March 23, 2004

Commentary: Why the EU ruling against Microsoft is a joke

Author: Melanie Hollands

The European Union's ruling Monday against Microsoft -- a fine of €497 million for antitrust violations -- is a joke. Even if Microsoft has to end up unbundling the audio and video from this version of Windows -- which is not a technical problem whatsoever -- the company will find a reason to put it all back together again the way it was planned in Longhorn (the next version of Windows, due out in 2006). It could also reassemble it in some other product. Alternatively, the company still could reach a compromise with the EU.

The hope appears to be that the ruling would prevent rebundling the audio and video in Longhorn or some other package. But I don't think it sticks. Microsoft's point is that integration makes the user experience better. The company may have to let in competitors on its API code. That said, Microsoft argues that its audio and video programs will still work the best with the Microsoft product. Plus, if the company charges the same price for bundled and unbundled Windows (and I don't see why they wouldn't), then it's all the same to its bottom line. Now, other companies can make an interface between Microsoft and these other programs to simulate an integrated user experience. But it seems these programs don't run as fast or as well. Anyway, that's the claim made by the Microsoft camp.

I don't see a major or immediate impact on the MSFT stock price as a result of the EU ruling, but I do think that the stock progressively and gradually will continue to weaken. I see support for the stock in the $23.50 to $24 range. MSFT is in the process of forming a substantial bottom pattern, so I would hold off going long until that bottoming process is more complete. That said, I think the next big move is up, but I'd be inclined to hold off starting a long position so long as the broader market continues to soften.

Looking out longer term, say in 12 months' time, I believe that MSFT will be trading at lower levels than it is currently, even if the market is marginally higher. This view was discussed in this column on March 10. It's a rough period for a share price when a company goes from being a growth stock to a value stock and the ownership constituency shifts from growth- to income-oriented. Then you must discount the risk of being declared a monopoly at Microsoft, as well as the threat of a substitute technology such as Linux. In light of this view, MSFT stock trading at nine times sales seems a bit high.

The basic problem I see for Microsoft (and to reiterate some of what I have written previously in this column) is that IT budgets are not going to grow very fast over the next several years, and the company already owns large chunks of the market. So there is limited ability to increase revenues from the Office business, because Microsoft risks ticking people off and driving more people off license.

Growth in new PCs, and therefore operating system sales, is likely to be constrained to three to four upgrades for laptops and four- to six-year cycles for desktops. Creation of new markets for other sorts of operating systems will probably be constrained by the reluctance of many potential partners to get into bed with Microsoft. That said, Microsoft does have some areas where it can grow, such as databases and analytical services, as well as growth opportunities in the small business end-user segment.

Melanie Hollands is OSDN's IT stock and business analyst.


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