Today's Wall Street Journal contained an article by their minority-owned analyst firm, breakingviews.com, echoing my own calls for breaking up Microsoft, entitled "A Microsoft Midlife Crisis?"
I wrote about Microsoft here, here and here, in some cases, quite some time ago, that it would be better for shareholders if it were split into logically consistent pieces: applications, operating systems, online, and gaming.
Now, Steve Rosenbush, Rob Cox and Martin Hutchinson write,
"Microsoft is spending freely because it has been unnerved by the rise of Google. Google has advertising revenue that Microsoft, despite the billions of dollars it has invested in search technology, has been unable to match. This potentially subsidizes Google's practically free offering of software that competes with Microsoft's core products.
So Microsoft is understandably nervous. But overpriced deals won't solve its problems. Microsoft is behind the curve on developing applications such as social networking and advanced search. Its over-engineered products are still too complex. The answer to Microsoft's problems must come from within. Breaking the company into more-manageable parts, instead of adding layers through overpriced shopping, would be a better way forward."
It's nice to have my analytically-based views reinforced by other observers, albeit much later. Granted, I don't typically give the folks at breakingviews much credit for original or controversial thinking. But in this case, I am pleased that somebody else sees the same irrational, inefficient behavior at the Redmond software giant, the same consequences and probably solution.
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Perhaps you missed this piece form breakingviews, published in November 2005:
Print Breaking down the gates
Bill Gates fought furiously against a break-up of Microsoft in 2001 when the Justice Department went after it. But it may be time for the software king to think of splitting up his empire of his own free will. That's one of the few ways he could liberate Microsoft from a cat's cradle of bureaucracy that's stifling entrepreneurial spirits and has led to a stagnant stock price.
Microsoft certainly knows there's a problem. "Complexity kills. It sucks the life out of developers and makes products difficult to build," was how Ray Ozzie, the chief technology officer, put it in an internal memo last month. Microsoft now has 60,000 employees. For an old-line manufacturer, that wouldn't be huge. But for a supposedly creative organisation, it's obese.
There are two main problems. First, decision-makers in one part of the organisation must make sure they don't conflict with one of Microsoft's multifarious technical or business priorities. The need for everything to conform with the Windows operating system - which, in turn, is undergoing a long-winded multi-year overhaul - saps everybody's energies. It's doubtful that even Steve Ballmer, Gates' right-hand man and a bulldozer of a figure if ever there was one, has the drive to break through.
The second problem is that Microsoft is losing the talent war to the likes of Google. Sure, it still has the world's largest base of accomplished programmers. But the era of gold rush option grants and cutting-edge work are over. If you want to make millions and have fun, Redmond is no longer your first destination.
It's no wonder, as Ozzie pointed out, that Google is eating Microsoft's lunch in Internet search; that Skype has done the same in internet telephony; and that Adobe has cornered the document-imaging market.
Splitting the group into three bits would be like Alexander the Great cutting the Gordian Knot, a piece of rope so complex it couldn't be untied. One would focus on operating systems. It would be a big monopolistic cash cow, with about $24bn of sales next year and $11.5bn of operating profit. Give it a public utility-style multiple of 12 and it would be worth $138bn.
The second part would produce Microsoft's popular suite of Office products. Microsoft Office, too, would be a cash cow - with $12bn of sales and $6.7bn of operating profit. On the same utility multiple, it would be worth $80bn. In the past, of course, Office benefited from its ties to Windows. Indeed, Gates was able to use his monopoly in Windows to build one in desktop software, squishing the likes of Lotus and WordPerfect.
But this linkage is now, arguably, a handicap. Anti-trust authorities have insisted on so many rules that Microsoft is no longer able to give in-house developers much of an edge. Meanwhile, new rivals are writing little packets of software in record time and distributing them over the internet. Freed from bureaucracy, an independent Office company could do the same too.
The final business, call it Blue Sky, would contain most of Microsoft's newish stuff - the Xbox games business, the MSN internet portal, Hotmail and the like. This division is barely, if at all profitable. But it should have about $7.6bn of sales next year - more than Google.
Now Blue Sky wouldn't merit Google's astronomic multiple of 17 times sales or even Yahoo's multiple of 11 times sales. But give it a multiple of six times sales and it would be worth $46bn. It would also have a better chance in the talent war. Developers might like Blue Sky options.
Unfortunately, a break-up wouldn't be a quick fix to Microsoft's moribund stock. Add up the three bits and chuck in the company's $40bn cash pile and you get to $304bn - only a touch above its current market cap. But there would, at least, be a chance of each business moving forward. Keep them tethered and it's more likely that stagnation will be followed by retreat.
That's entirely correct. The only reason I skim their little box on the back page of the Journal is because it's effortless.
I find their pieces to be largely safe rehashes of others' ideas, or just plain unlikely notions.
I was not even aware they existed back in 2005.
My own recommendations for Microsoft's breakup were independently developed from as long ago as the early months of this blog. Which was also in 2005. However, since that's from Blogger's pre-label days, even I haven't completed labelling every one of those early posts.
-CN
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