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Tuesday, February 25, 2003 - Page updated at 12:00 AM

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Company sparks region's growth

Seattle Times technology reporter

The flood of new millionaires created by Microsoft has slowed to a trickle. But even if the company never creates another software tycoon, it continues to have an outsized effect rivaling and in some ways surpassing — that of Boeing, which shaped Seattle through most of the past century and has three times the number of employees.

In jobs, in wealth creation, in real estate, in the spawning of scores of smaller businesses, the company that put Redmond on the map has spread its influence deep and wide in its quarter-century of existence.

And it has resources to do more. Even during the current downturn, the world's biggest and most powerful software company is selling more than $2 billion worth of software a month and has more than $43 billion in cash, the biggest hoard in corporate America.

While Microsoft employs 25,893 in Washington, its reach goes far beyond those who get a paycheck.

"Microsoft has had an effect on the economy that is in some sense immeasurable — the great wealth that's been created, and the lasting effects that wealth has on the economy in terms of spending or as a source of venture capital," said Dick Conway, a Seattle economist hired by Microsoft to study its economic effect.

Conway's upcoming report for the company concludes that Microsoft was the single largest contributor to economic growth in Washington from 1990 to 2001, accounting for one-seventh of the total gain in state employment.

Other findings from Conway's study include:

• Every job at Microsoft supports 3.4 other jobs in the economy, higher than the 2.5 jobs supported by Boeing.

• Directly and indirectly, Microsoft accounted for 128,000 jobs, or 3.6 percent of the total in Washington.

• Microsoft employees made an average base salary of $89,600 in 2001. Including stock options and other benefits, they averaged $255,000, nearly seven times the state average.

• In-state employees made $2.4 billion in wages in 2001. In addition, they had $3.5 billion in stock-option income.

• To support operations, the company spent $800 million on goods and services from Washington producers.

• From 1990 to 2001, Microsoft was responsible for more than a fourth — 28.3 percent — of King County's employment growth.

"It is remarkable because we did have a strong upturn, particularly here in King County, in the latter part of the decade, and still Microsoft accounted for better than one-fourth of the growth," Conway said.

But it will be a different story this decade, when stock options are expected to have an increasingly smaller effect. Economists say the option phenomenon that funneled billions into the area in the late '90s is on a downswing.

"I think the era of newly created Microsoft millionaires is virtually over," said Roberta Pauer, the state's regional labor economist in Seattle.

Two giants

One way to size up Microsoft's effect is to compare it with Boeing, the company that arguably still has the most sway over the state economy.

As a manufacturing company, Boeing will probably always employ more people than Microsoft, but the airplane maker is cutting jobs, selling off facilities and talking of possibly building its next jetliner elsewhere.

Microsoft, meanwhile, is hiring thousands, expanding its campus in Redmond and is expected to start construction on another in Issaquah this summer.

Both of the titans have undergone a midlife transition that led to structural changes, new corporate visions and a push to diversify into new markets. Both also made the changes as demand weakened for the core products that established their initial success — airplanes and software for desktop computers.

But unlike Boeing, Microsoft has no plans to embody its new self-image by moving its headquarters to a skyscraper in a larger city.

"We're very satisfied where we are," said Chairman Bill Gates, a Seattle native who founded the company 28 years ago with Paul Allen, a pal from Lakeside School.

While Boeing executives complain about the business climate in Seattle — often in conjunction with lobbying efforts — Gates and Microsoft Chief Executive Steve Ballmer credit the region as a factor in the company's success.

"Most (employees) are in Seattle and are very keen to benefit from the things that are great about the area," Gates said. "So being in Seattle has worked super well for us, and it's not something that we'd ever, ever change."

Traffic congestion and the challenge of growing in the increasingly dense suburbs are concerns, but Gates said Microsoft still wants to concentrate its development work in one place.

"It's a challenge, but it allows us to innovate across the boundaries and get a level of coordination that, if we split it into too many locations, we just wouldn't get," he said.

Ballmer said governments frequently ask the company to expand its development work into their territory. Already the company is doing that in China and at its development center in Hyderabad, India, where Ballmer said he would like to add hundreds of jobs.

But the company said most of the new development jobs will continue to be added locally.

"A lot of people would like us to do more R&D elsewhere, but we like having things close," he said. "And that could conceivably change at some standpoint, if the Seattle market really does saturate for us, but I don't think that's anytime in the near future."

In the driver's seat

While economist Conway's work is widely respected and cited by state forecasters, others are less certain about the company's economic effect locally. It's especially hard to figure the impact of option income, because it fluctuates with the stock price and it's not clear how much is spent locally, said Pauer, the regional economist.

"It's an intractable problem," she said. "You have no way of knowing, with the stock-option values, how much are spent locally in real estate or venture capital, in startups vs. investment in the national stock market, or out of state."

Employees receive options to buy stock at a later date but at a price fixed when they are hired. They may get additional options later as part of their compensation.

The options become valuable if the stock price is above the fixed price at the time the option is exercised. If the price drops far enough, they are worthless.

At Microsoft stock's recent price range, more than half of the outstanding options are worthless, though Ballmer contends that even those options have value and can be sold to speculative investors.

Meanwhile, the number of older, valuable options is diminishing because they have expiration dates. They must be exercised within seven to 10 years, so most may be used up within a few years.

The number of options exercised fell by half from fiscal 1999 to 2001, according to the company's most recent annual report.

Tracing the cash

The mechanics of options aside, it's difficult to pinpoint their effect on the economy through economist models. But there is plenty of anecdotal evidence of their presence, particularly on the Eastside, where it's still common to see Ferraris in the parking lot at the Redmond Target store, huge donations to school fund-raisers and elaborate mansions built along the shores of Lake Washington.

Boeing bonuses in the late 1980s often went toward RVs or a new pickup. But Microsoft employees may spend their windfall on a yacht in the Mediterranean.

One area that Microsoft-created wealth clearly affected is the residential real-estate market. Conway estimated Microsoft employees boosted the price of Seattle-area houses by 4 percent in the late 1990s, based in part on his estimate that the company created 10,000 millionaires.

"In other words, home prices would have been about 4 percent lower if it weren't for the high-priced homes Microsoft workers bought," he said.

Pauer said Seattle-area real-estate prices are still increasing 4 to 7 percent a year, "but they're reasonable gains, they're not double-digit gains, they're not 10, 12, 13 percent a year."

The wealth also spreads through philanthropy. Even with the stock price down, employees donated $15.4 million in cash to the company's most recent charitable campaign. The company matched the donations with $13.6 million, for a total of $29 million.

Hiring slows

Another way the state tracks Microsoft's economic effect is by monitoring how many people it hires.

As of Dec. 31, the company had 53,670 employees worldwide, including the 25,893 in the Seattle area. Though the pace of hiring has slowed of late, local employment has nearly doubled since 1998.

Most of the company's current job growth is happening elsewhere, as it expands its sales and service organization. Of the 5,000 new jobs budgeted for the fiscal year ending June 30, only 1,500 to 2,000 are expected to be local.

Microsoft's hiring has helped during the current downturn, but the numbers couldn't make up for the 40,000 Boeing jobs lost over the past four years.

"They were a help this time in terms of the employment growth. It would have been that much worse if they'd been laying off," said Bret Bertolin, senior economic forecaster with the state Office of the Forecast Council.

Within the technology industry, Microsoft's hiring is an exception. Its competitors have mostly cut jobs to shave costs. But Microsoft is not immune from the chill. As of Dec. 31, the company was falling behind in its hiring goals, a move that helped the company reach its quarterly earnings goals.

Boeing's in-state payroll could overtake Microsoft's if it ramps up significantly during the next upswing in the cyclical aerospace industry, Pauer said. Even so, the plane maker is no longer the biggest show in town.

"It used to be Boeing had no competition for ... greatest impact of a single company," she said. "It used to be Boeing, and then you had to go to the B-list. Microsoft and Boeing are now peers in their payroll impact, and that's quite amazing for a company that 20 years ago had just a few thousand (employees)."

Square-foot growth

Microsoft's relative optimism about job growth is telegraphed by its real-estate activities, including the development of a new Issaquah campus called Microsoft Highlands, targeted to accommodate up to 15,000 more employees.

Currently, most local employees work on two campuses in Redmond, with others scattered among offices in Bellevue, Issaquah and Seattle, near Pike Place Market.

At the start of the year, the company had 8.3 million square feet in 99 buildings or leased offices. That's more than the nearly 6 million square feet of office space in downtown Bellevue. (Microsoft had 101 more sites elsewhere in the country and 241 abroad.)

The company and subcontractors have an average of 450 employees a day to run the physical plant locally. Contractors building an office structure on the main Redmond campus employ an average of 148 workers a day, a figure that could rise to around 225 per day during the peak construction season this spring.

On average, the company adds 500,000 to 700,000 square feet of office space a year, the equivalent of four or five Costco stores.

Overall, Microsoft spent $436 million on new facilities and equipment in the second half of last year, compared with $322 million during the same period of 2001. As of Dec. 31, it had made commitments to spend $144 million more, according to filings with the Securities and Exchange Commission, but the filings did not specify when or where the $144 million would be spent.

All of this growth may help the economy, but it also creates friction in Microsoft's back yard. Growth spurred largely by the company has led to traffic congestion on State Highway 520 and in the Overlake neighborhood straddling Redmond and Bellevue. It also prompted the city of Redmond to block new commercial construction from 1997 to 1999 so road and housing construction and government services could catch up.

The moratorium prompted Microsoft to take an option on the Issaquah site, said José Oncina, Microsoft's director of real estate. The company's first choice, he said, is to continue expanding its main campus, but it needed assurances it would be able to.

"That's why we have Microsoft Highlands," he said. "We could not predict with certainty to grow here (Redmond) 12,000 to 15,000 people."

Even as the Issaquah plans proceed, however, Oncina is working to expand the 300-acre main campus. Over the past three years he has overseen construction of 2 million square feet of office space, including a new administrative center where Gates and Ballmer have their offices.

Now under construction is the largest campus building yet, and more growth could come west of Highway 520. Another option being studied is demolishing the eight original buildings on the campus and replacing them with taller structures with more efficient layouts, Oncina said.

At the Issaquah campus, on a hillside above an old gravel pit north of Interstate 90, Microsoft plans to build one building at a time as space is needed.

"If the head count keeps growing, we'll start construction next summer; if head count slows down, we'll hold off," Oncina said. "If head count is even greater than what we think, then we'll add additional buildings."

Oncina's planning focuses on the next five years, but he's also looking further ahead, past the 10 to 15 years it may take to complete the Issaquah campus.

"I don't think we're going to stop there," he said. "I have to think beyond that."

Brier Dudley: 206-515-5687 or bdudley@seattletimes.com

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