How to break up Microsoft: Maybe it’s not such a crazy idea

What if someone could create three large, nimble and profitable tech companies out of thin air, building each of them around a well-known and successful technology brand?

Each company would be big enough to be an industry leader, but not so giant as to be weighed down by a massive corporate bureaucracy or ties to legacy products.

These companies would be led by veteran tech executives, and populated with experienced employees — but they would have the freedom and flexibility of startups, blazing their own trails.

Sound good? Inside Microsoft, it’s more like heresy. But maybe it shouldn’t be.

A story by journalist Kurt Eichenwald in the latest issue of Vanity Fair examines “Microsoft’s Lost Decade” — documenting the company’s struggle to keep pace with its rivals. The piece concludes by suggesting that the ultimate solution could be to break Microsoft up.

So what would that look like? I decided to dive into Microsoft’s financials and imagine the possibilities. First, as a baseline, see the chart above for a forecast of Microsoft’s divisional results in calendar year 2013, as projected by Nomura Research.

There would, of course, be multiple ways to divide Microsoft into independent companies. This is very much a back-of-the-napkin exercise, but after spending time with the numbers and running the concept by some of my contacts on the Microsoft beat, this is what I came up with.

Windows Corp.: Windows 8, Windows Phone, Windows Azure, Windows Live, Windows Server, Windows PC hardware.

  • Revenues: $43 billion
  • Profits: $23 billion
  • Location: Redmond

Office Corp.: Microsoft Office, Word, Excel, PowerPoint, SharePoint, Exchange, Lync and Dynamics business applications.

  • Revenues: $28 billion
  • Profits: $18 billion
  • Location: Bellevue

Xbox Corp.: Xbox 360, Video Games, Xbox Live, Kinect, Halo, Mediaroom, Microsoft Studios.

  • Revenues: $10 billion
  • Profits: $900 million
  • Location: Seattle, Pioneer Square

Particularly in the case of Office, someone could come up with a better corporate name, possibly preserving the Microsoft name in some form. But regardless of what these new companies are called, the big idea is to let each of them grow and flourish on its own over time.

There’s a regional economic development angle here, particularly with the idea of putting the Xbox company in Seattle’s Pioneer Square. (I was invited to speak about Microsoft at the Seattle Rotary Club later today, and this idea of creating three economic engines from one could appeal to business and community leaders.)

In this scenario, the company would sell the unprofitable Online Services Division to another corporate buyer. (Facebook?) Cloud computing, online services and digital advertising would still be an integral part of the remaining businesses, benefiting from Microsoft’s experience. But farewell, Bing and MSN.

Microsoft CEO Steve Ballmer. (Microsoft photo)

(Sorry, but last week’s $6.2 billion writedown from the 2007 aQuantive deal was the last straw for purposes of this exercise. It’s hard to defend the online division as a core competency for Microsoft, at least from a business perspective. My colleague John Cook has been digging into what happened with aQuantive, and we’ll have more in a follow-up story on GeekWire.)

What about Skype? Microsoft just paid $8.5 billion for the Internet communications company, and the challenge in any hypothetical breakup scenario is that Skype’s technology applies across the board. (Yes, Steve Ballmer really screwed things up for me here.) Options could include keeping Skype in the Xbox group, where it currently sits, or spinning it off, as well, and making it a partner of the three other companies.

What about Ballmer himself? He’s probably the most driven and fascinating business person I’ve met in my time covering the industry, but I continue to believe the absence of a hard-nosed technological visionary at the very top of Microsoft is one of the main reasons the company has struggled in recent years. Each of these new companies would need a leader who fits that profile, if not as chief executive then in another overarching leadership role.

This rough sketch glosses over many of the details and leaves many questions unanswered — including the ownership structure of each company, and how they would be affiliated. Would they partner? Would they compete? Depending on the area of business, the answer to both questions could be yes.

From an accounting perspective, it’s important to note that Microsoft currently counts some of its costs as corporate expenses. Each new company would incur new costs as a standalone operation, and give up some economies of scale. So the bottom-line profits wouldn’t be quite as rosy for each spinoff company as the current divisional operating projections would suggest. But they would still be financially strong.

There are certainly downsides to this idea. As part of the same company, the different divisions are currently in a position to leverage common technologies and resources, and build on each other’s work, at least theoretically. Splitting up the company would take away that advantage and others that come from being under the same umbrella.

But that could be outweighed by the potential advantages, and the chance for each of these three big brands to be built by a company in control of its own destiny. At the very least, it’s worth a discussion.

FOLLOW UPAfter the writedown: How Microsoft squandered its $6.3B purchase of ad giant aQuantive

 

  • ch

    I look forward to the aQuantive follow-up. I worked at both aQuantive and MSN, and it was hard to watch Microsoft kill such a profitable and valuable company. I heard MSFT senior exec egos were partly to blame.

  • Just curious

    What would you do with Microsoft Research?

    • http://geekwire.com Todd Bishop

      Yes, that’s another tough question that I thought about but didn’t address above. One possibility is to split up MSR to form R&D units for each of the three independent companies.

      • guest

        Similar to what Apple did a long time ago.

      • Guest

        The reality is that MSR does very little that actually translates into real results. The XBox Go Game and Kinect are the only things I’ve ever heard of actually coming out of MSR.

        In my experience, MSR is an ivory tower completely divorced from reality. The product groups don’t respect them because they don’t make money and they don’t respect the product groups because, well, money is dirty to academics.

        MSR exists because Microsoft has enough money to sustain them and no one actually bothers to look at if they’re worth it.

        My prediction in any break-up is that 80%+ of MSR would go away as real analysis happens around cost and benefit.

  • Henry O.

    If MSFT were to split up in this manner, wouldn’t you think the cross-platform integrations and user experience synergies would greatly suffer from the disparate leadership teams? I think the last wave of product releases have really shown the values and importance of having everything under one roof and being able to provide customers with a familiar platform/user experience no matter what device or software they interact with.

    • guest

      You mean the ones that have been largely absent for more than a decade, are only visible recently, and even then are very rough and only found in certain areas?

      • http://twitter.com/DaQuantumFro DaMarico Fowler

        no he means Windows 8/Windows Phones/Xbox

        • guest

          Which would be the same thing.

        • guest

          Only at Microsoft does “cross-platform” mean across just one vendor’s offerings.

          In the real world “cross-plaform” means across Windows, Linux, UNIX, OS X, etc.

          It’s like the Blues Brothers:
          “What kind of music do you have here [at the country bunker]?”
          “Oh, both kinds, country and western”

          • guest

            The context was internal. So your rant is off-topic.

        • Henry O.

          Not only the consumer side stuff, but also the blending and consumerization of enterprise software that are adopting user experiences from products like Windows Phone. For example I think it’s a great idea to have the Office apps and SharePoint/enterprise collaboration tools having the same look, feel and touch capabilities as the tools employees use at home. No longer would there be a huge gap in innovation and user experience when people move from their place of work to home and car, etc.

  • guest

    “I love our strategy. The board loves our strategy”
    - Steve Ballmer
    There are numerous options worth considering in order to make MS more agile and competitive. But all are moot as long as Steve and the board are still in charge.

  • http://www.joshuamaher.com/ Joshua Maher

    I think the other part that is missing here is how much of the services that are shuffled into different companies share resources. This might make sense from a review of the public financial statements, but it doesn’t take into account the integration across the services such as Azure/Live/o365/xbox that has been a clear component of their strategy.

    • Paul_Owen

      Integration forces business units to select in-house technology, not best-of-breed. Margins improve at the cost of customer experience. Allow the separate companies to build from any technology (Linux, iOS, AWS, etc). Innovation and customer satisfaction will skyrocket.

  • http://twitter.com/DaQuantumFro DaMarico Fowler

    The only way i could see this go down if Microsoft pulled a GE; with a main Big Microsoft and affiliated smaller Microsofts

  • Bob

    “When Gerstner came on board, the conventional wisdom, both from industry pundits
    as well as many IBM insiders, was that the only solution for keeping IBM from
    eventual disaster was to break it apart. Gerstner saw through this to the real
    strength he believed IBM brought to customers. According to Gerstner, keeping
    IBM together and teaching the elephant to dance “was the first strategic
    decision, and, I believe, the most important decision I ever made—not just at
    IBM, but in my entire business career.”

  • guest

    “Options could include keeping Skype in the Xbox group, where it currently sits, or spinning it off, as well, and making it a partner of the three other companies.”
    I thought Skype was already a separate business unit?

    • http://geekwire.com Todd Bishop

      Skype is its own business unit, for practical purposes, but for purposes of financial reporting it’s part of the Entertainment & Devices Division along with Xbox.

      • guest

        Got it. Thanks!

  • guest

    I’m reading this while listening to Turner tell partners how great MS’s strategy is and how years of R&D investment dating back to 2008 are finally about to pay off. Sort of funny.

  • http://www.christopherbudd.com Christopher Budd

    Before the hate postings start, let me just say thank you for raising the question and doing so in a thoughtful, analytical way.

    I have said for years (even while there) that the greatest harm of the anti-trust case is that it hardened the leadership such that the idea of breakups, spin-offs and divestiture won’t even be considered.

    I concluded that breaking the company up made sense when I heard product groups making 2nd or 3rd best decisions for the sake of preserving other products (aka “the better together” strategy). That’s just bad for everyone long term. It leads to mediocre products, unhappy staff, and unhappy customers.

    Do I agree with all this? No. I think Consumer Windows Client and Windows Phone should go with XBox and form a true Consumer company and leave Windows Server and the Enterprise and Dev products in their own company (which is in my opinion, the silent but strong part of the company). But I think breaking the cone of silence and raising this question in a thoughtful and analytical way is only good for everyone.

    • http://twitter.com/DaQuantumFro DaMarico Fowler

      I think having a core Microsoft Group with a series of spin-offs is the most logical action

  • http://www.nickwhite.me/ Nick White

    Great article Todd. It would be awfully tough to justify separating Xbox and Windows since they’re currently moving closer together.

  • Anthony Nemelka

    This is IBM circa 1988/1989. Lou Gerstner saved the company by reversing course, leveraging its primary strength: being and acting big.

  • Bob

    Great article and thoughtful discussion on key topic for the industry and for our region.

    To me the main considerations for reviving Microsoft are:
    1) Do you really think it requires a revival? I think yes, but until one agrees that there’s a problem, discussing tactics for solving the problem is a waste of time and energy. Amazing to me how often “next step” debates often get off-track simply because it turns out the debaters have defined the debate topic differently and didn’t realize it.

    2) Is it a leadership issue rather than a technology/product/marketing/market or the myriad of other woes that might be causing the problem? Leadership matters, and it seems that in MS case they have yet to replace BillG’s technology leadership. True enough. Who are the replacement candidates? Can anyone, even BillG himself, be expected to lead what is now a very different company than it was when BillG built it the way BillG performed tech leadership? I don’t see him/her out there. Are there a few out there that could lead smaller efforts, like the three suggested here. Absolutely. So it’s a very practical question at this point. If it’s a leadership issue, and if there are no candidates because it’s essentially an impossible task to lead the org as currently defined, then ya gotta change the org.

    3) How to change the org? While the first blush in MS DNA is to always think product first and organize that way, I’d love to see a pivot around customer segment first and apply products to it. Enterprise and Consumer are the obvious high-level splits. Clearly MS does best in Enterprise, it’s deep in the financials and deep in the DNA. They build first for Enterprise, and then adapt to SMB and Consumer (with exception of xBox). I’d argue Apple builds first for consumer and then gets dragged into Enterprise which is not their corporate DNA sweet spot. But at end of day, and to pick up on Lou Gerstner quote above, thinking about the customer/user FIRST is one of the initial lessons this elephant needs to take as it learns to dance. Does that require a three-way company split? Not necessarily, but it does require new thinking which in turn may require new leadership.

  • Halfrack

    Missing the 4th Org – Microsoft Patents (shared technology cross licensing, plus the patent portfolio that all 3 new companies have access to).

    The management shift required to do this would be ideal – the empire builders who do little to improve products, but create a lot of BS and drama wouldn’t be able to go hide in a new division every year or two. The new Office Corp. could actually work as a 5,000 person org.

  • remyngtin

    MSFT needs a major shake-up , shareholders are pining for real action and not this incessant failure after failure

  • remyngtin

    MSFT needs a major shake-up , shareholders are pining for real action and not this incessant failure after failure

  • Scott Porad

    Todd–

    To really make these businesses hum, I think you need to rename and reorganize the companies around the use case that the business centers around:

    Windows Corp = Enterprise Corp
    Office Corp = Productivity Tools Corp
    Xbox = Consumer Corp

    Then, Windows Live and Windows Phone go from Enterprise Corp to Consumer Corp. Also, Bing and MSN would go into Consumer Corp.

    Then, by the way, I would rename “Windows Phone” to either “The Bing Phone” or “The Xphone”. (Basically, Consumer Corp needs one brand…is it “X” or “Bing”? I vote for “X”.)

    Also, I would put Surface in the Consumer Corp.

    In sum, for Consumer Corp, it then becomes a cohesive consumer experience centered to compete with Apple and Google…consumers use their Surface (does that get renamed Xpad?), Xbox and XPhone to connect to their online services (i.e. Windows Live, SkyDrive, etc.)

    Just imagine this: Consumer Corp sells you the whole home consumer package: an Xbox, Xpad, Xphone for $999 plus a) some monthly subscription for an online subscription akin to XBox 360 live, and b) a carrier plan for the phone and pad. You can’t tell me those packages wouldn’t sell like hotcakes at BestBuy, etc…!!!???

    • http://geekwire.com Todd Bishop

      Thanks, Scott, very good points. I was also a big advocate of Microsoft using the Xbox brand for what became the Surface — it would be better in a lot of ways, and the fact that they didn’t do that is more evidence that Microsoft is too beholden to the Windows brand.

      For what it’s worth, I showed my ideas to a bunch of former Microsoft employees before posting this, and I found it fascinating that most of them didn’t question whether Microsoft should be broken up, but how to do it. That tells me that a lot of people agree that it should be considered, at least.

    • guest

      Issues:
      - About 20% of Windows’ sales are to consumers
      - About 80% of Office sales are to enterprises
      - OEMs are major customers for both
      - Where does Server and related go – Enterprise Corp?
      - Enterprise Agreements don’t make sense without Windows + Office + Server
      - Consumer Corp, as envisioned by you, would almost certainly be unprofitable and therefore unsustainable
      - A renamed Windows phone (agree with that suggestion) in Consumer Corp would have to compete against Samsung and Apple for consumer mind share, with no MS advantage outside of Xbox
      - Enterprise Corp, who actually has some advantages to leverage, would have no phone to sell.
      While I agree about clarifying MS’s consumer branding, I see Consumer Corp getting clobbered in the match up you’re suggesting.