WASHINGTON, Oct. 3 (UPI) -- Globalization worked, as investors and politicians around the world are learning with the migration of global exports, investment dollars, and jobs to such countries as China, Brazil, India, Argentina, and Russia. So also has technological diffusion worked -- which is why, not by coincidence, those countries (and various small Western firms) pose major threats to the intellectual property rights of a number of key U.S. sectors, from pharmaceuticals to chip manufacturing to computer software.
The bottom line for global investors fishing for a few good shorts at these high levels for the U.S. technology market is, which of these sectors is most vulnerable to the kind of domestic and international assault seen in, for example, the music recording industry -- which has seen sales plummet in recent months despite the too-late effort to battle off low-cost piracy abroad and no-cost sharing over the internet.
Smart investors are putting their shorts on the computer software industry, with a special emphasis on the pitiful, helpless giants such as Sun Microsystems, Oracle, and even Microsoft. Awash with cash and wishy-washy bureaucracy that would have scandalized their founders 25 years ago, these are the giants that have the farthest to fall -- and will have the most difficult time dealing not only with emerging market piracy, but the more subtle assault of "open source" software termites operating in the U.S. and Western Europe.
Straightforward piracy is an issue solved for the software industry 25 years ago by a brilliant young executive named Bill Gates, who realized that only by basing software on undisclosed "source code" could the industry ever really thrive. Today, however, the quasi-monopoly enjoyed (in various sectors) by Microsoft, Oracle, and Sun is highly vulnerable to outright theft by such nations as Brazil, China, and Russia -- to name just three.
The collapse of global trade talks last month, led by the U.S. with its imposition of protectionist curbs and farm subsidies since 2001, threatens all global growth. But it's especially daunting for the owners of intellectual property.
It won't be long before some Third World country reverse engineers a workable version of one of the older (and better, actually) versions of Windows(r) -- perhaps even using some of the source code the company has willingly dribbled out in recent years to shield itself from various anti-trust cases. At that point, neither the U.S., diplomatically, nor an army of lawyers from its unpopular corporate giants, will be able to do more than the vast number of smaller companies that have already given up in international patent cases.
The problem of outright theft, however, is aided and abetted by a more subtle, but in the long run even more dangerous, threat to proprietary software: the "open source" movement. Open source can be a misnomer, but in general, open source is a product of thousands of programmers who agree to share their work in developing a joint product with revealed code -- hence, "open source." There are now many programs developed in this way, such as the operating system Linux, which might better be called "mixed source" or "shared proprietary source" -- because under the licensing arrangements for using Linux, programmers who improve or make changes to the system must agree that their innovations become the property of the system.
Linux and many programs built on it (such as the Linux-based office suite) function comparably to Microsoft, Oracle, and Sun products. The difference is, they're practically free. They thus fit in to a world in which consumers expect intellectual property to approach the near-zero marginal cost they now enjoy in sharing music, buying or selling stocks, making long-distance telephone calls over the internet, and logging on to the net itself using wifi.
These products and the service they may need, to be sure, are not truly free over time. Large companies, not to mention whole countries, that are now dumping Microsoft to run their networks on Linux, want help servicing their products. Hence such Davids like Red Hat and VA Linux have sprung up and -- over the last two years -- significantly outperformed the stock price of the proprietary software Goliaths.
Still, on the whole, no cost up-front is hard to beat. The software giants already concede their products have no advantages over open source products in terms of security and reliability. They hope to maintain sales based on superior service and customer service, but then again, none of the companies mentioned have a reputation for much other than arrogance when it comes to dealing with customers.
Furthermore, here again there is an important interaction between the emerging market of open source software, on the one hand, and the emerging market countries on the other. The high-tech low-wage countries of China and India.
"It is no accident," as the Marxists like to say, that China and India were able to work out a common agreement to implement open source software for many government systems. This is the least unlikely partnership one can conceive short of a joint venture firm named Sharon & Arafat.
According to a reliable U.S. official familiar with Chinese industrial espionage efforts, the use of Linux products by those governments is only the beginning. "The Chinese and the Indians both plan to become a hub for developing countries eager to escape from U.S. software 'hegemony,' if you will," the source said. Today, the People's Bank of China. Tomorrow, a billion desktops in India, another billion in China, and another quarter of a billion in Brazil.
In a friendly but powerful critique released this week, a Merrill Lynch analyst friendly to Sun Microsystems implored the company to lay off workers, cut costs, and reduce the timidity of the company's middle management. The same observation might be applied to Oracle and Microsoft as well.
But cost-cutting misses the point. It didn't help the recording industry; consumers are balking at paying $25 for a CD that costs a few pennies to produce, but they will also balk at paying $15 or $10. The same dynamic will inhere in software, the more so as these companies partake in the general product license governing Linux and Linux-based applications.
Sun and Oracle have even tried to sidle up to the Linux and open-source movement. In effect, they have invited the termites into their house, hoping that after a little munching a symbiotic relationship can be worked out. "Let them eat Microsoft," is the motto, and, to be sure, there is a special hatred reserved only for Bill Gates among the community of programmers who couldn't get hired, or compete, with the Redmond wunderkind over several generations of products.
Even so, it's a better guess that Microsoft, with the most cash and the largest house and the most solid oligopoly power, will out-survive Oracle and Sun. Ultimately it, too, is vulnerable. But with a kind of poetic justice, the first owners of intellectual property rights to partake in the undermining of intellectual property may be the first to go.
There are, to be sure, strategies that each of the Big Three could employ to ward off the termites. That's a job for those companies and their strategists.
In any case, none of the companies seems interested -- or even awake. Like IBM 25 years ago, they seem not even to be fully aware of the threat. Hence it is possible for Merrill, an obviously friendly critic of Sun, to critique the company's operations without reference to what is, in the long run, the primary threat to its existence.
THE BOTTOM LINE
Sun and Oracle remain good shorts, as they have for more than a year. Microsoft is becoming a good short, too; at these levels, it is already time to start nibbling. On the buy side, there are dozens of feisty young companies -- Red Hat, Sco Group, and VA Software -- that are already taking advantage of the new global paradigm.
The little competitors, indeed, are already fighting amongst themselves, much as some types of insects and carnivorous fish eat themselves. Heck, they're already suing each other. In this too, the software industry takes much hope, much as the recording industry delighted in its ability to crush this music-sharing program, or that overseas piracy operation. Pirates, one can kill -- but piracy, especially once it is welcomed into the intellectual community, just changes its address. And termites, unless completely exterminated, just keep munching.
Sell the proprietary software makers, buy the feisty open-source servicers. If the software behemoths awake, you'll read about it first here. In the meantime, that low rumble you hear from Santa Clara, Redwood City, and Redmond isn't a giant stirring. It's just a loud snore.
(Gregory Fossedal is chief investment officer of the Democratic Century Fund, managed by the Emerging Markets Group. His firm may hold some of the securities mentioned his articles. These positions and opinions are subject to change without notice, and neither UPI nor EMG assumes any responsibility for investment decisions made by readers. Investors should contact their own professional advisor before making any decisions to buy or sell these or any related securities.)