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Cure would be worse than Microsoft’s ill

Updated: May 3, 2013 12:14PM



Originally published: August 7, 2001

There’s a lot of talk about what a bully the government’s turning out to be these days.

No, it’s not just snatching Elian in the middle of the night that is causing a commotion. The investment world is holding its breath to see what type of loaded gun the government is pointing at Microsoft.

Markets hate uncertainty--and the Microsoft case has injected an unusual degree of worry and volatility into all of the major indexes.

At its low of around $66 a share on Monday, Microsoft stock had shed 44 percent from its all-time high at the end of 1999. At that point, the decline cost Bill Gates a whopping $35 billion of his personal net worth.

And it is likely to cost many fund managers their bonuses, since Microsoft is one of the key mutual fund holdings. Of the 3,465 domestic equity mutual funds, at least 1,025 held stakes in Microsoft at the end of the first quarter, according to Morningstar.

In fact, 881 of those funds list Microsoft as one of their top 10 holdings, and 305 funds list it as their largest holding.

I have no valid technical opinion about the merits or the danger of including Microsoft’s browser in the Microsoft Windows operating system, and I should also issue a disclaimer that I do write columns for Microsoft’s online MoneyCentral Web community.

But those caveats aside, it strikes me that once again the government is creating a larger problem than it is solving.

The courts have ruled that Microsoft is a monopoly, leaving the issue of the remedy to be decided. The markets are worried about the eventual breakup, and the lengthy legal proceedings that are sure to unfold.

Now, in the long run, a breakup of Microsoft might follow past patterns, and lead to the creation of even more value in the sum of the pieces than in the original enterprise as a whole. Just look at how the individual Bell system companies have reshaped and re-merged themselves in the wake of the AT&T divestiture.

While there’s no way of comparing what might have been, undoubtedly new share value has been created since the breakup. Many analysts figure that the same is in store for Microsoft--after the lawyers get their cut.

The real issue is why the government is using its powers to attack the Microsoft monopoly when there are so many more deserving ones around. No matter what you may think of the current issues, Microsoft created and unified a set of standards for personal computing that allowed unprecedented growth of both profits, efficiencies and jobs.

That’s what happens in a free market. It’s why we no longer have 8-track audio tapes or Beta videotapes. The most powerful and competent design becomes the standard. Then competitors can either improve on the standard--or call upon the government to come to their aid. In this case, the government listened and acted.

But why doesn’t the government heed the call to attack those monopolies that don’t create profits and jobs, but instead use their monopoly power to impede progress?

The Justice Department wouldn’t have far to look.

Take the educational system. It’s been a monopoly for the past century--a monopoly that, by all tests and measures, turns out an increasingly poor product. Yet when the market cries out for competition to create a better product through charter schools or vouchers, the government turns a deaf ear.

Or take the Social Security retirement system. It certainly qualifies as a monopoly--just as the Microsoft browser. It’s “bundled” into the system as an automatic payroll deduction, and you can’t very well opt out.

Its investment returns are terrible, even negative for today’s workers. Yet when the free market cries for privatization of the system, and retirees seek a choice of how they’ll invest for their own retirement, the government simply convenes a commission that agrees to disagree.

Where is the Justice Department when you really need a trust buster?

Microsoft’s potential breakup may be the solution the government--and its competitors--have been seeking. But just as a rising tide benefits all ships, so does a common standard benefit all users.

And as the uncertainty about Microsoft creates volatility for the entire tech sector of the market, perhaps its competitors will bear the costs as their own shares lose value amid confusion over which standard will prevail.

That’s called a Pyrric victory. And that’s the Savage Truth.

Terry Savage is a registered investment adviser for stocks and commodities and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail at savage@suntimes.com. Her third book, The Savage Truth on Money, recently was published by John Wiley & Sons Inc.



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