Sure it’s a monopoly. But is Microsoft a pyramid scheme, too?
From Jonathan: “What do you think about the article that appeared on the cover of the Financial Times recently that claimed that if the value stock option granted to employees were accounted for as an expense, then some high-flyers, like Microsoft, would have shown a net loss in 1996? Is Microsoft some kind of big pyramid scheme where the company maintains itself by paying its talented engineers in stock options (thereby diluting all the other shareholders)? The scheme works as long as the share price goes up, but as soon as people think it’s leveling off, the price could collapse.
“Full disclosure: in 1990 I was offered the option to acquire 2,300 shares (pre-splits) of Microsoft at the then present price. This was part of a job offer. I refused, because I was suspicious. When I interviewed at Microsoft with about six people during one day, they each pointed out that as a Microsoft employee, you get FREE soft drinks on the job — all the Cokes that you want. There was a big spray-painted banner hanging in the lobby, ‘Ship or Die.’ And there were no women working there, except for the recruiters, who were all exceptionally cute. Lastly, a young Microsoft engineer, responsible for the Macintosh version of Excel, took me to dinner at the only fancy Jewish restaurant in Seattle. I am Jewish, as anyone can tell from my last name, but I never said anything about it. Everything seemed so perfectly orchestrated. The hairs stood up on the back of my neck, and I bolted.”
A.T.: What do I think? The first thing I think, not surprisingly, is that this decision cost Jonathan $48 billion or something. Poor guy! It ranks right up there with my never having bought Berkshire Hathaway.
What I further think is that there’s definitely something to this. On the one hand, Microsoft is no pyramid scheme: It sells products the world clearly demands. (In a pyramid scheme, the big money isn’t made selling products but rather in selling the “right” to sell those products, and getting eight or ten people under you to sell eight or ten people under them the right to sell eight or ten people under them … like a chain letter.) Yet at some point, the cost of labor at MSFT is likely to rise, and the more exciting entrepreneurial opportunities will be at smaller firms. Today’s 18-hour-a-day men and women will take their $15 million and open pottery shops by the sea. Tomorrow’s talent will be harder to acquire and motivate. They may have to be paid with actual money rather than the prospect of stock options that climb to the moon. Paying with more competitive salaries will cause a drag on earnings which will cause a drag on the stock which will make stock-option compensation all the less a substitute for competitive wages. And some folks may decide it’s enough to work 12 hours a day, and others may decide they should take their talents to smaller enterprises or start their own.
But none of this may happen for quite a while, because Microsoft is such a powerhouse company, with lots of potential still to grow.
And this is true of lots of today’s high-tech companies.
And it’s not just employees who are being paid with the prospect of future stock price gains — it’s investors. Forget dividends. Forget big salaries. So long as the stock keeps rising, investors and employees will be happy.
And basically, it’s great: People in the high-tech world are working like crazy (and making fantastic technological progress), both because of the excitement of what they’re doing and because of those stock options … investors are shoveling in all the needed capital and demanding not a dime in return. The cost of labor and capital are both low.
Someday, employees and investors will want cash. That could well lead to a vicious cycle that disappoints a lot of employees and shareholders. But in the meantime, we’re remaking the world.
Quote of the Day
That I'm their competition.~Famed hedge fund manager Michael Steinhardt, when asked the most important thing an investor could learn from him.
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