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.
O f 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.