Money, Microsoft, and Fear
April 2000

There's an old joke about companies that have very high market valuations along with mediocre products. "That's okay, the stock itself is the *real* product!" For about a decade, Microsoft's stock has made a relatively steady climb up an ever-steeper exponential curve. And as any scientist will tell you, you can't keep doing that forever without sooner or later "hitting the rail". Sooner or later you encounter natural barriers or obstacles, laws of nature or economics or physics that make such continued growth an unrealistic and even self-defeating trend.

Microsoft's stock growth has set a new standard of high expectations in the financial markets. The marginal cost of duplicating the next unit of software is near-zero (the cost of pressing a CD or permitting a download). Therefore, holding a set of key software monopolies such as a mass-market operating system and mass-market desktop suite is essentially a license to print money. Say what you want about Microsoft's quality-control (or non-existent quality), they sure are good at *quantity* control. Microsoft has never had problems with mass-production of its products, even in the pre-Internet days. Knowing this, the financial markets have consistently bid up Microsoft stock well ahead of the value of competitors as well as non-competing makers of physical products.

However, nature seems to have a knack for restoring order... in other words, sooner or later "you have to pay the piper." Microsoft has known for years -- another of their clever set of non-technology "core competencies" -- that the real driver of stock price is not the general public, but rather, the stock analysts, the pension fund managers, and other major holders of large quantities of securities. As with OS preloads, 90% of the action takes place in back rooms, smoke-filled meetings, or globe-encircling conference calls. Just as only 10% of operating system sales occur through the retail channels, roughly 10% of stock price dependence is based on public opinion. The other 90% is based on the opinions of the "experts" who hold the large blocks of securities and investment portfolios. These people are not paid to pick the company with the best products, but rather the company with the best stock trends. Which means that as soon as the certainty of Microsoft's monopoly evaporated, so did the certainty of Microsoft's continued exponential stock-price curve. And that is the key to why the price of Microsoft stock is suddenly at a 12-month low, only weeks after a 12-month high. The fund managers and big-money professionals are no longer willing to blindly park their money in the Microsoft pool, knowing that monopoly profits are inevitable. They are not so inevitable any more.

This also means that all the cute, self-effacing commercials in the world are not going to boost the price of Microsoft stock. Trying to use public opinion as a lever to prop up the value of MS stock is going to be about as successful as trying to catch a tidal wave in a teacup. The sudden downdrafts in the overall high-tech marketplace are temporary, because companies not holding monopolies don't have much to lose. Removing money from those bets is somewhat illogical. However, the huge volumes of stockholder retreats from Microsoft are reasonable and intelligent. The question thus becomes "How well can your portfolio weather the current storm?" That depends on how much shelter you have taken in Microsoft stock.

Most recent revision: April 15, 2000
Copyright © 2000, Tom Nadeau
All Rights Reserved.