Remaking Microsoft: Break Up The Company

Microsoft needs a makeover from top to bottom.
Microsoft needs a makeover, and not one of those cosmetic restructurings where the org chart changes but the company stays the same.

For evidence that its business is broken, look no further than its financial results for the quarter ended Dec. 31 and the fact that the company's stock hit a 52-week low. Microsoft revealed that its client business declined 8% and that sales of Office to consumers plummeted 23%. Microsoft is laying off employees and cutting costs, and it has stopped offering guidance to financial analysts. In other words, Microsoft isn't sure what the hell to expect next.

The economy is partly to blame, of course, but Microsoft's problems are much more deeply rooted. It's a proprietary software company in an open Web services world, and its laudable effort to reorient itself around "software plus services" is taking too long.

What might Microsoft do to remake itself? It could spin off MSN, its entertainment division, or its ERP business to create more nimble, independent companies. Back in June 2000, when U.S. District Judge Thomas Penfield Jackson ordered Microsoft to be split up to stem anticompetitive business practices, it was considered a strong-arm move that the Department of Justice ultimately rejected.

This time, Microsoft's breakup should be voluntary, aimed at shedding bureaucracy (the company's administrative expenses were $5.1 billion in fiscal 2008), unburdening internal developers from the expectation that everything they create be gunked up with hooks to other Microsoft products, and get better products to market faster.

Microsoft has kept its $60 billion ship intact as a way of encouraging synergies across product lines, but that strategy may have reached the point of diminishing returns. Windows PC users want iPods, iPhones, and BlackBerrys, too, not all Microsoft technology all of the time.

Microsoft also needs to do a better job of capitalizing on its huge investment in R&D--$8.2 billion last year--by finding new ways to expose the innovations coming out of Microsoft Research and getting its patented technologies into the hands of entrepreneurs. The Windows ecosystem spends too much time in Microsoft's slipstream.

A decline in venture capital funding makes this a tough time for startups to forge ahead with bold ideas. Microsoft should consider creating its own VC arm and funding startups directly.

Breaking up the company, throwing open research, and pumping money into boot-strapped ventures will require unblinking leadership. Microsoft has a strong mix of veteran top executives and fresh blood, including Stephen Elop, president of its Business Division, and Qi Lu, president of Online Services. But the questions of who will succeed Steve Ballmer as CEO, and when, hang out there. As part of its overhaul, Microsoft must provide an answer.

Illustration by Sek Leung

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