Microsoft and hi-tech fallouts

THE TIMES (London)

April 5, 2000

ECONOMISTS like to play around with something called "event analysis". This is a tool that they think allows them to look at some event and tie to it a set of consequences. So when Judge Thomas Penfield Jackson created an "event" - his decision that Microsoft has indeed violated the anti-trust laws – several analysts rushed to assign it the blame for a huge drop in the price of technology stocks.

As the markets awaited the decision, the leading American financial news television station featured a clock, counting down the hours until the judge's verdict would be released. And a chart, showing the drop in the Nasdaq. The excitement built. Eager commentators rushed to guess the consequences of the guilty verdict: heavy fines, monetary damages paid to competitors, restrictions on Microsoft's business and contracting tactics - even a break-up of the company.

The possibility of any agreement between Microsoft and the Justice Department was remote. Bill Gates stubbornly insisted from day one that he would never agree to a settlement that prohibited him from continuing to tie new applications to his monopoly operating system. And Joel Klein, the Attorney General, speaking for the Government, was equally insistent that he would settle this case only if such ties were ended.

So the collapse of the settlement negotiations and Jackson's subsequent decision could hardly have been the cause of the Nasdaq fall. Indeed, even if one assumes that the decision will eventually cripple Microsoft by forcing it to become a tamer competitor, it is hard to see why it would drag down the prices of shares of its high-tech competitors and the Nasdaq index as a whole.

Those competitors, after all, should benefit from any restrictions put on Microsoft.

Any damages that Microsoft might have to pay to injured consumers and competitors may well be substantial, but given the company's cash hoard cannot be crippling. Also, even if the courts decide that the only way to prevent Microsoft from continuing to violate the law is to break it up - the only practical solution, in my view - history suggests that investors will do as well or better holding shares in the company's component parts.

So what seems to be going on with high-tech shares? Their fall began well before the Microsoft decision and coincided with a recovery in so-called old economy shares. What we may be seeing is an end of the artificial distinction between new and old economy companies. All companies are benefiting from the new technologies that have captured investors' imaginations, whether they be old-line retailers that are using the Internet to lower their purchasing costs and give their extensive customer bases another way to buy from them, or dot coms that are offering options to traditional suppliers.

As investors realise this, we can expect high-flyers to come close to the ground, and low-flyers to gain a bit of altitude. None of this has anything to do with what has transpired in the Microsoft case, or will transpire as it wends its way through the appeal process.