Microsoft Plays Bad Cop

Jul 20 2001

Lord knows I've tried to defend Microsoft when everyone else wanted Bill Gates' head on a spike. But this stunt Microsoft pulled last night really makes me mad.

It all began a week ago, on July 11, when Microsoft pre-announced higher-than-expected revenues- and did it in a very classy way. In its press release, the news about higher revenues came second, behind a headline that candidly confessed a massive multi-billion-dollar write-off of losses on bum investments. The write-offs were expected, but the higher revenues were a surprise - so Microsoft's stock soared the next day and lifted the hopes of the entire market.

That same day, the company announced that it would allow OEMs – original equipment manufacturers - more flexibility in the way the Windows desktop is pre-installed on new PCs. That was followed shortly by Microsoft's settlement with the state of New Mexico in the antitrust suit, and lots of conciliatory noises about settling with everyone and anyone - it all made for the impression of a kinder and gentler Microsoft, born again as a model corporate citizen.

Then this week it all started looking like maybe it was all just a Mutt and Jeff routine - last week it was Microsoft the good cop, and this week it's Microsoft the bad cop. First, the Wall Street Journal reported yesterday that Microsoft is dropping support for Java run-time applets in its next generation Web browser running under Windows XP. OK, everyone said that was a monopolistic tactic, but hey, I'm a libertarian - why should Microsoft have to support the products of archrival Sun Microsystems if it doesn't want to? Next, the company filed a Petition for Rehearing with the U.S. Court of Appeals, seeking to overturn that court's support of the Circuit Court's Finding of Fact that the commingling of code for the Windows operating system and the Internet Explorer browser is a monopolistic practice. OK, so the company is not rolling over and playing dead and making nice on the portions of the appeal that went against them, but hey, I'm a libertarian - isn't it Microsoft's right to protect itself using all the legal remedies at its disposal?

Since Microsoft represents the largest single stock position in the fund I manage, I figured this was all just fine.

And then when I read the headline of the company's earnings press release after the bell yesterday, I figured everything was just fine, too. After all, it said:

Microsoft Announces Record Revenue For Fiscal Year 2001

Windows 2000 Professional, .NET Enterprise Servers Post Record Fourth-Quarter Revenue Performance

Yep, reading through the first page of the press release, it was all just hunky dory. Earnings beat by a penny , and revenues came in at the very high end of the higher range pre-announced a week earlier. And according to the glowing write-up, all Microsoft's corporate initiatives have been performing brilliantly. What's not to love? These guys just can't do anything wrong! This stock's going to be up 10 points tomorrow, and the whole market will go with it.

All that - everything I've described so far - was the bait. The switch came on page two of the press release.

After all the bragging and all the hype, inserted innocently under the "Business Outlook" section, was the revelation -offered with utterly no explanation - that the upcoming quarter is going to be a disaster - an EPS miss of 6 cents below the Street's expectations, and lower than expected revenues, too. And P.S., your cat is dead.

This is the most ineptly handled guidance disappointment I've ever seen. Well, perhaps "ineptly" is too generous. Words like "manipulative" come to mind. And for a company striving to make a good impression on a skeptical world, this is a stunning act of bad corporate citizenship. And it can all be summed up in one damning question: What's in last night's guidance that couldn't have been disclosed a week ago?

In the online Wall Street Journal's coverage of Microsoft's report, Goldman Sachs' veteran Softy-watcher Rick Sherlund - ever the master of understatement - is quoted as saying that investors might "feel a little whiplashed." Yeah ... they just might.

And they might feel a little angry, too. In fact they may feel mad as hell, and like they're not going to take it any more. They're going to take it out on Microsoft today. And on the whole market.