The Baby Bills Are Back

First it was Forbes, and now Goldman Sachs is raising the idea of splitting up Microsoft.  When the Department of Justice proposed splitting Microsoft asunder, the company resisted it tooth-and-nail.  Ten years later, it isn’t a crazy idea and could be done on Microsoft’s terms.  It might just be the best way to unlock value in the company (Goldman points out the company has a –8% annual return on a dividends-reinvested basis since 2002).  So why not divide it (and the accompanying mountain of cash) up into multiple companies and distribute equity in each to the shareholders (of whom I am still one).  Faster growth businesses will merit higher multiples, cash cows can focus on distributing cash and comps with other companies will be easier.

Microsoft today is a sprawling software conglomerate spanning everything from ephemeral celebrity gossip to plumbing resident deep in the bowels of the enterprise.  There are cost efficiencies to having all that under a single roof, but there is less and less evidence of product synergies as the company struggles in multiple markets.  The company may simply be too big to coordinate and synchronize effectively across individual businesses (and has been for a long time).  The strategy tax burden grows with overall size.  For years teams have been trying to minimize any dependencies across the company.

Office would be all over the leading smartphones and the iPad if not joined at the hip to Windows.  Products like OneNote are a waste of time in this day and age without broad and ecumenical device support.  Windows and Windows Live are hampered from encroaching upon Office and Exchange, even as their competitors do so.  Azure’s operating system and programming model choices largely mirror Server and Tools’ offerings.  And Server and Tools would be both more multi-platform and get more credit for existing multi-platform support outside of the Windows orbit.  It has taken mobile over a decade, and it has required an existential crisis, to shake off the Windows desktop baggage.  The complexity of the business results in too much energy going into internal positioning and coordination as opposed to customer value.

You could get as many as six companies out of Microsoft, three of which would be over $10 billion in revenue, a fourth (Xbox) is about half that and the other two around a billion apiece.  So these aren’t tiny businesses that lack scale to stand on their own.  Forbes proposed just three companies (Windows, Office and Web) and Goldman is timidly raising the idea of a consumer business spin-out.  If I were doing it, I’d create six companies:

  • Windows Corporation (Nasdaq: PCOS) – this is the first of the ten billion dollar plus behemoths and a cash-generating machine.  They need to focus on the tablet threat and decouple from the power-hungry Intel.  I’d put Windows Phone here to encourage efficiencies at the base operating system level and a coherent scalable Windows strategy.  Windows Live is the cloud services play.
  • Office Corporation (Nasdaq: CLPY) – behemoth number two is also a cash spewing machine that gets the productivity suite plus Exchange and SharePoint.  BPOS and Office Live are the cloud services play.  They go device crazy.
  • Server and Tools Corporation (Nasdaq: BOBS) – the third behemoth and one with increasingly healthy profits could be part of Windows Corp. but better to have a standalone enterprise company that can focus on competing with Oracle.  One key decision would be whether to put Dynamics here to help compete with Oracle or could be better off being application agnostic (this assumes you can find some enterprise application vendors Oracle hasn’t bought).  You also could buy or merge this company with SAP.  STB gets Azure for its online play.
  • Xbox Corporation (Nasdaq: XBOX) – this is over a $5 billion business (there is some noise in the numbers from Zune and Windows Mobile/Embedded) but minimal to no profits.  Time to show it can stand on its own.  There is little technology synergy with the rest of the company.  Give this company a good chunk of cash to fund the next generation console (and Zune as a fabulous consolation prize).  The awesome Xbox Live is the service play and they can also go nuts across a broad variety of devices.
  • Bing Corporation (Nasdaq: BING) – give Bing a few billion dollars as a buffer and lets see if sinks or swims.  This group is actually doing a great job executing.  Microsoft is now the clear number two and most markets like at least two players.  Plus Google doesn’t look like they will close this market out with the 80-90% share once expected.  With Yahoo’s distribution in hand, lets see if the losses start moving soon in the right direction.  The defensive rationale for Microsoft being in the search business is to keep Google’s profit pools from being used to drain Microsoft’s own profit pools like Windows and Office.  Google might worry less if there is no overarching Microsoft threat. 
  • MSN Corporation (Nasdaq: ADHOC) – you could combine this with Bing to have a single online company, but I think it is better to have a standalone entity that is portable in the coming portal consolidation game with AOL and Yahoo.  Give up MSN for the search distribution.

The Baby Bills (Svelte Steves?) are welcome to do deals with each other reflecting both legacy and new relationships.  You don’t give each company a copy of all the source code as the DoJ had proposed, but both Windows Corp and STB Corp would get a snapshot of the Windows code (and maybe also the development tools).  The sales forces are largely segregated already except for the broad enterprise-facing field which serves multiple businesses today so will require some careful partition.  The company has multiple campuses already and hosters have proven it is easy to operate datacenters with multiple tenants (you could even spin the datacenters as their own company and get all that capital off the new balance sheets).  It would be a distraction for a year but I think the benefits of greater management focus, a strategy tax cut and a more motivated workforce would more than make up for it.

And for those whose reaction to this missive is to viscerally defend the status quo, do you think the whole of Microsoft is greater than the sum of the parts today and what is an alternative to restore confidence in the company’s future and move the needle on the stock price?  I’d love to see Microsoft recapture the energy, ambition and success of yore, but scale and complexity seem like some of the biggest impediments.  And maybe Mini-Microsoft can change to Multi-Microsoft.

5 thoughts on “The Baby Bills Are Back

  1. Rebecca Dias

    Loving your blog entries, keep em coming. Do you think that anything is actually possible as long as Ballmer is CEO? The recent departure of Ray Ozzie is a depressing one. While he never had ownership of any real bits, he was strategic in pushing MS into the cloud which was a lifesaver for the company today. The stock would be tanking much harder without the online services play.

    One challenge I see in your separation of Windows Online and Office is that I feel that Office and the service infr. must go hand in hand. Like you said, no one cares about apps unless they are device nimble. The one core strength is the productivity env for the Information work so it is critical to have portable productivity apps.

  2. Charles Fitzgerald Post author

    Becky,

    Thomas “Justice Not Blind, Just Asleep” Penfield Jackson would congratulate himself but stranger things have happened. I’d place a hedged trade long Steve and short Ray.

    In my world, each division would have its own service component. Office starts with BPOS and whatever else they doing now.

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