SOCIAL TOPICS (Archive): EMERGING ISSUES

Published, March 1999

       The following two articles offer a glimpse as to how socially responsive investors could come to opposite conclusions about the merits of investing in Microsoft. Microsoft is a core holding in many of our clients’ portfolios.

       Microsoft: the firm we all love to hate. We all know why. It’s a predatory monopolist. It’s big, a dancing elephant that’s killing all the little, and some not so little, creative creatures. Bill Gates is a nerdy guy who’s too rich, and never thought of giving away a dollar that wasn’t good marketing for Microsoft. My computer doesn’t work and it’s Windows’ fault. Microsoft squashed Apple, and Apple had a better product. The stock is outrageously priced, worth more than the GDP of all but a handful of countries, well over $400 billion. So what if it’s a great place to work and makes relatively benign products. It is ugly and in our face, something IBM never was.

       Microsoft’s future and ours turns on a complex issue: whether its operating system, Windows, is a natural monopoly. Natural monopoly? The nature of the product is such that each new unit of product costs less than the one before. If the product were not a monopoly, enormous social waste would result. An electric utility grid is a natural monopoly. A telephone system used to be one, but technology changed that. Society has usually wanted to regulate such beasts to eliminate price gouging and encourage new ideas, but regulation can be as stifling to innovation as the monopoly it regulates.

       The computer marketplace lusts for a standard and a standard setter. Computers have become complex beyond our wildest imaginings. We want user-friendly tools that work, and work together. The history of this industry shows that companies operating cooperatively ultimately don’t. Their self-interest erodes their cooperation. Only market share has compelled standard setting. In theory, having the best products has driven market share. IBM used to set the standard. It chose Microsoft to make its PC work and the rest is history: The tail now wags the dog.

       Microsoft’s dominance now sets the standard. Was it its predation that made this happen? Nobody made software developers abandon Apple for Microsoft. Nobody forced us to make Word and Excel the dominant products of their type. That is, nobody other than the marketplace. Us. If we have any problem at all with Windows, it is that it is not simple and robust enough. Microsoft is not yet enough of a standard setter. We want lowest cost. We want the latest. Microsoft gives it, or most of it, to us. No other operating system, Linux included, will make what I need to do this moment, and tomorrow, possible on my PC.

       Microsoft wants us to know that what some define as a predatory practice, like incorporating a superior browser, is Microsoft’s notion of making its integrated software more useful, standardized and reliable. Microsoft continues to innovate at a rapid rate and its products are cheap. It leads a huge industry that is an engine of our economy. As long as this remains true, it is going to be hard and even undesirable to do more than slap its predatory hand. Microsoft will have generally acted in our public interest and it is an acceptable social investment. But once its dance stifles innovation or gouges us at the cash register, it will be a company on the wrong side.

       Why did the chicken cross the road? Microsoft thought it wanted to go there today. An admittedly bad joke, but for the hundreds of millions of people who rely on Microsoft software every day to do their jobs, run their businesses, or communicate via the Internet, it has a certain poignancy.

       Microsoft has monopolistic control of key software used worldwide: more than 90 percent market share of personal computer (PC) operating systems, 80 percent of word processing software, and 93 percent of office software suite bundles. The company’s profitability alone suggests monopoly power. Net profit margins were near 40 percent at the end of 1998, an extraordinary figure even in a booming market. What made this happen? Skill? Luck? Is it because Microsoft gives consumers what they want, as Microsoft’s ads croon, “Where do you want to go today?” Or is it, as some critics charge, due to Microsoft’s alleged criminal business practices that attempt to expand its monopoly position in one market, Windows, and extend it to Web browsers and more, in order to gain a “One World Microsoft”?

       Regardless, social investors should be alarmed. Microsoft is not just another monopolist and computer technology is not just another industry. Microsoft’s dominance in PC operating systems threatens the future of the Internet as the next frontier of democratic communication and commerce. The company says no one can control the Internet. But is that just more Microsoft marketing spin to deflect prosecution or public outcry? Market power can also become political power.

       Predatory tactics stifle innovation. Microsoft’s “vaporware” tactic — promising forthcoming products in response to a competitor’s announced innovation, is a prime example. Unlike the competitor’s product, which is generally ready for shipment when introduced, vaporware is promised in the near-term, but may take years to be delivered. Sales of competitors’ products suffer, as consumers await delivery from Microsoft. The Software Publishers Association (SPA) accuses Microsoft of participating in a number of anti-competitive practices in an attempt to gain monopoly control of the server market with its Windows NT operating system. SPA’s charges include: vaporware announcements, use of its power to control technical standards and specifications, and predatory pricing. Eventually the competition is choked out and Microsoft is then free to raise its prices. U.S. consumer groups, led by the Consumer Federation of America, claim Microsoft has overcharged consumers by $10 billion.

       Depending on the outcome of Justice’s antitrust case, the federal government has a number of options for dismantling Microsoft’s control of the future of computing, electronic commerce, and the Internet. The company’s operating systems business could be turned into a regulated public utility. A government-sponsored, independent standards group for computer interfaces could be established, by which Microsoft would have to abide. Other potential remedies include breaking up Microsoft à la AT&T, fining Microsoft for any crimes against its competitors and consumers, or forcing it to refund its monopoly profits to consumers.

       We do have choices. Many concerned individuals believe that Apple, for example, offers reasonable alternatives to many Microsoft products. Unfortunately, for investors the alternatives are less clear. Where do you want to go today?