Microsoft's Resistance to Breakup, Explained

By Reuters  |  Print this article Print

Microsoft is entrenched in business and consumer consciousness as the company that owns the Windows OS and the Office productivity suite. But Apple has made serious inroads recently, capturing the imagination of both business and consumers with its iPad tablet device. Is Microsoft's efforts to protect its core markets hampering innovation? Some say yes.

Breaking up the company is what a federal judge ordered in 2000 after concluding Microsoft had abused its monopoly position with Windows, although his judgment was subsequently overturned and the case was settled two years later with no changes to the company's structure.

The company resisted that idea, hoping to leverage its huge scale across different businesses, but it could have been a benefit, some former workers say. "Maybe it would have been better for the company to be broken up," said Mike Koss, who worked at Microsoft between 1983 and 2002 and now works with a number of startups in Seattle. "I've always been in favor of having individual business units that would actually focus on their individual markets."

Koss said fear of "stepping on somebody else's toes" -- essentially the behemoths of Windows and Office -- constrained innovation at Microsoft: "When I would try to start new things, I'd be spending 80 percent of my time just trying to beat back all the other teams that are trying to kill what I'm doing."

Friar at Goldman Sachs suggests a break-up of the consumer businesses could unlock some value, perhaps letting the Xbox operation stand alone. The status quo cannot continue, she says, of Microsoft trying to focus simultaneously on business customers and consumers.

"In many ways, Windows 7's success is a long-term curse, not a blessing, because it masks Microsoft's vulnerability and delays the reckoning that's coming," said another former employee, who asked not to be identified. "It needs to either accept that it's an enterprise company, or if it wants to compete in these new businesses -- mobile, social, internet -- it needs to make more fundamental changes."

Microsoft still shows no public interest in breaking into smaller autonomous units. Ballmer himself called Friar's break-up plan "nutty" and "next to crazy". Company insiders say the new line of phones -- featuring Office applications, Bing, Xbox games, Internet Explorer browser, Hotmail and Outlook e-mail and Zune music player -- is a perfect example of the company's disparate parts working together on one product, which would have been much harder if they were separated.

Some say the innovation issue is a red herring, arguing that Microsoft was never a true innovator, just very good at getting its own version of existing technology to a mass market. "I don't think the proposition buying the stock is that they are going to be the innovator in a visionary way," said Hanson at BlackRock. "(But) they are going to be a disciplined integrator and remain relevant to the competing ecosystem."

The Cloud Ahead

If you ask Microsoft executives what the future holds, they will talk about "cloud computing," a broad phrase describing the provision of software, services and data storage over the Internet.

This sea-change is a potential threat to Microsoft as it represents a shift away from software installed on computers toward a more fluid scenario. Why pay for and install Microsoft Office when you can use Google Docs over the Internet for free?

After some initial skepticism, the company says it is now fully committing itself to the cloud, with a strategy of "software plus services" -- essentially banking that the future will be a combination of installed software that is connected to the web.

The move toward the cloud was championed by chief software architect Ray Ozzie -- the intellectual heir of Bill Gates -- who is retiring in the next few months, feeling that his job at Microsoft has been done. Bob Muglia, the head of the server and tools business, is charged with putting Ozzie's vision into effect.

Muglia, whose unit sells the server software and runs the data centers that keep the cloud running, says the shift toward cloud computing is as big a revolution as the PC and the Internet. "We're in the middle of this incredibly interesting transition," he said in an interview at Microsoft's campus. "There is some risk associated with that and yet I view this as this massive opportunity for us."