Microsoft's War Of Attrition
Rich Karlgaard, Forbes.com, 03.19.01, 2:21 PM ET
Consider this pair of data points from last summer:
1. Steve Ballmer began trashing Net stocks in his public appearances.
2. Microsoft yanked most its corporate advertising from the Web.
The last was especially suspicious: Microsoft (nasdaq: MSFT - news - people)
had its own portal--MSN--to support and was keen to prove its
"Net-worthiness" to skeptics. So, why would Microsoft debunk the Net in word
and deed and risk looking old economy or hypocritical?
Simple. Perhaps there was a higher priority. Maybe Microsoft decided to
start a war of attrition.
This time last year, Yahoo! (nasdaq: YHOO - news - people) was worth $96
billion, Sun Microsystems (nasdaq: SUNW - news - people) worth $150 billion,
and America Online (nyse: AOL - news - people) worth more than $200 billion.
Against this inflated dot-com currency, Microsoft's $24 billion bank
balance--a huge cache by any measure--was rendered strategically impotent.
Microsoft was suddenly impotent in other ways--and not just from its
smackdown by the Clinton Administration's Department of Justice, either.
Between 1995 and 2000 Microsoft, like all older companies, suffered a brain
drain. Young talent was migrating to the dot-com world. This loss was
particularly galling to Bill Gates, who prides himself on his ability to
recruit the best and brightest. (Gates once told me, in the early 1990s,
that Goldman Sachs was his chief competitor. Huh? I asked. "Sure," said
Gates. "We compete in the same IQ pool as the top investment banks.")
Losing talent and watching cash decline in relative terms, it's my guess
that Gates and Ballmer decided enough was enough--it's time to go to war
against these troublesome dot-coms. But rather than launching a direct
attack--a political and public relations nonstarter since the DOJ was
breathing down its neck--the company stealthily set out to wreck
Classic! Brilliant! And totally expected, hatched as it was from the minds
of those two 800-math-SAT-scoring chess masters from Redmond. Ballmer is out
the next day trashing Net valuations. And back home, Gates gets the word to
the Microsoft ad department to stop all of its corporate advertising online
for the remainder of 2000. Gates knows such Microsoft cooling on the Web
would give license to chief executives around the world to cut their Web
advertising, too. (Gee, if the brilliant Gates is doing it...) And that's
precisely what happens.
This Microsoft strategy--and it's only a speculation--came to fruition last
week when Yahoo! shocked Wall Street with sales figures 25% below estimates.
Yahoo!'s market value immediately sank to a three-year low of $7 billion.
Microsoft's cash balance, meanwhile, rose to $27 billion. Translation:
Microsoft could buy Yahoo! for pocket change if it wanted.
The dot-com plague has spread to Net infrastructure giants like Oracle
(nasdaq: ORCL - news - people) and Sun--the two hated Silicon Valley rivals
of Microsoft who funded the legal assault that began in Palo Alto, Calif.,
five years ago and wound up at the Clinton DOJ. Sun is twice damned: its
stock down 70%, and half its employees with options underwater. Meanwhile,
Sun's beleaguered sales force is vainly trying to extract profit from its
new severs. From California to Virginia, these slick boxes must compete
against thousands of year-old boxes from hundreds of dot-com liquidation
Boy, has that shut up Sun's Scott McNealy for awhile! Come to think of it,
if you're Gates and Ballmer, you couldn't have planned this little Web
Armageddon any better. Cash is king once more, and Microsoft wields $27
billion of it. Talent is fleeing back to Redmond. The once uppity Yahoo!
goes begging for white knight. Sweetest of all, those loudmouths Larry
Ellison and McNealy have been gagged for a season.
Bill and Steve couldn't have planned it better.
Here and abroad, the Internet is no longer easy money, which probably explains last week's abrupt resignations of both Yahoo! Europe Managing Director Fabiola Arredondo and Yahoo! Asia Managing Director Savio Chow. Both said publicly they were leaving for personal reasons, but industry insiders speculate that when the going got tough, these two top execs got going--with hefty options packages in hand. -- http://www.forbes.com/2001/02/23/0223yahoo.html
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