SEC: Should I or Shouldn't I 9980

John Bailo

Hard to prove that the stock price was kept artificially high, since it has been wavering between $24 and $28 for almost 4 years now. Revenues have been consistent, expenses have been managed, and profits are rediculously high. The SEC case would be very hard to make.

On the other hand it may be shown that Microsoft used Longhorn to prevent the OEM and Corporate CIO customers - the actual decision makers for nearly 95% of Microsoft's total revenue - to ignore Linux and accept terms which were designed to continue to exclude Linux, in their contracts. In this case, it would be roughly $100 Billion worth of fraudulently sold goods, some portion, perhaps 10% of which was illegally obtained through misrepresentation.

Furthermore, by using these fraudulent claims to convince the OEMs to exclude Linux, Microsoft was able to charge an artificially inflated price through it's continued and expanded monopoly control of the marketplace - in the face of those elements of Judge Jackson's rulings of law upheld by the Appeals court and in direct violation of the precise wording of the Appeals court ruling. This means that Microsoft may have illegally obtained another $20 billion in revenue through price manipulation.

Finally, Microsoft may have contributed to the losses incurred by companies like Gateway, IBM, HP, and Dell PC divisions, on a number of product lines, because they had been fraudulently persuaded to commiditize their brands on the promise of the delivery of Longhorn.

Microsoft is now calling their new line "Vista" which is supposedly the new name for the Longhorn code-name. It's still a "bait-and-switch" tactic in a $100 billion sale.

Of course, the challenge is to get the OEMs and CIOs to provide an estimate of how much less they might have paid Microsoft if they had known that Microsoft would not be delivering the promised functionality. Furthermore, the OEMs and CIOs would have to provide estimates of the savings they might have realized if Linux had been a more dominant factor in the marketplace.

While there are many case studies where Linux has provided substantial savings, and where, especially for large multi-billion dollar corporations, Linux would have provided savings of as much as 75%, most of these savings would be speculation at best and Microsoft would cite Linux and found that they lacked the training to support it.

Microsoft has already ignored or defied about 4 settlements with the FTC related to it's illegal use of Vapor-Ware to manipulate the marketplace and manipulate purchasers of $Billions worth of products into excluding compebreastors based on the promise of product that didn't exist or was never delivered.

Microsoft settled with the FTC in 1986 over the Vapor-Ware claims that MS-DOS 4.0 would include Mulbreastasking - a claim designed to prevent OEMs and corporate customers from switching to DR-DOS which had true preemptive mulbreastasking.

Microsoft settled again in 1989 when they announced OS-2 "Lite" which was intended to keep OEMs and CIOs from purchasing existing versions of OS-2 (so that they would later buy Windows).

Microsoft was investigated in 1992 when they announced Windows NT as a way to kill interest and coverage of Sun SLC and ILC workstations which were priced to compete with Windows and had captured nearly 15% of the corporate workstation market. Microsoft settled that claim almost immediately.

Microsoft included settlement terms with the DOJ over it's use of vapor-ware claims related to Windows NT, intended to keep UnixWare, Linux, and Solaris workstations off the market.

Microsoft settled with the FTC again in 1997 over claims related to Windows98, and in 2001 over vapor-ware issues with Windows ME. There were also FTC investigations and a quick settlement related to Windows XP.

The bottom line is that Microsoft has gotten away with fraudelent "bait-and-switch" advertizing and market manipulation tactics for over 20 years, and will probably be allowed to get away with it for another 20 years.

Keep in mind that the purchaser of these products, those who actually make the decision of what software will actually be included in the machine that sits at a corporate desktop or on a retailer shelf, are supposedly very well educated, very sophisticated, and very well informed buyers.

It's not like Microsoft has some huckster sitting in the retail store making fraudulent bait-and-switch claims about Windows and it's compebreastor to sweet white-haired old grandmothers who blow their pension checks on a PC that turns out not to be capable of running the upgraded software.

Because these are supposedly qualified purchasing agents, often executives and members of the board of directors, they are supposed to be smart enough to know the difference between such fraudulent claims as vaporware "hype" and actual products available. They are supposed to be qualified to make the purchasing decisions that will be in the best interest of their company and their customers. Most of these purchasing agents should probably have had their offices cleaned out back in 1992, but today most of those final authority decisions are made by the CEOs themselves.

This is slowly changing as more of the kids who cut their teeth on Linux back in 1994-5 because they couldn't get Windows 95 to run on their 80486 VLB machines, are now moving up the corporate ladder themselves, and have been producing extraordinary results with Linux.

Microsoft's stock has done practically nothing - up or down - since March of 2002. The "bottom line" which is the only one the SEC really cares about, is that Microsoft continues to get a steady flow of revenue, and a steady flow of profits, and reports them accurately.

Microsoft does make misleading statements to the press, mostly focused at protecting these revenue streams. But again, this is an FTC issue, rather than an SEC issue. You can bet that if Microsoft suddenly has a bad quarter, where revenue suddenly takes a nose-dive, and they don't accurately report that fact as soon as they know it is going to happen, the SEC would be right on top of them. At this point, Microsoft is still promising revenue increases and profit increases as well as an exceptionally large margin - profits as a percentage of revenue - that is exceptionally high for any U.S. corporation.

If you are a Microsoft investor or an attorney representing investors, then you should probably call them back. If you purchased Microsoft stock in September of 2004, based on claims that Microsoft would deliver Longhorn, you have lost about 20% of your investment, you **might** be able to trigger an investigation. If your mutual fund manager, 401K manager, or other insbreastutional money manager bought in and published that the basis of their purchase was Longhorn, and the dumped it at $24, then you have an even better case.

Most market managers are fundamentalists with Microsoft. The industry is fickle, but Microsoft maintains solid profits, solid revenue growth, and no corporate debt along with huge cash reserves.

The more important question might be "What are they doing with those cash reserves?".