Alas, Babylon
In Alas, Babylon , Pat
Frank's classic nuclear-apocalypse novel of the 1950s, a man awaits word that
nuclear war is imminent. He'll know that time is up when his brother, working
for the government and privy to top-secret information, sends him a telegram
with the words "Alas, Babylon." The collapse of Microsoft would not be quite as
calamitous as a nuclear war. But, like many others who've gloried in owning
Microsoft stock, I would dearly love a signal if the moment to run for cover
arrived.
I need a
signal more than most Microsoft shareholders do, perhaps. I joined Microsoft
straight out of college in 1989 and left this August, taking a small but
healthy chunk of its stock with me. Now I have far more of my family's savings
invested in a single firm, for which I no longer even work, than any sane
financial adviser would recommend. That's OK with me, because I still think
Microsoft is a great company with a great future. But nothing lasts forever. I
can't expect a telegram from Bill Gates saying "Alas, Babylon." So here are the
signals that will warn me the unthinkable may be happening.
Of course, any analyst will tell you that Microsoft's
strategic position at the center of the computer industry is paramount. Chances
are, if you're using a computer, you're running at least some Microsoft
software. In particular, there's a that you're running some variety of the
Windows operating system. The ongoing Java war (read about Java in "Webhead" and "The Motley Fool")
is a battle for this strategic center.
Java doesn't scare me--yet.
There's so much software written for Windows, and PCs running Windows are so
ubiquitous, that it's hard to see it being supplanted. But I'll know something
is wrong when someone I know buys a Java-only home computer . Not one of
my geeky computer-nerd friends, either--they'll buy anything--I mean someone in
my family, or any of my basically computer-illiterate friends. Unlike
corporations, which will occasionally throw money at bizarre nonstandard
computing solutions like NeXT, OS/2, or Java, normal people only get one shot
at it. So they are conservative. They ask around. They buy what their friends
buy or (more likely) what their kids' friends buy. When Java invades the home,
I'll know the tide has turned.
By then,
of course, it will be too late. I will have missed my chance. I believe the
only thing that can defeat Microsoft in the home (or, for that matter, at work)
is if Microsoft fails to make computers easier to use . I spend far too
much of my life setting up computers for friends and family and answering dumb
questions. But it's not really the questions that are dumb--it's the computers.
Software and hardware configuration is too error-prone; incompatibility remains
too common; and software is too difficult to use. People aren't getting a
fraction of the productivity--or the fun--they could, and their computers soon
become merely expensive toys. Frustration is rampant. If Microsoft doesn't fix
this in a year or two, someone else will.
A yardstick I watch on a daily basis is the
stock price. But I'm not nervous about it dropping--I worry when Microsoft
stock stagnates, particularly when it stagnates at a high price . Now it
seems backward to judge a company's success directly by its stock price. A
Warren Buffettesque buy-and-hold strategy tells you to look at the
fundamentals. If they're strong, hold on to the stock. But Microsoft's
lifeblood is its employee stock-option program, and so the stock price is, in a
sense, one of the fundamentals. Options are how the company attracts and
retains smart young college graduates with no money and (most important) no
lives. A person joining Microsoft today right out of college will get a number
of options giving him or her the right to buy shares of Microsoft at the lowest
closing price the month after he or she joins. And most employees get more
every year. In essence, options give the employee any future increase in stock
price. If the price doesn't increase, the options are worthless.
Options "vest" (take effect)
gradually over several years. At any time, therefore, valued employees have a
sizable amount of money that's theirs--if they stay around long enough to get
it. Psychologically, it doesn't work to have the stock stay at the same price,
then shoot up after four years. By that time, the employee is long gone, lost
to some little start-up about to have an initial public offering. It's worse if
the stock stays at a high price, because the employee knows (or at least
worries) that there isn't much upside. I don't mind a little volatility,
because this makes it more likely that a new employee's options will hit a
momentarily low price during that crucial first month (when new employees,
paradoxically, have an incentive to want the price to go down). And I don't
mind periodic declines, even steep ones, because it's a chance to scoop up some
more good employees at (to them) an attractively low price. Over the long term,
though, what I want to see is a steady upward progression.
On a more personal basis, I
watch my friends slowly trickling out of Microsoft, leaving because they've
made enough money, or because they've burnt out, or because they just want to
try something new. That, in and of itself, is not necessarily a warning
sign--old blood leaves, new blood comes in, and sometimes the old blood comes
back after a while. In any case, most of these friends remain in the software
business. They love it, they live it, and they can't stop talking about it.
They talk about the important things: the key technologies, the good people,
the big deals. And they do it all the time: while feeding babies, hiking up
mountains, and even in nominally social situations. I'll know that the jig is
up, the end of the world has come, and it's time to sell my very last share of
MSFT when conversations at parties no longer center on Microsoft .
