PHOENIX - When IBM bought Lotus in June 1995, many Big Blue fans and other industry pundits expected the $3.2 billion software acquisition which put IBM on the desktop would be a "Microsoft killer" (see Annex Bulletin 95-44, 6/06/95). It's been anything but...

In its fiscal year 1998 (ended June 30 last year), Microsoft eclipsed IBM's software revenue ( $14.5 billion vs. $13.5 billion - even giving IBM an extra six months, as its fiscal year end is Dec. 31). And this year, it has eclipsed ALL of Big Blue's corporate net profits! ($7.1 billion vs. $6.7 billion -last four actual quarters).

To put things in perspective, Microsoft earned more money for its shareholders from about $19 billion in revenues, than IBM did from the $82 billion!

Of course, all of that was entirely predictable. We said in April 1996 that Microsoft would eclipse IBM in 1998 (see Annex Bulletin 96-27, 4/25/96). And it did (see Annex Bulletin 98-06, 2/05/98). Before padding its lead in 1999 ($19 billion to $14 billion).

So the fact that Microsoft has now also eclipsed Big Blue's entire net profit - from all its hardware, software and service businesses combined - is only adding a Redmond insult to Armonk's injury.

Four years after IBM's highly touted Lotus acquisition, the "Microsoft killer" expectations are starting to sound like a bad joke. Prior to the purchase, IBM software revenue was 2.4 times Microsoft's. Now, Microsoft's are 1.3 times IBM's.

They say that nothing attracts competition like success. And fat margins. Unfortunately for Microsoft, success and fat margins also attract envy. And lawsuits. If you can't beat them, sue them!

Not since the days of IBM's dominance of the computer industry's early years (1960s and 1970s), has a company been under such a legal assault by the government as Microsoft is these days. The fact that Washington may be acting as a proxy for Microsoft competitors is highlighted by the star witness testimony of competitor executives, such as those from IBM or Netscape, in the Justice Department's antitrust lawsuit.

And now, Microsoft has attracted the SEC scrutiny, too. The company announced on Thursday that SEC has been investigating its accounting practices, especially the way it accounts for reserves.

SEC's beef? Microsoft may have UNDERSTATED its profits by creating reserves (so called "unearned revenues") which may be too high for SEC's liking.

O tempora, o mores! During the pre-perversion days on Wall Street, companies used to be chastised if they OVERSTATED their earnings. Now, the government seems to chase anybody whose success represents a threat to the corporate banking and industrial establishment.

Besides, even if Microsoft did somehow overstate its revenues, you would think that either the accounting board (FASB) or the IRS might have more to say about that than a government agency whose job is to regulate the stock exchange trading (the SEC). What makes this "investigation" even more perplexing is that it was supposedly launched by a Wall Street article published in January of this year.

Ever heard of any other competitors, such as IBM or Oracle, for example, being investigated by the SEC on accounting matters? We haven't. So asked by this writer at the Thursday's teleconference with analysts and the media to comment about whether or not the SEC investigation of accounting rules was unusual, the Microsoft CFO, Greg Maffei, replied that the SEC does have a large staff who tend to deal with accounting issues.

Yet it took a Wall Street journal reporter to draw their attention to Microsoft!? So why don't we just get rid of the SEC accounting department, and have the media scrutinize public companies instead? The SEC lawyers can then pick up from where the reporters leave off.

And with a good reason (did the stock rise), if you look at Microsoft's business results. After changing the way it accounts for certain unearned revenues (to mollify the SEC hound dogs?), and after reclassifying certain categories of its costs and expenses, the company's bottom line did not change at all. But Microsoft's revenue for the first nine months of the current fiscal year went up by about 5.8% (from $13.2 billion to $14 billion).

The company has also reclassified its prior years' figures to conform with the new presentation (you can see them all in Table 2).

Putting aside such accounting issues, Microsoft's business results for the FY99, which ended on June 30, are expected to be nothing short of outstanding. As you have already seen, we expect the company to report a net profit of $7.1 billion on revenues of $19.3 billion, for a 37% net margin.

Since the launch of Windows '95 in August 1995, Microsoft's earnings have grown at a compound annual rate of 49%, while its revenues have been increasing at a rate of 34% annually.

Now compare that to IBM software's meager annual growth of only 3.2% during the same time frame, and then you may understand why success breeds envy. Especially considering the slow and painful death of a would-be Windows challenger - Blue Lou's OS/2 Warp at the same time.

As a result of the surge in Microsoft's so-called "platforms" (operating systems) revenues, this segment of the company's business now accounts for about 55% of the total, compared to only 40% in the pre-Windows '95 year.