The July 29, 1996 cover of Business Week screams, "JITTERS! With investors worried about earning and interest rates, the large awaited stock market sell-off finally hit." This week's cover asks, "Is it finally over?"
Yet strangely enough, between the summer of 1996 and today, the total market value of all Internet companies has skyrocketed from 9.5 billion dollars to well over 500 billion dollars.
Technology bubble?
While big-headed Wall Street analysts have been criticizing overblown tech-stock prices since at least 1996, the U.S. economy has been booming, and the stock market has been bullish since at least 1991. However, starting April 3 -- the day before the announcement of Microsoft's guilt by judge Thomas Penfield Jackson '58 -- Microsoft kicked off a streak of market volatility with a loss of 16 percent of its total value. On the same day, the Nasdaq Composite Index lost 6 percent of its value.
This past Friday, the Dow Jones Industrial Average and the Nasdaq lost 5.7 percent and 10 percent, respectively, both setting records for their biggest single-day point drops ever. Of course, the big question on everyone's mind is, what's going to happen now?
For starters, investors probably need not worry about the economic party (oxymoron?) being over just yet. Yesterday, the Nasdaq completed a total reversal, setting a record for the biggest single-day point gain of 254 points, making its two-day total this week 472. But in the long run (much more important for those who are investors instead of day-traders), will the stock market -- particularly the economically jump-starting technology sector -- continue to shine?
The bull's power
To find out, we should take a look at what started many of these jitters in the first place: Jackson's Microsoft verdict early this month.
Certainly there have been other factors. The Labor Department recently reminded investors of the prospect of inflation when they announced that the Consumer Price Index rose 0.7 percent, largely due to energy price spikes. Additionally, the Commerce Department announced yesterday that housing starts (construction of new housing) decreased 11.2 percent in March -- often an indicator of economic slowdown and consumers' monetary conservatism.
But in the long run, investment banks will look toward the stock market to judge the economy's condition -- and with Microsoft heading the biggest industrial boom in years, Microsoft's future is a major concern.
Jackson plans to announce Microsoft's punishments next week, which will give investors at least some idea of the future of the technology industry's leader. Despite this, it's no secret that Microsoft will vehemently appeal Jackson's ruling, possibly taking it to the Supreme Court. The answers to whether Jackson's ruling be upheld may be found in his lengthy "Conclusion of Law," which explains in detail how he thinks Microsoft went wrong.
Monopoly power
First, Jackson wrote that Microsoft has monopoly power through its Microsoft Windows product. According to the findings of the case, "There are currently no products ... that a significant percentage of computer users world wide could substitute for Intel-compatible PC operating systems without incurring substantial costs."
While it is well known that Microsoft holds over 80 percent of the operating system market share, Microsoft does have some ammunition. The continued popularity of the iMac (which uses MacOS exclusively) and the rising popularity of Linux (an open-source, UNIX-based operating system) cast some doubts about Microsoft's future monopoly over the operating system market. Considering that the appeal process could take more than two years and that the technology industry moves so quickly, there is no way to know whether Microsoft's huge market share will diminish.
Aside from the Windows monopoly, the court did not find that Microsoft "acted with a specific intent to obtain monopoly power" with their Internet Explorer web browser.
Anticompetitive means
Second, Jackson asserted that Microsoft used anticompetitive means to gain market share.
These "means" involved unjustifiably tying their web browser Internet Explorer to the Windows operating system. Product tying is illegal if a court finds that the two products are truly separate entities and that the company holds market power with at least one. Jackson also said that Internet Explorer is "not demonstrably the current 'best of breed' Web browser."
An appeals court could conceivably disagree with these statements, since a June 1998 ruling said product tying is only illegal if the company's sole purpose is to retard competition. On a related note, many computer professionals find Internet Explorer to be a natural extension of Windows.
Also, a recent Stroud.com study found that Internet Explorer loads Internet pages faster than both Netscape 4.72 and 6.0 do, showing that Internet Explorer may indeed be a "best of breed" browser.
However, Jackson also takes issue with Microsoft's use of Internet Explorer's ActiveX technology, which he feels was designed to prevent Sun's Java technology from destroying Microsoft's Windows monopoly. Whether Microsoft did this intentionally is up for debate, but the Justice Department certainly made a good case for themselves in this section of the verdict.
In addition, Microsoft has said that this year's upcoming Windows Millennium Edition will include even more products tied into the operating system.
Both of these issues could be an appellate sticking-point.
The government also found that Microsoft illegally prevents computer manufacturers from customizing the Microsoft Windows startup screen. However, this is not a major issue in Jackson's report, and probably, Microsoft simply will be asked to allow computer manufacturers to make this change if they are punished.
Foreclosure
Lastly and most surprisingly, the government did not find that Microsoft's preferential distribution behavior -- giving customers price discounts and other benefits in return for buying or promoting specific Microsoft products -- violated the legal test for foreclosure. In the case of foreclosure -- the act of preventing a competitor from entering a market due to exclusive dealings -- the government must prove that at least 40 percent of a company's business dealings constitutes exclusivity.
In the end, this finding may be Microsoft's saving grace. The crux of antitrust law is often foreclosure, and the judge allowed Microsoft to escape on this point. This is especially surprising, because the company's preferential business practices seem an implicit admission that Microsoft does not believe their products are "best of breed."
While Jackson does a good job criticizing Microsoft in his report, his fact-finding is also filled with places for an appellate to take issue with his ruling. It is, therefore, very possible that Microsoft's appeal will succeed, which will in turn be great for Microsoft stock holders and tech-stocks as a whole.
A bright future
But even if Microsoft's appeal fails, chances are that the results will be good for investors if the judge decides a split of the company is necessary. Often, such as in the case of AT&T's 1982 break-up, a company's split parts are more powerful than its whole. Microsoft could make even more money for investors as separate companies, just as other companies are voluntarily discovering now by spinning-off their Internet divisions.
In the short run, Microsoft's earnings report release tomorrow is expected to help its stock. Analysts predict the company to report very strong earnings.
Furthermore, yesterday's list of earning reports awed Wall Street and invigorated the Dow, with Coca-Cola, Pfizer, Johnson & Johnson, Sprint, Delta, PaineWebber and Ford reporting surprisingly high earnings for this past quarter. To help the Nasdaq, a Monday Ziff-Davis report showed that online retail is "alive and kicking," citing a Shop.org study predicting that online sales will double, jumping from 33.1 billion dollars in 1999 to 61 billion dollars this year.
Although analysts still consider Microsoft stock to be a bit dicey, the future of the tech-industry leader looks bright. While no one can be sure, and the market will inevitably have its ups and downs, Microsoft has not, and probably will not, cause the bullish bubble to burst.
But one thing is for certain: Business Week will certainly be announcing the economy's impending doom yet again at least a few more times during this new decade.
