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Web of Finance
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| Mar 24, 2004 4:07 pm |
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EU Ruling Against Microsoft |
Melanie Hollands
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The European Union's ruling (leaked Monday, and officially announced today) 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 somw way to justify a reason to bundle it all back together again the way it was planned - possibly in Longhorn (the next version of Windows, due out in 2006). It could also reassemble the pieces 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 - that its audio and video programs will still work the best with the Microsoft product. In addition, the company argues that (me paraphrasing) it is being unfairly treated in a "free market". Yeah, whatever.
Anyway, as a result of this ruling, the company may have to let in competitors on its API code. Now, I think there are many customers who would welcome buying an unbundled product, for thomw these video and audio apps add little (if any) value. And my guess is that if Microsoft charges the same price for "bundled (Windows + Apps)" versus "unbundled "Windows" + "unbundled apps" (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, these are come of the claims being made by the Microsoft camp.
The EU ruling potentially opens up the door for other organizations to sue Microsoft. And over time, it's possible this could erode Microsoft's credibility. But I doubt that erosion to its credibility will be quick, due to its way dominant market position and the substantial financial resources it has at its disposal to defend itself.
I don't see a major or immediate impact on the MSFT stock price as a result of the EU ruling (perhaps a small "relief rally" after the official announcement). But I do think that the stock progressively and gradually will continue to weaken over the long-term (say, 1-2 years). For now, 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, and 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. 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 discount the risk of being declared a monopoly at Microsoft, as well as the threat of a substitute technology such as Linux, which is a substantial longer-term threat in my opinion.
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.
Weighing up these factors, my view is that MSFT stock trading at nine times sales seems a bit high. I think five to six times sales is more reasonable, considering its growth opportunities for the next couple of years. However, mutual funds often own MSFT as a proxy to the NASDAQ Index (of which MSFT contributes around 12% on a weighted basis) or the tech sector. So, I doubt that the stock would sink to such lower valuations any time soon. Going forward, I think MSFT can continue to trade in a $24 - $28 range for a while.
Cheers
Melanie Hollands
President
Koala Capital, LLC
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