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