Microsoft: Seen Solid in Long-Term
Microsoft: Seen Solid in Long-Term
By Hal Plotkin
Silicon Valley Correspondent
Several leading industry analysts say Microsoft Corp.’s beaten down stock remains by far the best long-term bet in the crucial operating system market despite this week’s good news for Linux and the ongoing anti-trust case against the company.
“You’d be crazy not to own stock in it,” says Chris La Tocq, an analyst at the Gartner Group, based in San Jose. “Even in a post break-up environment Microsoft would be able to find the leverage it needs.”
On Tuesday, PC maker Gateway Inc. {GTW} announced it would use chips from Santa Clara-based Transmeta Corp., an Intel Corp.{INTC} rival, along with Transmeta’s Mobile Linux operating system, to power the next generation of low-cost Internet access appliances it is developing in partnership with America Online Inc. {AOL}
The news was seen by some as another indication Microsoft may be in danger of losing its hold on the crucial operating system market to Linux, the free rival “open-source” operating system that is supported and serviced for a fee by companies such as Red Hat Inc. {RHAT} and Caldera Systems Inc. {CALD}, among others.
Worries about the rise of Linux and, more importantly, fallout from Judge Jackson’s pending anti-trust ruling, have sent Microsoft’s stock reeling, leading to a loss of nearly $300 billion in market capitalization in recent weeks.
Although some financial analysts recently downgraded Microsoft’s stock on concerns about the company’s worsening legal woes, several leading industry analysts who don’t participate in the securities industry say investors are making a big mistake to bet against Microsoft at this point.
The industry analysts are careful to avoid making predications about how Microsoft’s stock may fare over the short term as investors respond to news about developments in the anti-trust case over the next few weeks.
But they say several factors leave them very confident about Microsoft’s long-term prospects, particularly in comparison to rival firms pushing the free Linux operating system. The confidence is not dimmed, most of them say, by fears about the impact of the proposed breakup.
The industry analysts note that Microsoft continues to hold on to a huge lead in key software application markets and has a proprietary business model that remains considerably more profitable than anything yet developed by any Linux firm, which must make their money selling service and support, rather than software.
“The Linux companies are gaining some momentum,” says William Epifanio II, an analyst at JP Morgan, based in New York. “But they’re not going to be the next Microsoft. Investors are likely to put a multiple on those stocks that is commensurate with services companies, not a high-margin licensing company.”
In addition, there are questions about whether a majority of mobile wireless Internet applications might eventually turn out to be voice-activated, a development that could make any early Linux wins in that market irrelevant over the long run.
Microsoft currently controls 94 percent of the market for both word processing and spreadsheet applications, for example, and fully 80 percent of the market for personal database software.
“That’s not going to change,” says Dan Kusnetzky, vice president of system software research at International Data Corp., based in Framingham, Mass. “The world is not going to change overnight no matter what happens in court.”
Kusnetzky says Microsoft will eventually deliver more value to shareholders if the company is broken up despite protestations to the contrary by Microsoft founder Bill Gates and other senior Microsoft executives.
“The history of what happened to AT&T and Standard Oil is relevant,” he says. “Those stocks were worth a lot more a few short years after their break-ups.”
La Tocq, of the Gartner Group, says the timing is actually ideal for a highly profitable break-up of Microsoft. He says the currently contemplated government plan will lead to the creation of two market-leading platforms that can be used to dominate both established desktop and emerging online software application markets.
Under the government’s plan one Microsoft company would still have the Windows operating system, which is currently used on more than 87 percent of all desktop computers.
The other company would own Microsoft’s Internet Explorer web browser, which is expected to become a platform for the delivery of Microsoft’s next-generation web-based software applications and services.
“That would be a big opportunity for Microsoft,” says Seamus McAteer, an analyst at Jupiter Communications, based in San Francisco, California. “[Microsoft’s] Internet Explorer could become the real platform running inside Linux to give the same basic functionality as Windows.”
“All of our models indicate shareholders would do very well after a break-up,” agrees Rob Enderle, vice president of the Giga Information Group, based in Santa Clara, California.
“In fact, if the company doesn’t break up it would probably be nibbled to death over time by smaller, more focused competitors. It makes a lot of sense for Microsoft to think about how they could do better as two or three smaller, more nimble companies,” Enderle adds.
Enderle puts only one caveat on his expectation that Microsoft will thrive after a breakup, if one does in fact eventually take place.
“Microsoft’s management has to believe it can work,” he says. “If Bill Gates really believes a breakup will hurt the company, he’s in a position to make that happen.”
Epifanio at JP Morgan also likes Microsoft’s stock right now – but for very different reasons.
He says the proposed break-up of the company would be an absolute disaster for shareholders and could even cripple the entire technology industry.
But Epifanio nonetheless still has a “buy” rating on the stock based, he says, on his belief the plan to break Microsoft up will be overturned during what is expected to be a lengthy appeals process.
“The restrictions the government wants to apply to Microsoft are onerous and totally unworkable,” says Epifanio, a former senior software company executive. “If the government succeeds Microsoft’s operating system business will be worth almost nothing.”
Epifanio says several features of the government’s break-up plan, such as requiring Microsoft to support different versions of its operating system and forcing it to reveal formerly secret details about how its software works, would put Microsoft at a severe competitive disadvantage.
“I just don’t think it’s going to happen,” he says. “Anyone who knows anything about how the software industry works will see that this is a misguided proposal that is horrible for consumers and which manifests a clear lack of understanding of the damage that would be done if it were ever implemented.”
“Microsoft is a cheap, screaming bargain right now,” he says. “It’s not a good buy if you believe the company will be broken up. But I don’t believe the breakup proposal will survive the appeals process. It’s just too illogical.”
In the meantime, several other analysts say it would be easy for investors to read too much into this week’s announcement that Gateway Corporation will be using the Linux operating system in its forthcoming Internet appliances.
There have been several other recent indications that many makers of next-generation Internet-enabled handheld wireless devices also plan to bypass Microsoft’s mobile operating system in favor of Linux or their own proprietary operating systems.
Left unresolved, however, is the question of how popular these new Internet access devices will prove to be given their technical limitations and the momentum behind voice activated mobile Internet access services being pioneered by firms such as Mountain View, California-based Tellme Networks Inc, which recently garnered a $60 million dollar investment from AT&T Corporation {T} in exchange for a minority share of the company.
Tellme’s system lets consumers use any kind of telephone and their own voice to request the same kind of information that is slated to be provided on mobile, wireless Internet access devices.
“I’m not sure if anyone is going to be able to design anything that good for a two-inch screen,” says Simon Yates, an analyst at Forrester Research, based in Cambridge, Massachusetts. “If there was a voice-activiated service that can give me the same information I know I’d certainly use it. There’s a lot of validity to what the Tellme folks are doing.”
Yates says no one can be certain about what might happen to Microsoft share values if the company is broken up. But he agrees a properly managed breakup could bring shareholders considerable benefits.
“A Microsoft applications company could easily put out Linux [compatible] versions of its applications,” he says. “It would put the folks selling Linux applications out of business on day one.”
Like the other industry analysts, Yates says it’s anyone’s guess what will happen to Microsoft’s stock over the next six months.
“Most investors these days don’t seem to be thinking past six months,” he says. “But from a technical standpoint, the breakup of Microsoft could be very beneficial.”
