Trending: Microsoft opens mysterious office in small town a ferry ride away from Seattle

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

 

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