icrosoft finally
caught a break last week when the Justice Department decided to settle
with the software giant, apparently shutting the antitrust case that
began in 1998 (although a total of 18 states have until Tuesday to
decide whether or not to sign on to the DOJ agreement). Tech sector
analystys discussed with NRO Financial the potential impact of the
settlement on both the company and the Nasdaq, as well as Microsoft's
prospects following the recent launch of its Windows XP operating
system.
Jeff
Taylor, Reason magazine
The settlement puts limits on Microsoft business practices, gives
more freedom to OEMs, but does not touch Bill Gates’s line-in-the-sand
of “freedom to innovate.” The only thing I don't see is discussion
of a fine, which I would think Redmond would be more than happy
to part with to give the state attorney generals a trophy. Preferential
treatment of software makers sounds like an open-ended invitation
to continued litigation, as no software developer ever thinks his
or her code is rejected on the merits. That could be very attractive
to anyone who wants to keep Microsoft in court, and Microsoft may
regret this provision real quick.
The state
AGs essentially have a political decision to make. Do their constituents
— trial lawyers — want them to continue a high-profile
fight the rest of world doesn't understand? Attacking Microsoft
has already achieved the goal of creating plenty of work for lawyers
in the tech field, and the prospect of at least five years of close
supervision of Microsoft means full-employment for tech lawyers.
I believe the AGs, perhaps with some noisy dissent, would make sure
the agreement is vigorously enforced.
— Taylor is the editor ofReason’s weekly email newsletter,
Reason Express.
Jonathan
Rudy, Standard and Poor’s
Out of all Microsoft’s recent products, the XP operating system
is definitely the surest thing that they have, and going forward,
that’s probably the biggest positive for their stock. UltimateTV
doesn’t seem to have taken off, and I’m not too sold on the X-Box
as far as it being the bang-up success a lot of people think.
The real benefit
for XP will be in the install base on the consumer side, for the
Windows 95/98/Me users. That’s the real immediate opportunity for
Microsoft. Not that corporations won’t upgrade to XP, but it’s more
of a gradual process than anything else. The roll-up and the upgrade
to Windows 2000 happened a lot slower than was anticipated, so you
still see reports of companies that, within the last six months
or so, just upgraded to Windows 2000, or are in the process of doing
so now. And Microsoft also appears to be keeping Windows 2000 in
production, but with the new licensing plan, they’re trying to push
people towards XP.
At this point,
the ongoing trial is the source of the real hesitancy. As far as
performance, Microsoft’s stock is as well positioned as anyone in
software, just with their upgrade and the incremental revenues from
X-Box. They have been putting a lot of money into R&D for X-Box
and getting into new initiatives (e.g., .Net, Hailstorm, etc.).
That being
said, it’s pretty difficult to assess the long-term impact of the
settlement on the company. You’re really looking at a trading range.
Depending upon some of the valuation metrics, they’re not cheap
at these levels. Based on their discounted cash flow, their fair
value is anywhere from the mid- to low-60s. The company still trades
over ten-times sales, which certainly isn’t cheap. Earnings-wise,
they’re approximately 35-times our estimate for their next fiscal
year, so it’s definitely not a cheap stock. It’s a question of what
sort of multiple do you want to pay for their growth going forward.
From our perspective, you’re not going to see that high-teen consistent
growth rate that you’ve seen in the past with Microsoft.
You also have
to say that an unfavorable ruling couldn’t help but impact the Nasdaq
as a whole. Microsoft really has been a stalwart in the market in
the past couple of months; it’s shown some solid leadership, and
if something like that were to happen, I couldn’t see it not
taking down the Nasdaq with it.
But the flip
side is that any sort of positive event could easily benefit the
market. I feel comfortable with the fair value for Microsoft being
somewhere in the mid-60s. But with a favorable ruling, all bets
are off: the stock could easily trade to new highs, at least new
52-week highs.
— Rudy
is a software analyst for Standard and Poor’s.
Neal
Goldman, the Yankee Group
It’s
unclear what percentage of consumers are really going to upgrade
to Windows XP, for a variety of different reasons. Are there enough
compelling features in XP to drive somebody to say, “I’m going to
spend $100 for the home version or $200 for the pro version, plus
an extra $30 to $50 for memory”? So far, I think the answer’s probably
no. XP is a more stable OS than Windows 98 or Windows Me, but I’m
not sure somebody is going to spend $99 to go out and buy a more
stable operating system. On the other hand, it’s really saying something
when Microsoft says: “Windows XP is thirty to forty times more stable
than Windows Me.” What does that say about Windows Me?
XP will probably
not spur any major new software sales in and of itself. So Microsoft
is spending a lot of money, but it’s unclear what the long-term
impact is going to be for them. In some ways, it’s just what they
have to do: they keep raising their bar. At some point, they’d have
to upgrade their systems, otherwise they risk losing market share.
— Goldman is the director of the Yankee Group's Application
Infrastructure & Software Platforms Planning Service.
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