The Steroid Effect and the Stock Market

After several exchanges with my buddies, the other half of my life--the IT industry--collided with sports. I realized how the effect of the steroids issue in baseball is similar to what's taking place in the stock market and the U.S. economy today. Maybe I'm making this jump because baseball season is in full swing, and my Boston Red Sox are in first place ahead of the Bronx Bombers. Maybe I'm reading too much into this because I'm a sports fanatic, but I see a "steroid effect" in our economy. Here's why.

I believe that if it continues down its current course, Major League Baseball will collapse within the next five years. Bud Selig will go down in history as the worst commissioner ever for letting the players' union get too much power and for allowing too many bad owners open franchises in poorly conceived markets (seriously, who thought of putting not one but two teams in Florida? You could find more people that have seen Mariah Carey in "Glitter" than a Devil Rays game). Strikes, high salaries, low attendance, payroll discrepancies and too many hair-brained expansion teams are going to ruin the game. But the worst part about MLB's state is this steroids business.

Several players and league officials have stated recently that steroid use in the majors is rampant; one player even publicly admitted that he used steroids during his MVP season. While steroid use had long been suspected--MLB doesn't test for anabolic steroids--the evidence before us now is unsettling, as some players estimate more than 50 percent of the players have used illegal substances to enhance performance. It's not such a farfetched claim. Baseballs are literally jumping out of the parks in record numbers. Ten or 15 years ago, you were happy to see the major league home-run leader break the 40-dinger mark. Now guys are hitting 60 or 70 homers. Some teams have four different players hitting 30 or more homers. It's like a nine-inning home-run derby.

Not many people were worried about this until recently. After all, only a true baseball purist enjoys a 1-0 pitchers' duel. The fans love home runs. They love high-scoring games and lots of offense. Why should we worry about the home run fest?

Because in all likelihood it's not real, that's why. Sure, history will record the numbers. But those who know better will always be filled with doubt and for them, the game will never really be the same. Even if steroid abusers are small in numbers, the scandal still casts doubt on just about every player and every accomplishment in recent years.

Well, MLB is reaping what it sowed now. By failing to implement steroid testing and thus making baseball a safe haven for illegal drugs, they've turned the sport into a mockery. Charles Barkley was right (gasp!)--athletes are not role models. It makes no sense. They test for steroids in other professional sports. They test in the Olympics, although sometimes it's not effective. Get this--they even test in Minor League Baseball (although they don't suspend guilty players). If baseball doesn't start enforcing the law, every major league park will look like Tropicana Field in Tampa--basically empty, with only a few diehard fans deluding themselves in the stands. Sadly, I suspect the powers that be in baseball were so happy with the offense explosion post-1995 that they turned a blind eye to what was really going on. The numbers were so great, they decided not to mess with success.

Sounds familiar, doesn't it? The steroid effect and the plight of baseball are eerily similar to what's happening in the stock market and, unfortunately, our own IT industry. Two American institutions that celebrated explosive success in the late 90s are now found to have unlawfully and unethically boosted numbers, which calls into question the validity of their unprecedented good fortunes and threatens to demolish their futures.

Say what you want about a potential economic recovery, but this industry and country won't see major improvements until investors feel they can trust Wall Street again. With each passing week, however, we see another company under the gun of the Justice Department or Securities and Exchange Commission. Shading financial reports with fuzzy math, dumping losses into spin-offs and subsidiaries, hidings assets, juggling contract revenue and finding other creative ways to improve performances in the books are rampant in our economy today.

I'd like to believe these deceitful "errors" were committed by a handful of rogue executives, full of greed and without morals. But it wouldn't be true, would it? We all like to think that it was just Enron and Arthur Andersen, but too many corporations have been probed for this to be a scenario of isolated incidents. Xerox, Tyco, WorldCom, Qwest, Global Crossing, Adelphia Communications and Kmart (Kmart!) are just a few of the well-known companies under the government's microscope. Plus, financial services firms like Ernst and Young and Merril Lynch are also finding themselves in hot water. It's all confirming the public's suspicion that our allegedly transparent, by-the-book market is stricken with deceit and half-truths.

Even the SEC itself is being scrutinized; chairman Harvey Pitt is under fire for meeting with KPMG, a former client of Pitt's when he was a private lawyer, during the SEC's investigation of the company and its audit of Xerox.

Sadly, a number of the software companies have also found themselves the subject of government probes and inquiries. Companies like Microsoft, Computer Associates, Peregrine Systems and Network Associates have been scrutinized by government regulators to varying degrees. Other technology firms such as Legato, Quintus and Unify have been investigated.

The "steroid effect" hurts companies that should have no reason to fear, too. For example, rumors swirled around IBM in April that Big Blue was in trouble with the SEC. The rumor was untrue, but perception sure slapped the hell out of reality--IBM's stock price took quite a fall as a result of the rumors.

The accounting controversy may be having a worse effect on the software industry than others. In a sense, the "steroid effect" is more damaging to software vendors because this industry has already been slowly losing credibility with customers and investors. Many software vendors have become experts at the art of marketing embellishment, and there are simply too many exaggerated claims around products that are overly complex and difficult to integrate. Unlike hardware vendors, which are limited by benchmarks and speeds and feeds, software performance is difficult to define. It's gotten so bad that customers can't really be sure of anything when they engage a software company. I've mentioned the unfortunate erosion of credibility of software players before in a column that ruffled some feathers (see "Forget the Whales--Save Software"), and now the accounting woes have become yet another obstacle for vendors to leap over.

What's the solution? When a company is forced to restate their earnings for three or four years, then the system isn't just imperfect; it's flat-out broken and it needs to be overhauled. Make executives more accountable, not just accountants and CFOs. And make them criminally accountable, too. No more white-collar fines and probation. No more "Generally Accepted Accounting Practices." Give me well-defined, no B.S., follow-the-rules-or-go-to-jail accounting laws to protect people. And the investors have to demand these changes, just as the fans have to demand steroid testing to save baseball. This isn't "Monopoly" or fake money we're dealing with, after all. This is people's hard-earned money, their children's college tuition, their life savings, and retirement funds.

And we were fooled. Had. Took. Swindled. Bamboozled. Conned. Cheated. Pick a word, any one of them will do. We bought into the success of the stock market, literally, but much of it wasn't real. We found out that the numbers do lie, and so do the executives and accountants we trust with our money. I'm beginning to think that the majority of these companies were never the powerhouse successes that they portrayed themselves to be a couple of years ago. I'm thinking it was all smoke and mirrors, an Oz-like disguise.

I feel like Richard Gere at the end of "Primal Fear." Remember that scene where Gere is talking with Edward Norton, a cold-blooded killer who had pretended to be a mentally ill kid named Aaron? Norton's character had fooled everyone into thinking that he had a violent split personality named Roy and that Roy was the murderer. Gere catches on in the final minutes of the movie, asking Norton if there ever was a real Roy. "There never was an Aaron," Norton replies with a sinister grin.

Well, folks, there never was an Enron.

To get over all of this depressing stuff, I've decided to start a fantasy league for the IT industry. That way, I can act like I'm playing the stock market, only I won't lose my life savings. So I'm going to put together a fantasy software league. Why not? We could have a draft, pick some "players" and compile stats on license revenue, earnings, market cap, etc. At the end of the calendar year, we'll compare numbers and see whose "team" wins.

Anyone want to play?