From: Robert J. Bradbury (bradbury@www.aeiveos.com)
Date: Sat Oct 02 1999 - 18:33:23 MDT
On Sat, 2 Oct 1999, Robin Hanson wrote:
> Wei Dai wrote:
>
> > Also, assuming that most Microsoft shareholders also hold Intel stock,
> > shouldn't Microsoft already be maximizing some joint function of
> > Microsoft's profit and Intel's profit instead of maximizing Microsoft's
> > profit alone?
>
> Microsoft employees are incentivized by Microsoft stock and options,not by
> Intel stock or options. I find it pretty implausible they are
> trying to maximize anything but Microsoft stock.
Ah, but the question is whether Microsoft (or Intel) employees
know the history of technology stocks. Technology stocks
of have cycles that are relatively predictable. Oracle,
Sybase and Sun are examples of stocks that "hit" the wall.
When you hit the wall is when you have grown so large that
you cannot continue to grow at the rate previously extrapolated
by Wall Street. This growth rate might be because your market
is growing rapidly or because you are trouncing your competition
and gaining market share (or both). But in both cases sooner
or later you must hit the point of diminishing returns.
It is easy to project trends based on past historical performance,
it is very difficult to project the decline in those trends based
on market saturation. Since companies like Microsoft or Intel
have growth rates that are faster than the world population growth
rate -- they WILL at some point saturate!
[For example, for me I will saturate at Windows 2000 (a real operating
system for real machines) and I've already saturated at Office '97
since Office '99 (or whatever it is called) actually does a *worse*
job converting office files into hypertext, so it is really a step
backwards from my perspective.]
In addition, semiconductor stocks, such as Intel have a boom/bust
cycle. If you look, I suspect you will find that Intel took a
bigger hit than Microsoft when Asia went belly-up. Intel also
has the problem of significantly different competition than
Microsoft. Intel's will ride in a somewhat inverted curve of AMD.
Intel has to deal with near-term substitutions and margin cutting
while Microsoft does not. You can replace an Intel machine with
an AMD machine in a day and probably not notice the difference.
However retraining someone familiar with MS products to work
productively in a Linux or Word Perfect environment takes *much*
longer.
A smart employee will exercise his options (in Microsoft or Intel)
and then use his equity to play on the margin with the companies
that are growing faster. I would have to look at the numbers, but
I suspect that both Microsoft & Intel employees would have done better
over the last couple of years by investing their "excess equity"
in either Cisco, Yahoo or AOL.
I think this argument has to be rethought in terms of the growth
rates of the respective companies. If Microsoft is growing at
40% annually and Yahoo is growing at 100% annually, the Microsoft
employees standing around the water cooler aren't going to be saying
"Lets buy Microsoft Stock". They are going to be saying "Lets by
Yahoo and watch it very carefully to catch it before it crashes".
When you are paying margin rates of 7-8%, any company growing
at a rate above that is fair game and you are going to look to
the fastest growing companies to maximise your ROI (keeping in
mind the words of fellow employees who experienced the '87 crash
or other debacles).
Robert
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