Entries from May 1998

Bill Gates — A Rockefeller For The ’90s

David Frum May 19th, 1998 at 12:00 am Comments Off

Two great powers are girding for war. No, not India and China; the U.S. and Microsoft.


After years of threatening to do so, the U.S. Department of Justice has filed an antitrust suit against Microsoft chieftain Bill Gates for monopolizing the software industry. To the consternation of Microsoft’s competitors, its Windows
operating systems come equipped with an Internet browser, an e-mail program, a fax program, a simple word processing program, a compact disk player, a calculator, and many other functions — all for less money than I paid for my first DOS program back in 1982. It’s a strange world in which a businessman is condemned for constantly reducing his prices and improving the quality of his product, but that is the world in which we live.


In fact, it’s the world in which U.S. business has lived for 100 years, and for a historical perspective on it, you might want to take a look at the best business book of the season, Ron Chernow’s dazzling biography of John D. Rockefeller, Titan. The parallels between the careers of Rockefeller and Gates are striking. Both men amassed the largest fortunes on the planet by achieving 95% monopoly control of the vital industry of their era: kerosene in Rockefeller’s case, computer operating systems in Gates’. Both were hated by their competitors for constantly slashing prices and thus driving their less efficient rivals out of business, and both found themselves on the wrong side of the antitrust laws as a result. Chernow is a gripping narrator and a brilliant portraitist and he makes the elusive, enigmatic Rockefeller come alive in his own eccentric way: a devout man, a generous man, a cunning man, a ruthless man – a creative genius who destroyed those who stood in the way of his creation.


In 1911, the U.S. Supreme Court ordered Standard Oil broken up into 34 separate companies. The company’s crime? Using its gigantic market share to force its suppliers — especially the railways that carried its products — to cut their
prices. That enabled Standard Oil, already the lowest-cost producer of oil in the world to cut its costs even further, thus enabling it to sell even more cheaply and undercut its competition that much more deeply. It was the daughter of a defeated Standard Oil competitor — the crusading journalist Ida Tarbell – who most successfully blackened Rockefeller’s reputation for posterity.


Despite (or perhaps because of) his career as the most engaging historian of business in the U.S., Chernow is no free market enthusiast and he takes the accusations against Standard Oil more seriously than they deserve. True, John D.
Rockefeller did not mean to be a public benefactor. He meant only to accumulate wealth by crushing his competitors into powder. But that did not make the benefaction any less real. Between the founding of Standard Oil Co. in 1870 and
the peak of its market dominance in 1890, the cost of kerosene plunged from US23 1/2 cents to US7 1/2 cents a gallon, slashing the cost of lighting and heating the world’s homes and farms. Likewise Gates, out of sheer brutal competitive instinct, has helped put amazing computing power on the desks of hundreds of millions of people around the world.


And just as Gates, by helping to deliver ever-cheaper computing power, has speeded the transformation of the individual computer into a subunit of the worldwide Internet, so Rockefeller, by driving down fuel prices, made possible the inexpensive motorcar. In 1908, Henry Ford introduced the first Model T. In 1910, sales of gasoline for the first time outdistanced those of kerosene. In other words, the U.S. government won its case against Standard Oil at the same moment Rockefeller’s petroleum monopoly was being destroyed by market forces. After 1908, demand for petroleum products rocketed far beyond the capacity of any one company, no matter how colossal, to supply. Instead of delivering cans of kerosene to hardware stores, oil companies had to set up networks of filling stations to pump gasoline into cars. It was a new world, and the old ways were obsolete. Rockefeller became richer than ever. But his market power drained away — at exactly the same time as if the government had left his industry entirely on its own.


It’s a lesson the lawyers prosecuting Gates would do well to learn.

Originally published in The Financial Post.

Herd Instinct

David Frum May 18th, 1998 at 12:00 am Comments Off

Okay,
maybe in some sense they deserve what they get, but I still can’t help feeling
sorry for the baby boomers. They’re like a gigantic herd of wildebeests
starving to death because their own hooves have trampled all the grass.

When
they decided en masse sometime around 1982 that they had to buy a house >that minute, they triggered one of the
greatest real-estate inflations in history — only to discover, when the time
came to sell and trade up eight years later, that they had created one of the
greatest buyer’s markets in history for the baby busters who followed them. Now
they’re doing it again, frantically plowing all their money into stocks,
bidding up share prices in a buying frenzy that can only be compared to –
well, to the housing frenzy of the 1980s. Somebody ought to ask all those old
Woodstockians, Has it never occurred to you that your 50 million fellow boomers
will be liquidating their portfolios to finance their retirement at exactly the
same time you will?

Thirty
years ago, the boomers’ parents were demanding, If you are such individualists,
why do you all listen to the same music, wear the same pants, and affect the
same haircut? Today, those same individualists are all buying the same stocks
at the same moment. And brute demographics tell us that just as the price of
coonskin hats, chardonnay, sport-utility vehicles, and now Viagra shot up when
the boomers decided they wanted those things, so the stock market will rise as
long as the boomers have worked themselves into hysteria about saving for their
old age. Alas, brute demographics also tell us that sometime around 2010,
America will enter into the most prolonged bear market in history, as geezer
boomers unload the shares they bought in the 1980s and 1990s.

Call
it nemesis. The boomers unleashed the sexual revolution, only to find
themselves at the fertility clinic 25 years later. They brought the drug
culture of the Beats to suburban shopping malls, only to find their own kids
toking at 12. They once pored over the writings of Frantz Fanon and Herbert
Marcuse for insight into the instability and injustice of capitalism. Now they
are betting their life savings that the one part of capitalism exempt from
instability and injustice is the New York Stock Exchange. Good luck!

Don’t
misunderstand: I’m part of this trend. I’m a boomer myself, albeit one born on
the boom’s unfashionable post-1958 back slope. Nor am I some fearless
investment contrarian. I too am busily buying overpriced stocks for my
retirement plan, including some Merck at 30 times earnings as recently as last
month. I bought those shares with the same misgiving with which I spent an
entire week’s allowance on an Elton John LP in 1974: a dark internal suspicion
that peer pressure had just manipulated me into doing something incredibly
foolish.

Who
wants to miss out on this fantastic market rally, no matter how irrational one
suspects it is? But the very same herd panic that has stampeded the boomers
into stocks will, one day, stampede them all out again. How to avoid being
trampled by the boomers? Well, as Lyndon Johnson discovered, there are just too
damn many of them to fight. Much wiser to do what Dr. Spock suggested and humor
them: Anticipate where they are going and get there first.

If
I were cleverer about these things, I’d buy real estate in the spots to which
the boomers will want to retire — Idaho, maybe, or British Columbia. (One
thing we know: It won’t be Florida. At age 70, the boomers will still be
rebelling against their parents.) I’d write a mass-market paperback about how
rude and disrespectful teenagers are these days, and I’d start planning another
one, to come out in about 15 years, saying that, just as the time had come in
the 1960s to talk frankly about sex, so the time has come in the 2010s to talk
frankly about incontinence. I’d buy myself a partnership in a funeral home.

As
it happens, I am not at all clever about these things, and so I will probably
just go on buying Merck at ever-rising multiples. And when the day comes that
I’m selling shares for a fraction of the price I paid for them, I’ll do my best
to think philosophically about the disaster. After wrecking things far more
precious and seemingly much more permanent, how on earth could the boomers be
expected to spare my little portfolio?

In The Aftermath Of Monicagate Hillary Is Once Again Ascendant

David Frum May 12th, 1998 at 12:00 am Comments Off

First
Lady Hillary Rodham Clinton is feeling frisky. Last Wednesday, she made news
with a bold break from U.S. Middle East policy. Speaking by satellite to a
gathering of young Israeli Jews and Arabs, she declared: ‘It would be in the
long-term interests of the peace in the Middle East for there to be a state of
Palestine a functioning modern state on the same footing as other states.’

Much
ink has been spilt trying to interpret what these sentences tell us about U.S.
foreign policy. In fact, their real importance is what they tell us about Mrs.
Clinton herself.

Mrs.
Clinton’s power within her husband’s administration has rollercoasted up and
down. She earned a big IOU in February 1992, when she appeared by her husband’s
side on 60 Minutes and nodded her head vigorously as he denied (untruthfully as
we now know) his affair with Gennifer Flowers. Clinton paid the IOU handsomely
in 1993: people whose primary loyalty was to Hillary, not Bill, were given
powerful jobs on the White House staff and in the Justice Department, and
Hillary herself commandeered control of the most important initiative of
Clinton’s first term, health-care reform.

Alas
for Hillary, she made a total botch of her job. Hillary’s friends all too often
proved either incompetent or ethically tainted. And Hillary’s own carefully
cultivated image of rectitude was stained by revelations of her abuse of power
in the White House and her troubling business transactions in Arkansas, from
her inexplicable $ 100,000 cattle futures windfall to the Whitewater deal
itself. Hillary’s explanations of her conduct repeatedly fell a good distance
short of the full truth. By 1994, she had achieved the distinction of becoming
the first First Lady in history to have lower poll numbers than her husband,
and her catastrophic health-care failure helped the Republicans win control in
November 1994 of both houses of Congress for the first time since 1952.

So,
for the next 30 months, Hillary went underground. She wrote an anodyne book and
was sent out of town on long trips to Central Asia and other remote places. She
relinquished much of the substance of her power and even more of the appearance
of power. By early 1996, the president’s popularity had rebounded and his
re-election was in the bag. Hillary’s poll numbers, by contrast, remained
dreadful.

Clinton’s
1996 triumph seemed to have liberated Bill from Hillary’s tutelage once and for
all. Hillary herself appeared to understand that her stock had fallen as her
husband’s had risen. I happened to hear Hillary Clinton speak in the spring of
1997. The talk was off the record and before a friendly audience. Even so, she
chose her words with remarkable care: never once did she talk about what she
thought or which policies she preferred. It was always, ‘My husband’s
administration has done this,’ or ‘My husband thinks that.’

Perhaps
not so coincidentally, Clinton celebrated his new independence by reverting to
his old taste for reckless sexual adventure. And here comes the big irony of
the story. Once again he was caught. For a week, his political fate hung in the
balance. And then, once again, Hillary saved him. Had she kept silent,
Monicagate would probably have destroyed him. Instead, she gave interviews to both
NBC and ABC, to affirm she believed her husband. The public decided, ‘Well, if
she has no problem with her husband’s behavior, how is it any of our business?’
It was 1992 all over again.

And
once again, there was a price to pay. Since the NBC and ABC interviews,
according to numerous reports by White House insiders, Hillary has enjoyed
something close to operational control of the presidency. Even in her 1993
glory days, Hillary stayed away from foreign policy. Not any more. And the
purpose of her comment on Wednesday was to announce her new and astonishing
power to the entire world.

It’s
an alarming state of affairs. Alarming because the lawful chief executive has
in effect been replaced by an unelected and unaccountable freelancer. mso-spacerun:yes'>Ê Alarming, too, because that unelected and
unaccountable freelancer has shown such consistent bad judgment, both at home
and now abroad.