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Appendix B: "If PCs Could Fly" (Dec 1994)


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Analysis of Microsoft’s FY00 Business Results

Microsoft Growth Slows

Strong Consumer e-Commerce Not Enough to Offset Weak PC Sales

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John Connors
PHOENIX, July 18 – Is the world coming to an end?  For, the unthinkable has happened.  Microsoft has just reported its first quarter of flat revenues.  And even after adjusting for a multitude of fortuitous events that boosted the year-ago results, the software giant’s fourth FY00 quarter growth is only in single digits (up 9%).

Microsoft CFO, John Connors, blamed the weak demand for business PCs and the customer transition to Windows 2000 for the growth slowdown.  He said the business PC shipments rose in high single digits, while the demand for consumer PCs increased in mid-teens since a year ago.

Indeed, the fastest growing Microsoft business segment was consumer commerce, now a $3.1 billion operation, up over 50% in the latest quarter, and up almost four-fold from $796 million in the FY98 (i.e., two years ago).  Which was evidently not enough to offset other negative factors affecting the larger segments of the $23 billion-software giant.

Speaking of giants, real or perceived, back in 1990, at the start of the 20th century’s last decade, Microsoft was nine times smaller (!) than IBM’s software revenues.  Yet “everyone” believed even back then Microsoft’s brazen, if inaccurate, claims that it was the largest software company in the world.  Power of marketing… perception “ueber alles.”

Eight years later, facts had finally caught up with Microsoft’s fiction.  In FY98, the company eclipsed the Big Blue’s software business, just as we predicted three years earlier when IBM spent $3.5 billion buying Lotus, the supposed “Microsoft killer.”  Not. 

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And Microsoft has never looked back.  Its latest annual revenues were 79% higher than those of IBM software.  Notwithstanding the good Lotus growth during the last five years, the overall IBM software revenues have been basically flat.  At the same time, Microsoft revenues have grown at a compound annual rate of 31% since 1995, despite a slowdown in the FY00 growth to “only” 16%.

One year ago, Bill Gates’ company eclipsed IBM, again. This time, Microsoft earnings exceeded all of Armonk’s corporate profit.  And its latest FY00 net, despite “only” a 21% increase from a year ago, was 35% higher than what the Big Blue has eked out from all its nooks and crannies.  Including Armonk’s questionable, if not fraudulent, “financial engineering” endeavors, such as the use of its pension fund to prop up profits.

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As if to underline the differences between the two computer giants, Microsoft’s CFO announced today that his company has no intention of resuming the stock buybacks that were suspended earlier this year. 

Meanwhile, IBM continues to squander about $7 billion a year trying to buy an illusion of prosperity through this Wall Street game of smoke and mirrors.  In prior years, Microsoft, like IBM, had also spent billions on this expensive charade (see “Corporate Cabbage Patch Dolls”, Oct. 1998).

But while IBM’s share repurchases have resulted in a declining equity (down $8 billion since Lou Gerstner took over; down $23 billion since 1990), Microsoft’s equity has been surging along with its market capitalization.  During the last 12 months, for example, its equity has soared by 43%, from $28.3 billion to $40.7 billion.  That makes it now more than double IBM’s current shareholders’ book value ($19.5 billion as of Mar. 31). 

As for Microsoft’s market cap ($413 billion), despite its recent decline (down over 30% since January), mostly due to the Justice Department’s antitrust action against the company, it is still more than double IBM’s grossly inflated stock market value ($183 billion).

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An Aggressive Monopolist

Speaking of antitrust, when IBM was the target of three such government cases against it (filed in 1932, 1952 and 1969), the company’s aggressive behavior in the marketplace was tempered through either punitive or voluntary curbs.  By the time the last Justice Dept. case had fizzled (in 1982), the Big Blue was at best only a docile, benevolent monopolist.

Microsoft, by contrast, has continued to act aggressively in the marketplace despite the government trustbusters’ saber-rattling throughout the 1990s decade.  And not only against its direct competitors.  Also by entering new markets in which the Bill Gates’ personal and corporate power began to threaten some of his customers.  Such as the powerful financial institutions, for example, that “own” and control the Washington political lackeys.

Furthermore, unlike the besieged IBM monopoly, whose Board by 1982 became stacked with more lawyers and/or former government officials than were the combined Boards of seven largest American multinational corporations at the time (see “In IBM We Trust,” Dec. 1983), Microsoft’s PR in Washington had been practically non-existent prior to the government’s latest filing of its antitrust lawsuit in 1998.

Text Box:  Cover art for a 1984 Bob Djurdjevic book "In IBM We Trust," never published - for publishers’ fear of IBM=

By that stage, Microsoft’s frantic lobbying was too little too late.  While it took 13 years in IBM’s case for the trustbusters to fail in their efforts to split up the giant computer monopoly, it took only two years for the government lawyers to convince a federal judge to order a break up of Microsoft.  Which order is suspended for the time being, while the company takes its appeal directly to the Supreme Court.

Microsoft’s behavior was a textbook case of supreme wealth breeding supreme arrogance breeding supreme debacle.  But ferocious opposition to the court’s order to break up the company by Gates and other Microsoft leaders also defies reason, at least at a first glance. 

After all, unlike IBM that was run by faceless bureaucrats by 1982, Microsoft insiders, Gates first and foremost, still own 26% of the company.  Which means that “Gates & Co.” stand to gain the most from the likely market value appreciation following the break-up.  One only has to look at the market capitalization of “Baby Bells,” following the 1984 break-up of AT&T, to see the enormous benefits that the original “Ma Bell” shareholders have reaped from that company’s antitrust loss.

So what does the Microsoft leaders’ staunch opposition to break-up mean?  That these savvy folks are Text Box:  stupid enough to act against their best financial interests? 

No.  We think it means that they are guilty as charged.  Only if Microsoft has indeed amassed its enormous wealth through tie-in sales and other illegal monopolist practices, can a break-up spell bad news for insiders.  Only if Gates did break the antitrust law while becoming the richest man in the world, would the prospects of the two “Baby Bills” be dimmer than those of the present juggernaut.

They say action speaks louder than words.  Microsoft executives’ fierce opposition to the break-up is the latest case in point, their “not guilty” plea notwithstanding.

Business Segment Analysis

Asia was by far the best Microsoft region, surging ahead by 46% to $2.6 billion in revenues in the FY00 (about 32% in constant currencies).  As a result, the Asia revenue has now been reported as a separate geographic entity for the first time.

Latin America and Australia also showed strong growth (we figure up 35%).  Canada’s rise was “moderate”, while the U.S. increase (up 8% by our estimates) was described as merely “modest,” according to Microsoft.

Text Box:  European revenues increased in line with Microsoft’s overall worldwide growth (up 16%).  But in constant currencies, the business on the Old Continent was humming at a much higher rate (up 23%).

Microsoft’s OEM revenues, negatively affected by the soft PC demand, showed one of the slowest growth rates in years, increasing by only 9.6% during the 12 months of the last fiscal year.

In terms of the horizontal business segments, as the global demand for PCs slowed, so did the Microsoft “platform” revenue (operating systems software).  As a result, this business segment, which accounts for 41% of the company’s total business, ended the FY00 only 10% bigger than a year ago, the lowest growth rate in years. 

Microsoft’s largest segment - applications software that represents 45% of the total revenue - grew by 19% in FY00.  And as previously noted, the consumer commerce showed the fastest growth of all three horizontal segments.  Microsoft’s Connors said that he expected the consumers e-commerce revenues to continue to grow at 50%+ rates in the current fiscal year.

Microsoft Brand Name Surges in Value, Second Only to Coke

The company’s CFO also pointed out that the MSN web site has now become the number one site in the world, with over 200 million unique users visiting it on-line, according to the latest statistics.  This compares to 156 million users reported by the Internet’s second most popular site - Yahoo.

No wonder Microsoft is now the world’s second most valuable brand name, “breathing down Coca-Cola’s neck,” according to the annual survey of corporate brand names worth $1 billion or more, conducted by Interbrand, a consulting company.  Interbrand put Microsoft’s brand value at $70.2 billion, as compared to $72.2 billion for CocaCola. 

Among the 75 companies that qualified for this year’s survey, technology companies dominated the top echelon.  IBM placed third, followed by Intel and Nokia. 

Consumer brand names, such as General Electric, Ford and McDonald’s were also among the top 10.  In all, 42 of the top 75 companies were American-based.

Gates to Navy: “You Scratch My Back…”

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Likes Nuclear Carriers…J
But Microsoft wants to be recognized not only as a strong consumer brand name, but as a credible corporate supplier, too.  To that extent, Connors boasted that Windows 2000 has been selected as the “would be platform for the mission-critical Integrated Warfare System on the first of the U.S. Navy’s ‘next generation’ aircraft carriers, the CVN-77, also dubbed as the ‘Smart Carrier’.”

But as you can see from the story in Appendix A, “Bill Gates Buys Eight Percent Stake in Maker of Nuclear Carriers,” originally published by the Truth in Media last February, there may be more to that U.S. Navy selection than meets the eye.  Such as “you scratch my back, I’ll scratch yours?”

Either way, if the past performance of Microsoft “platforms” is any indication (see “If PCs Could Fly,” Dec. 20, 1994, see Appendix B), we are sure to lose the next war if the victory depends on “Smart Carriers” based on a Windows operating system.  

No wonder that even the U.S. Navy, and not only the Chinese, are buying some of their “mission critical” weapons (such as “Sunburn” missiles) - from the Russians!  (see “U.S. Navy to Buy Russian Missiles, China and Russia to Gang Up on U.S.,” Truth in Media Bulletin 2000/4-8, Apr. 15, 2000).

Never hurts to have a “Plan B,” does it, after you’re done feeding the domestic defense industry sharks with American taxpayers’ dollars.

Happy bargain hunting!

Bob Djurdjevic



From the Truth in Media Bulletin 2000/2-6, February 23, 2000

Bill Gates Buys Eight Percent Stake in Maker of Nuclear Carriers

NEWPORT NEWS, VA, Feb. 20 - Microsoft chairman Bill Gates, the world's richest man, has bought an eight percent share of Newport News Shipbuilding, the Associated Press reported on Feb. 20. The purchase, disclosed on Feb. 18, 2000 in forms filed with the Securities and Exchange Commission, is worth $68.9 million at current stock prices.  And it makes Gates one of the shipyard's two top stockholders. He now shares the No. 1 slot with First Manhattan Co., a Madison Avenue investment firm. Both own 2.6 million shares.

Gates, with a personal fortune estimated at more than $100 billion, hasn't publicly said why he bought a piece of the shipyard. The shipyard employs about 17,300 people. It is the nation's only builder of nuclear-powered aircraft carriers, which earned $97 million last year, according to the AP.

In the last year, defense industry giants General Dynamics and Litton Industries each have tried to buy Newport News Shipbuilding. Those deals were scuttled amid concerns from the Defense Department about a potential lack of competition. Gates bought his piece of the shipyard through Cascade Investment LLC, his investment firm with headquarters in Washington state. Cascade filed the required disclosure forms Friday with the SEC.


TiM Ed.: And so this renowned philanthropist and founder of charitable foundations has now joined the ranks of the America's "death merchants."  Repent, then sin… repent, then sin.  It's all par for the course, of course.  We've said as far back as 1994 that if Windows-powered PC were airplanes, they would be killing millions of people around the world - every day. 

It's also interesting to note from the above story that the Pentagon was concerned about a supposed lack of competition within its stable of "death merchants," but had no problem with Microsoft's virtual monopoly in PC operating systems.   You scratch my back, I'll scratch yours… What a world.   What a stench.


IT Industry Needs Better Reliability, "Buying" Standards

If PCs Could Fly...

What Would Be YOUR Chances of Making It Home Tonight?

 PHOENIX, Dec. 20, 1994 - If this writer's PC were an aircraft, it would have crashed no less than 10 times during the last two trips to the East Coast alone!  Even cats don't have that many lives to spare... It is a small consolation that some of the crashes were caused by pilot error (i.e., the WINDOWS or other software bugs), not hardware failure.  Dead passengers don't care why they died.  Only survivors and relatives do! Which reminds us of a "real life" anecdote...

 At one point in the late 1960s, an entourage of high-ranking IBM executives arrived at the Boeing headquarters near Seattle for a bit of customer glad-handing.  Close to the end of the visit, an IBM-er asked the Boeing people what would be the most important thing they (IBM) could do to help this valued customer?  A hush fell over the room.  You could practically hear the wheels turning inside the Boeing executives' heads.  

Finally, the top data processing manager spoke up.  "You must improve the reliability of your computers," he said.  The IBM-ers were offended.  They felt their machines were already highly reliable, relative to the competition.  They tried to point that out.  The DP manager shook his head.  "You don't get it, do you?  Do you realize that if we built our aircraft the way you build your computers, you'd only have a 50% chance of making it home tonight?"  

The IBM-ers were stunned.  Then, they went to work...

Today, no one is talking about the mainframe reliability anymore.  It is simply taken for granted, just like the relative safety of "jumbo jet" air travel.  Not so in the PC industry.  This segment of the mar­ket is still roughly where the mainframes were in the 1960s.  The "PC jets" are crashing millions of times every day.  But since these systems die one at a time, and since only the customers' nerves, data and time are lost, not human lives, such tragedies go unrecorded in the media headlines (until the first time someone commits a suicide after seeing his life's work going down the drain as WINDOWS or other software crashes without a back up ).

Intel Debacle

There are exceptions, of course, to these "deaths in solitude and anonymity."  The recent publicity regarding a flaw in Intel's Pentium chip is rapidly turning into a media avalanche, and a PR disaster of perhaps unparalleled proportions in the IT industry.  Yet, we also see the event as an invaluable, badly-needed consumer education, which may eventually lead to better buying standards. 

Until the ubiquitous PC showed up on the scene, the flaws in the IT products, or the shoddy service or software design, only affected the corporate customers.  If it wasn't written in the agreement, the vendors rarely volun­teered to make good on such deficiencies.

But now that they are selling their products to millions of consumers, the "techie" vendors' business practices must also mature.  You see, there is an implied contract at work here.  When one buys a Tylenol, for example, one does not expect to die.  When one deposits a pay check in a bank, one does not expect the money to disappear.  When one buys a car, one does not expect a "lemon."  Etc.

"When I was working (for RJR Nabisco) in the food industry, and for American Ex­press, I learned that such trust must not be violated," said Rick Thoman, who heads up IBM's PC business.  For, if it is, the entire industry's reputation will suffer, not just that of a particular vendor.  Which is why IBM decided to stop selling the PCs with the Pentium chips last week.

Indeed, why should the IT buyers accept anything less than the pharmaceutical, banking or food customers?  Why are they propelling "nerds" into multi-billionaires by making their sub-standard products "bestsellers?"  The answer, of course, is because they don't know any better.  Which is a dangerous predicament.  Just check out an old proverb:

 "He who knows not, and knows not that he knows not....

....is a fool - shun him;

He who knows not, and knows that he knows not....

....is ignorant - teach him;

He who knows, and knows not that he knows....

....is asleep - wake him;

But, he who knows, and knows that he knows....

....is a wise man - follow him."

 Whichever vendor first demonstrates that "it knows that it knows" and helps educate the IT consumers, will reap sig­nificant long-term benefits.  Just as the late Peter Finch yelled out of his window in the film, "Network," "I'm mad as hell, and I'm not going to take it anymore!", millions of IT buyers now probably feel the same way.  They offer a terrific sales opportunity!


 Annex Ed., 6/18/2000: This writer personally delivered the above message to IBM’s CEO, Lou Gerstner, in a private meeting the two had held in Scottsdale, AZ, in late October 1994.  It obviously fell on deaf ears, as IBM continues to milk its corporate dinosaurs six years later, while paying only lip service to consumer business opportunities.

NOTE: The print edition of this report, of course, contains additional charts and tables not included here.

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Volume XVI, No. 2000-17
July 18, 2000

Editor: Bob Djurdjevic
Published by Annex Research;
e-mail: annex@djurdjevic.com

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