“Is it time to break up Microsoft?” a self-described “frustrated” investor asked Ballmer during the company’s annual shareholders meeting on Tuesday.
Ballmer quickly nixed the idea.
“It’s not in my natural genetic makeup to think that way,” Ballmer said. “I obviously don’t think it is time. I don’t think it would be useful.”
Bill Gates, who handed the operational reins to Ballmer a decade ago but remains Microsoft’s chairman, backed the current CEO in one of the two times he spoke at the meeting.
“There’s a lot of synergy across the company, and it’s been a real strength,” said Gates. “I don’t think there’s a line where you’d find net simplicity by trying to create a new company.”
Questions about Microsoft’s business organisation have come up irregularly, but the most recent demand for a break-up largely stems from an October note by Goldman Sachs, said Rob Helm, an analyst with Directions on Microsoft, a Kirkland, Washington research firm that focuses on Microsoft.
“Part of it stems from Friar’s analysis,” said Helm, “although investors are also unhappy with the stock’s performance over time. They’re starting to ask if there should be fundamental changes to the business.”
In early October, Goldman Sachs analyst Sarah Friar downgraded her position on Microsoft from “buy” to “neutral”, and along the way, suggested that the company would be worth $52 billion more if it broke into several entities.
“There’s a distance to Microsoft’s offerings, who they’re targeting and also their financial performance,” said Allan Krans, an analyst with Technology Business Research, explaining why investors and Wall Street are asking questions. “When you look at Microsoft, it’s not as cohesive as other companies, like HP. There, printing is a big part, but it’s not carrying the company.”
Three weeks after Friar’s note to her clients, Ballmer called the idea of breaking up “nutty” and “the second most crazy idea I have ever heard”.
On Tuesday, Ballmer used more measured words.
“All of the people we compete with in devices will be in phone, PC, and TV, which in our case means Xbox, Windows, and Windows Phones. It’s Apple, it’s Google, it’s us,” said Ballmer. “Divesting something only means creating a harder time competing for all relevant parties.”
Helm agreed with Ballmer, but saw a different reason for Microsoft to remain one rather than many.
“The obvious downside [to breaking up the company] is that some of Microsoft’s businesses have a strong defensive aspect,” said Helm. “Bing, for example, may lose billions, but it protects Microsoft against platform competitors like Google.”
In Helm’s thinking, business units such as search and Xbox have forced rivals – Google and Sony, respectively – to expend resources maintaining their market position. Spin off those units – search and the cloud in particular – and Windows would be more vulnerable to market erosion.
“It’s the Netscape strategy,” Helm said, referring to Microsoft’s move against the once-leading browser in the 1990s.
Nor does it make sense to split Microsoft into two large companies, one dedicated to consumer software and devices, the other solely to provide software and services to enterprises. “I have to agree with Ballmer there,” said Helm. “Microsoft is in both enterprise and consumer software, and software is so sensitive to scale.”
And it doesn’t make sense to separate Windows from the Office franchise, added Krans. “There’s a cohesion between those two,” he said. “I think that’s valid, and it certainly resonates with customers.”
That’s not to say Microsoft shouldn’t listen to, and learn from, the calls for a break-up.
“It may be that, with the arrival of non-Windows mobile devices, the applications business will have to act more as an independent business, even if it’s legally part of Microsoft,” said Helm.
In 1999, a federal judge ruled in a long-running antitrust case, saying that Microsoft should be split into two companies, one to produce Windows, the other to develop all other software.
Microsoft later avoided that judgement by agreeing to a settlement with the Department of Justice and several states’ antitrust regulators.