.

Preliminary Conclusion

Let's all lend a helping hand to the Microsoft Corporation so that we can get the economy back on track. Please do send your comments and suggestions to "little bill" at bill@billparish.com

Also refer to the following report for valuable and specific background financial information regarding many of these matters at Microsoft.  http://www.billparish.com/msftfraudfacts.html
 

Parish & Company is an independent fee based investment advisor to individuals, pensions and trusts based in Portland, Oregon.  No fees are accepted, either directly or indirectly, from any provider of investment products.  Your comments are most appreciated and please do visit my research archive.