Sent: 23-06-2009 12:25:02
In this issue:
Return to full article list
HomeFree weekly newsletterSelf Managed Super Fund ArticlesContact usLogin
Microsoft to Enter Bankruptcy Protection!
The idea that Microsoft might eventually need bankruptcy protection seems fanciful near the peak of its powers but the sight of the once great General Motors being humbled as it enters Chapter 11 protection highlights that current market power cannot be taken for granted.
The title of this article is a deliberately provocative attempt to highlight the real life fight all corporations face to remain relevant. General Motors is just one actor participating in the passing parade of American industrial companies as the economy continues to evolve.
One hundred years ago, names like Morgan, Rockefeller, Du Pont, Carnegie and Guggenheim dominated the north American corporate landscape. The remnants of their accumulated wealth are still evident in many ways so great was their impact but their full industrial might is greatly diminished.
In August 2005, Asarco LLC entered US bankruptcy protection. The company which, by then, was a shadow of its former greatness had been formed by members of the Rockefeller family as a trust to control metal smelting in north America. After a battle for control, the trust was taken over by the Guggenheim brothers in 1901.
By the beginning of world war one, the Guggenheims controlled 75-80% of the world's supplies of copper, on one estimate, through Asarco and names like Kennecott, Bingham Canyon, Magma and Chuquicamata as well as interests in the Congo which today still resonate as some of the world's largest copper producers.
In 1903, the Guggenheims employed a mining engineer named John Hammond on what was then the highest salary ever paid to an employee of $250,000 a year and an incentive payment equal to a 25% share of all the mining properties he acquired throughout the world. This outrageously large remuneration package for its day and the regal lifestyle it permitted attracted criticism but the incentives worked to help build a global giant. Apparently, there is nothing new in high salaries and incentive payments.
Many would have considered it incomprehensible that, within 50 years, the industry the Guggenheims built would be struggling for its survival.
Some baulked at the control being exercised by the brothers from their headquarters at 120 Broadway, the largest and most opulent office tower in New York when it was completed in 1912. In some places, including in North America, there was open rebellion against them. Elsewhere, nationalism prevailed and, as others mastered the art and science of mining and refining, the Guggenheims and other American companies lost their competitive advantages.
The U.S. government became progressively less helpful. By the 1970s, environmental activists were making demands on the mining companies which were too hard to sustain. As the importance of "American metal" diminished, the costs imposed on the American industry mattered less and less to the broader population whose priorities had changed.
The parallels between the mining industry and the motor vehicle industry are eerily similar. In both instances, rearguard actions stalled adjustment processes but the mining executives had to eventually leave their once prestigious downtown New York offices for regional centres like Phoenix, Tucson and Mexico City just as the auto executives have had to eschew their corporate jets and other touches of luxury for more modest environs.
IBM is another high profile example of a company that defined an industry. Not so long ago, a personal computer was branded according to whether it was produced by IBM or was simply IBM-compatible. A non-IBM machine was a cheap and inferior substitute, by definition. Before then, of course, the name of IBM was synonymous with business machines big enough to fill rooms and give the U.S. a global competitive and military edge.
Today, the production of personal computers is undertaken successfully throughout Asia by companies which learned the necessary skills as Americans conceded that there was nothing special about their products after all.
Microsoft is today's equivalent of the Guggenheims, General Motors and IBM. Microsoft potentially dominates the daily lives of anyone whose work or leisure involves the use of personal computers. However, we should remember that, within the past 20 years, Lotus 1-2-3 was a dominant spreadsheet, WordPerfect was the word processor of choice and Netscape was a competitive, widely used internet browser. Things change quickly.
In 15 years time, is there any reason why Microsoft will not be challenged by software companies in India, China or Brazil offering high quality, open source software for a fraction of the current prices?
These few examples emphasize that the test of corporate success is not how big or profitable a business currently might be. These factors are important. However, the far more important test is how adaptable companies are to changing conditions. And, even that might not matter. The U.S. lesson is that, ultimately, companies may not be adaptable but the economy must be able to throw up substitutes as the need arises.
Guggenheim Brothers gives way to General Motors which gives way to IBM which passes the baton to Microsoft which....
This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.