Dueling Fools
Microsoft 2000
The Bear Rebuttal
By
Matt makes a good case, especially with regard to Microsoft's superior financial position and ability to generate cash. It has created unbelievable value for shareholders.
But once again, it's yesterday's news. Microsoft faces more competition and challenges than ever before. The vise-like grip it's had on operating software and office applications -- which enabled it to generate such amazing profits -- is loosening as the Internet has triggered a shift away from PCs to software that can be delivered over the Web.
In a nutshell, Internet architecture makes it easy for complex software to be stored on servers and quickly delivered to PCs. Distance is irrelevant. The complexity of the software is irrelevant.
This means that desktops won't have to be weighted down with expensive operating systems that must be licensed to users. If every desktop no longer needs to run Windows then there's no way Microsoft can repeat its performance over the next 10 years -- to say the least.
Now, this change isn't happening overnight, and Microsoft's profitability has yet to be impacted, but I think it's right around the corner, in the next two or three years. As companies like AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %>, Qwest Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: QWST)") else Response.Write("(Nasdaq: QWST)") end if %>, and Level 3 Communications <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LVLT)") else Response.Write("(Nasdaq: LVLT)") end if %> start rolling out fast, cheap Internet access, consumers and businesses will need Microsoft less and less.
Why? Check out your desktop and ask how many applications you really need. If you're like me, you need word processing, a browser, e-mail, and spreadsheets. That's about it. All of it can be delivered over the Web to an Internet appliance without the Windows operating environment. As soon as the bandwidth needed to get people online quickly and inexpensively is widely available, Microsoft will have a hard time maintaining a growing revenue stream from its buggywhip operating system and Office applications.
The company's starry financial performance springs from the competitive position it enjoys. It isn't magic. As the economics change and Microsoft is forced to adjust prices to compete, I think its financials will come down to Earth.
Will Microsoft prevail? I think it will continue to be a successful company. But is it Foolish to pay 60x earnings for a company whose major revenue streams are about to be seriously challenged for the first time, that has to adapt to an entirely new way of doing business, and fight off a major antitrust suit? There are better investments at that price.
Matt says the bull case hinges on Microsoft's performance over the next 10 years. I think he's right.
Also Check Out the Duel Flashback: Best Buy
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