Microsoft's run to glory seems unlikely to stop

Analysts worry about implications of government's role

Profits and precedents

The giant's future

April 29, 2000|By Stacey Hirsh | Stacey Hirsh,SUN STAFF

The government's recommendation to break up the world's largest software company may push stock prices down and could cause the company to lose some momentum, analysts said yesterday, but it is unlikely to hinder the long-term success of Microsoft Corp.

"I really don't think that the breakup would somehow create some massive reduction in earnings for Microsoft, and I don't think it would dramatically affect their growth issues," said Paul Resnik, director of research at Joseph Stevens & Co. in New York.

Of greater concern, Resnik said, is the government's involvement in the case. He said this has been unsettling to the marketplace in part because so much of the economy's extraordinary growth has come from technology, an industry in which the free-flow of ideas is key and that has been greatly unfettered by regulations.

Another troubling question, he said, is the implication for other companies with a competitive edge in the market.

"I think that's a market concern as to what sort of precedent does this create," Resnik said. "Is this the first of many antitrust suits?"

The U.S. Justice Department and 19 states yesterday recommended to U.S. District Judge Thomas Penfield Jackson that Microsoft be split into two companies. The judge gave Microsoft four months to come up with a breakup plan.

Microsoft has until May 10 to respond to the recommendation, although the company has said it will contest the government's position. The recommendation, which came after the market closed yesterday, was widely anticipated and Wall Street responded tamely. Microsoft closed yesterday at $69.75, down 6.25 cents, while the technology-heavy Nasdaq closed at 3,860.66, up 86.63 points.

For consumers, some argue, a breakup of Microsoft could open the door to many more options, but could also lead to more problems.

"At the end of the day, I think they'll get lower prices and more choices, but I think they also get more complications and more may be expected from them," said Bill Whyman, an Internet strategist at Legg Mason Wood Walker Inc.'s Precursor Group.

Consumers, for example, may be faced with dealing with more software upgrades as well as compatibility issues. They may also be required to do more when it comes to the installation of some products.

"There might be more choice, but I think there's a real question whether what you're getting is going to work better," added Christopher Mortenson, managing director of Deutsche Bank Alex. Brown.

The Justice Department also recommended that Microsoft offer Windows with the ability to use different browsers. Robb argues that Microsoft is lagging behind AOL and Yahoo when it comes to delivering a package of services, from e-mail and stock information to basic Web navigation. No one company, he argued, controls the browser anymore, so that recommendation won't really change anything.

Mortenson, however, said it's a mistake not to bundle computers with browsers, as if the government had decided years ago that the automotive industry could not put radios into cars.

And Whyman argues that that recommendation will be useful to other browser companies. Overall, he said, the recommendation to break up the company could help the PC makers, allowing them to reap the benefits of restrictions on Microsoft-exclusive contracts.

John Robb, president of Gomez Advisors in Lincoln, Mass., said those companies have already gained negotiating power with Microsoft.

In the 1980s and early 1990s, computers sold for about $2,000, about $100 of which was for Microsoft. But the price of computers has since dropped significantly, and the percentage computer cost tied up in software has increased, said Robb, who believes that Microsoft is not as dominant in the marketplace as it was five years ago. With a breakup, PC makers might be able to push that percentage lower, Robb said.

Several analysts said most of the effects of the government's recommendation have already been felt in the market.

"I bet at this stage most of the effects have already taken place," said Robert Lande, a professor at the University of Baltimore who has been following the case closely.

Lande and other analysts said an eventual breakup is improbable, and many say Microsoft will likely appeal the decision. But the question of whether Microsoft is as efficient and profitable as the sum of its parts still remains.

"I think the answer is, we don't know," Whyman said.

Mortenson said a breakup could slow down the company considerably, particularly since Microsoft does not operate as separate business units.

"I worry that in a very rapidly changing and dynamic marketplace," he said, "Microsoft could lose a lot of momentum while they spend a year or two getting split up by the government."

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