Investors lay low in wake of Microsoft judgment

Investors are very much taking a wait-and-see approach following Thursday's decree that Microsoft Corp. should stop forcing PC makers to install its Internet Explorer software as a condition for buying its popular Windows program.

True, Microsoft's stock opened down about $2 per share in Friday trading and Netscape Communications Corp.'s stock was up about $1.63 per share, but such fluctuations are anything but abnormal in the recent trading climate for technology issues. A legitimate case could be made that Friday's changes have little or nothing to do with Thursday's supposed landmark decision.

"It's neither a make or break situation," said Arthur Newman, an analyst at Gerard Klauer Mattison. "The best that could be said is that it's mildly good news for Netscape shareholders and mildly bad for Microsoft shareholders."

But a more intriguing scenario for investors could develop if the U.S. Justice Department is able to build on Thursday's decision. Assuming this is indeed the first step toward chipping away at Microsoft's virtual monopoly, there's some historical evidence that suggests this could actually be a harbinger of good news for the likes of Netscape and Sun Microsystems Inc., as well as hundreds of yet-unborn companies.

Ironically, it could actually be tremendously beneficial to big, bad Microsoft itself.

"If you look back to the 1970s when IBM held an undisputed monopoly in the mainframe market, the Justice Department stepped in and did much the same as it is now doing to Microsoft," said Don Collier, president of ProLytix Inc., a Santa Barbara, Calif., stock tracker. "It made IBM open up its systems for compatible peripherals from all kinds of companies, giving birth to literally hundreds of new companies and investment opportunities."

The historical parallel fits in that the IBM of 1975 owned the hardware, software, services, and leasing packages for mainframe computers. This cradle-to-grave strategy through bundling has been effectively copied by Bill Gates at Microsoft. At the time, would-be mainframe competitors and peripheral providers were essentially frozen out of the market, regardless of their technological or economic benefits.

"When they opened up the market, IBM didn't suddenly go under," Collier said. "Maybe their margins were trimmed from 65 percent to 50 percent, but they more than made up for it in volume. The investment community and the customers benefited from more competition and IBM wasn't hurt a bit."

A similar scenario unfolded when the AT&T juggernaut was disbanded in the early 1980s. When the Justice Department broke up AT&T's monopoly, a slew of competing regional carriers were thrust into the market. Also, companies such as MCI, GTE, and Sprint were able to get in on the action just before the Internet explosion made its way into the telecommunications industry.

"The difference between AT&T and Microsoft is that AT&T was extremely inefficient because they could afford to be," Collier said. "By comparison, Microsoft has been very efficient in terms of producing products itself and acquiring smaller companies to round out their package."

Microsoft has become something of a corporate black hole, swallowing up small companies that have new ideas, then incorporating the intellectual property in its exclusive operating system. If the Justice Department can force Microsoft to essentially open up its operating system to the market, those small companies which otherwise would have become another notch on Gates' bedpost could become thriving, independent businesses.

"The Justice Department has a very strong case," said George Koo, an analyst at Burnham Securities. "People may have felt that Microsoft wasn't going to be touched and that would explain the recent run-up to $146 per share. But now it's down about $10 from that point. How much of that is due to this one event is hard to gauge."

Undoubtedly, another Microsoft or IBM will materialize in the next 10 to 20 years if it isn't already out there waiting to pounce. From an investing perspective, it's a win-win situation as investors can capitalize on the amazing growth of the next great company and the subsequent creation of competitors or complementary firms in its wake.

"For Microsoft, this is just a small bump in the road," Collier said. "They still own the world in a sense, but if the Justice Department prevails, a whole world of opportunities for entrepreneurs and investors will follow."