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Few civil trials have captured the public's attention like Microsoft's battle with the Justice Dept. Not many spectacles in the world of business are more exciting than watching two Goliaths go at each other. That's why the eyes of the world were on Judge Thomas Penfield Jackson on Apr. 3 as he issued his much anticipated antitrust ruling against Microsoft. Watching from the front row, so to speak, were the company's shareholders. In heavy trading, the stock lost 14.5% of its value.
Chances are, however, that most of these spectators are missing the real action. While there is a remote possibility that the judge might order a breakup of Microsoft, the better bet is that any punishment will be in the form of restrictions on the way Microsoft does business. While that is certainly important, by the time the punishment goes into effect, it could be rendered moot by the changing landscape of computing. Indeed, history may judge that the antitrust suit's real impact was in distracting Microsoft's top executives -- as their business was stolen away by new entrants. Microsoft's real battle, then, is not in the courtroom, but in the business trenches, and it's a fight the company could well lose. So instead of compulsively watching every detail of the legal proceedings, Microsoft investors should do the following:
-- Take a look at Transmeta by reading the Jan. 19 press release from the private Silicon Valley company. That announcement made a small ripple in the financial press but quickly disappeared in the hubbub over the launch of Windows 2000. Transmeta has designed a microprocessor that is especially suited for products such as cell phones, laptops, and handheld computers. What makes Transmeta's chip so special is that it uses software to do a lot of the work that Intel's chips do now, and so Transmeta's can be smaller, cheaper, and use far less battery power.
Maybe Transmeta won't hit it big, but what's important here for anyone with a stake in Microsoft is that this startup has found a new way to build the information appliances we've heard so much about. It may be only a matter of months before gizmos such as Web tablets and extremely cheap mobile phones become ubiquitous, thanks to chips such as those designed by Transmeta.
What is Microsoft doing to prepare for this future? A lot, according to its press releases. The company recently announced a partnership with Qualcomm (QCOM) for a new wireless phone design based on Microsoft software, and it continues to push Windows CE as an alternative to the pervasive Palm operating system for handheld computers. But don't believe the hype. The jury is still out on the new wireless protocol, and Windows CE devices have been battered in the marketplace by Palm's more popular computers. Microsoft needs to revamp its strategy in this arena for its operating system to continue to rule computing.
-- Keep an eye on Linux. The initial wave of euphoria among Microsoft bashers has subsided, but Linux fever is far from dead. It's clear now that this free operating system won't replace Windows in all the personal computers on earth. But smart investors have known all along that the PC isn't the real battlefield. The network, as Oracle CEO Larry Ellison (among others) likes to point out, is the computer. He who controls the network controls the future of computing.
Traditionally, no one company has owned networking software. Networks tended to run on a hodgepodge of operating systems, from Novell's (NOVL) NetWare to multiple variants of the Unix operating system, including Compaq's Tru64 and Sun's Solaris. Microsoft entered the networking space in 1992, when it launched NT, and it has steadily grabbed market share so that it now owns the biggest piece of the server operating system pie (about 35% according to International Data Corp. figures).
Still, much of NT's successes are at the low end of the network world. That was supposed to change this February, when the company launched Windows 2000. The new operating system was to challenge incumbent high-end Unix operating systems and let Microsoft dominate networks in the same way it dominates PCs.
That was before Linux exploded onto the scene, however. Unlike Microsoft's Windows, the code for which is proprietary and kept hidden from customers, Linux has open-source code that can be changed by anyone who wants to, as long as they don't hide their changes. Because of the flexibility that open-source code allows, Linux has quickly grown from a graduate student's project into an operating system that works well as an overseer of a network of servers. If a company needs to tinker with Windows 2000 to get it to work right with its system, it needs to get the changes made by programmers in Redmond. If a change is needed in Linux, in-house programmers can do it.
In 1999, Linux claimed one-third of the server operating system market, according to IDC. It could surpass Windows as the leading server operating system this year if its growth rate holds up. And losing momentum in this marketplace could prove devastating to Microsoft in the long run.
-- Watch Microsoft's share price. This is one thing you can always count on investors to do, of course. Besides the effect on your portfolio, there's another reason to fret a dramatic drop in Microsoft's stock: It will hamper Microsoft's ability to hire and retain top-notch employees. "Microsoft's culture is built on the myth that its stock price will perpetually climb," says Linux advocate and programmer Eric Raymond. "When the stock starts to fall, it takes the air out of its recruiting machine, and it will be a lot more difficult to attract the brightest programmers." (That assumes, of course, that the stock doesn't snap back soon.)
And if anyone needs loads of bright programmers, Microsoft does. The company is built around a culture of intelligence, with honor and riches bestowed on some of the smartest people in the country. And all those smart people have repaid Papa Gates: Although Windows doesn't get much credit from most of its frustrated users, any programmer will tell you that Windows is a monumental piece of engineering. Although it's big, bulky, slow, and prone to crash, no other operating system can work with so many pieces of hardware and so many software applications. The fact that one company was able to manage such an enormous programming project (Windows 2000 has more than 40 million lines of code) speaks volumes about the collective intelligence of the 10,000 programmers employed there.
Microsoft's challenge, however, is much greater than the one facing Windows 2000. The company has to compete on the network front, the Internet front, the Web appliance front, the cell-phone front, the applications front -- and on PCs, too. It's going to take a lot of smart programmers to win all those battles. Maybe more of them than Microsoft can ultimately afford, if the stock slide occasioned by Judge Jackson's decision becomes a permanent condition.
Sam Jaffe covers investing for Business Week Online
Copyright 2000 , by The McGraw-Hill Companies Inc. All rights reserved.
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