Why Its Time to Break Up Microsoft

Microsoft posted a record quarterly profit of $4.5B on record revenue of $16.04B after the markets closed yesterday. The EPS of 51 cents blew away analysts consensus forecasts of 46 cents for the quarter. Any other company announcing a financial performance of this magnitude would have seen its shares pop in after hours trading; not Microsoft. Of course that may change when the market open today but it is a telling marker of investor sentiment towards the company.

In my view its one more indication that the company’s true value is being overshadowed by a 'Crisis of Perception.' Investors see Microsoft as a vision-less consumer company struggling to compete with Apple and Google while in actuality its an innovation machine transforming the world of enterprise IT. You only have to look at numbers like the unearned revenue line (A proxy for new long term annuity contract signings with enterprise customers) to see just how much an enterprise machine the company is. That number grew 20% in FY'10!

Of course the lack of pop in the stock is likely relate to the fact that the company continued to pour cash into its search and mobile phone efforts as well as the other loss-making consumer focused on-line properties.

In my view it is time to stop the pretense that Microsoft can become a 'Cool' high growth and highly profitable consumer products company. The enterprise DNA of the company just isn’t going to mutate quickly enough to let that happen in any reasonable period of time. In my opinion the situation requires radical surgery. This would include spinning off XBox into a separate games focused company, merging the consumer on-line assets with Yahoo to give them scale in a competitive race with Google and finally ditching the phone business.

Yes I did say get out of the phone business. Here’s my prediction: Windows Phone 7 will be the 'Zune' to Apple’s iPhone and Google’s Android i.e. cool competitive technology with no chance of building the scale required to compete with those other platforms. It’s time to stop wasting money on phone which could be better leveraged elsewhere in the product portfolio.

A slimmed down Microsoft that was entirely focused on delivering the worlds best enterprise business platforms might not be 'Cool' but it would be a lot more interesting for both customers and shareholders. The development teams would regain the focus and investment dollars they need to extend their competitive advantages in this market and the move to achieving and maintaining leadership in cloud services would be accelerated. The change would also address the 'Perception' issues which are overshadowing investors opinions about the stock. Without the consumer business 'Boat anchor' the company could increase R&D spending in its core business AND return substantially more to share-holders in the form of dividend payments. Turning Microsoft into a dividend paying machine is one sure way to move the stock.

If the board and executive team really do recognize their responsibility to maximize value for shareholders then its time for them to focus the company on what it does really well; building the world’s best enterprise software and cloud services. Unfortunately stories about new attempts to re-brand the company just reinforce the view that senior leadership is missing the point and is intent on continuing the long march to irrelevance. If that’s the case then maybe it really is time for new management.

One response

  1. Imho it is the visible effort to make Microsoft a cool company while neglecting serious structural issues which causes the real problem. The company’s perception suffers the most because they try so hard to be seen as innovative — introducing «be what’s next» as a tagline will therefore have the opposite effect…

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