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Should Microsoft Give In To Investor Panic?

By: Nathan Weinberg

After going nowhere for a long time, Microsoft's stock took a huge hit this past month, prompting some investors...

to demand the company take significant action to improve the stock price. According to Bloomberg, at least two significant shareholders are demanding the company use some of its $34.8 billion in cash, as well as take on debt for the first time in the company's history, in order to buy back shares, perhaps as much as $60 billion worth of the stock. The article says Microsoft is just reaching the end of a $30 billion buyback program started in 2004.

(via Microsoft Watch)

Microsoft's market cap stands at $235 billion. Knocking off over 25% of the company's value would shrink the company into something far less than it was, in a way, either ending an era, or starting a new one in which a very different, smaller Microsoft takes on companies like Google, in very different markets.

Microsoft's stock took the big hit due to the fact that the company plans to be spending billions to create competition with Google and other major web companies. Microsoft's leadership believes in the company's direction, and would never choose to quit, but the real question is if investor pressure can force them to cave. The big guys, Ballmer, Gates and co., all likely want the company to do extremely well with its major releases at the end of this year, as well as win the fight for Web 2.0. If they buy back the stock, they will not just be admitting defeat, they will be guaranteeing it.

A smaller Microsoft might be better able to compete, admittedly, but it will mean that the current era of Microsoft has been a failure. There is a good chance the smaller Microsoft will have to fire a lot of people and cancel a lot of capital expenditures. Eventually, they will learn how to develop Windows, Office, and Windows Live for much less money. The software will be less ambitious, tightly developed, like the stuff Apple creates, but it will be cheaper, with new versions coming a lot more often.

The new Microsoft may very well team up with Yahoo, something that can't happen with the current Microsoft. Yahoo refuses to team with Microsoft now, knowing they would only make it easier for Microsoft to gain a significant foothold, but if Microsoft were weaker, Yahoo could feel safer, especially if Microsoft was forced to give them significant ownership of Windows and Windows Live.

In the scenario I imagine, Microsoft shrinks down, making Mini-Microsoft and his readers happy. Microsoft then creates a dual-headed corporation, with Yahoo and Microsoft as equal but seperate partners. Microsoft then withdraws from the home market entirely. Microsoft develops Windows for businesses, while Yahoo develops Windows for the home.

Microsoft's Windows for businesses includes volume licensed and business tailored versions of Windows. These have zero capabilities beyond running serious, business applications. They create a secure codebase that runs office applications that work far faster, and with far less risks, than the current Windows does. They also build Microsoft Office.

Yahoo's Windows for home users takes Microsoft's codebase and builds world-class media layers over it, producing Media Center, Internet Explorer, and a home-centric interface for Windows designed for ease of use. They also take control of Xbox, and tie that in with Windows, to create a great games platform for Windows. Eventually, they move the PC and the Xbox so close to each other that you can barely tell the difference: both run off Windows, both play games, both run Media Center.

Yahoo also takes all of Microsof''s internet assets. Everything Windows Live has created, and everyone who works in those divisions, jumps to Yahoo. Windows Live gains Flickr and, and becomes the web services arm of Yahoo. Yahoo handles search, Windows Live handles web services, but both are Yahoo divisions. Yahoo ties in the services into Windows as deeply as they can, and since they aren't a convicted monopoly, and are only building on a platform Microsoft officially owns, they can be more flexible, as long as they aren't proprietary.

So, what does everyone get?

Microsoft gets back to basics, building two focused, powerful codebases for Windows and Office. They can concentrate on things that matter for business customers: secure computing, efficient applications, and addressing concerns with frequent updates. They don't have to spend money on home users or the internet, but guarantee that even though they are staying out of those areas, Windows won't lose those markets. Microsoft develops on the internet out of fear that it will undermine Windows, and if you remove that fear by making it someone else's job, Microsoft can get back to doing a good job, and selling a ton of the only products that make them real money: Windows and Office.

Yahoo gets something huge: The operating system in every home in the world. They win the desktop. They get the media center. They get video games. They get the most popular web browser (built off a secure Microsoft communications codebase, but using a Yahoo-designed interface). They get hundreds of millions of dollars of investment into web services. And they get a chance to tie it all together to beat back Google.

In this two-headed corporation, everybody wins. Businesses get more focus in their operating systems and guarantees software development will work, and work on time. Home users get a company that has a good idea what they want. Internet users get every service under one roof, and tighter integration with their operating system.

Is it a crazy idea? No. Is it wild, and risky? Yes. Is it worth it? Absolutely.

Microsoft has a lot of momentum, and in the wrong direction. It has a lot of strengths that are getting nowhere, and failures it refuses to address. And it has a corporate culture that can't win in certain areas.

Yahoo has a tiny market cap, compared to Google and Microsoft, and zero products designed to lift it to the next level. If Google is a one trick pony, then Yahoo has that same trick, but only about half the time. It needs a big move into a new area, one that makes Yahoo's services more important while making a lot of money all by itself.

Why not?

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About the Author:
Nathan Weinberg writes the popular InsideGoogle blog, offering the latest news and insights about Google and search engines.

Visit the InsideGoogle blog.

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