Yes, it's fun to piss and moan, but once in a while, you have to put yourself in the CEO's shoes. So here's a response to reader Bruce Hamm's question of two days ago: What SHOULD Microsoft do?
(First, I should clarify my position regarding Microsoft: My position is not that Microsoft's web business sucks. It doesn't. Microsoft is either the third or fourth strongest web company on the planet. My position is that the common idea that Microsoft is going to do what it has done in many software businesses--come from behind, bury Google and Yahoo!, and rule the web--is ludicrous. Microsoft has been trying to come from behind on the web for a decade, and it is almost as far behind now as when it started. A few more years--or Microsoft Live, or AdCenter--is not going to change this.)
So what should Microsoft do?
1) Merge MSN with AOL in the complex transaction described below. Do NOT enter into a "partnership" with Time Warner. Time Warner has had enough trouble managing AOL by itself; don't make things worse with a joint venture (a.k.a., a "joint agreement to take no responsibility" and/or "joint headache"). As part of the deal, give the combined company a right of first refusal on Time Warner content and Microsoft software and insist on a good distribution deal with Time Warner Cable. Pay for the purchase with stock in the new company, called, for the sake of this post, AOL-MSN (see No. 3 below), with Microsoft and Time Warner each keeping a major chunk of the equity.
2) Eliminate duplication: development teams, VOIP efforts, content platforms, network operation centers, bandwidth deals, sales forces, call centers, etc. Make the two IM systems interoperable. Make AOL mail work with Outlook. Put both companies on the same search and advertising platform. Unify the mission. Take the best of both management teams and hire new blood. Etc.
3) Spin the combined entity off as a separately traded public company, with Microsoft and Time Warner together owning about 70%-80% (but neither having a controlling interest) and the public and other strategic partners owning the rest. Make sure the company has at least $5 billion in cash.
4) Cut broadband distribution deals with cable companies, telecom companies, and wireless companies. Start with Comcast, which wants access to the AOL subscriber base so badly that it's talking to Time Warner on its own. Focus efforts on trying to migrate dial-up subscribers that want to quit AOL to broadband partners, thus retaining some revenue. (In each market, at least two broadband distributors compete with each other, and they would both love to attract AOL dial-up subs.) Consider buying Earthlink, United Online, etc., to gain more leverage in these partnerships.
5) Combine the portal infrastructures of AOL and MSN and gradually migrate toward a single brand in each geography in which one is weak. Integrate the portal with Windows (Microsoft will still be a strategic parner). Leverage Time Warner content (Time Warner will still be a strategic partner). Consider partnering with News Corp., which should have a stake in a major portal. Partner with News Corp's MySpace, and provide technology and content to MySpace's users.
Why merge? Because MSN and AOL are currently fighting it out for No. 3 in the web wars, and neither has a realistic shot of gaining market share by itself (let alone becoming No. 1). Merging will create a stronger No. 3, with about $2 billion of annual cash flow, the world's leading online communications services, strong positions in the U.S. and internationally, strategic partnerships with the world's leading media and software companies, etc. And also merge because most markets only support three major generalists, not four, so the future for either company alone looks bleak.
Why spin the combined company off? Because the immense personalities and talents needed to pull off a merger like this probably won't want to work for massive conglomerates for whom the Internet is a sideline business (Microsoft or Time Warner), especially when they get paid in the conglomerate's stock options. Because the conflicts and infighting at Time Warner and Microsoft are stifling the growth of the web businesses. Because being a stand-along company will increase focus and pressure on management. Because Microsoft and Time Warner shareholders will benefit as much, if not more, from owning equity in a strong No. 3 web company (AOL-MSN) than from owning a controlling interest--and consolidated cash flows--of same. Because the combined company will be able to develop its own personality and identity, which it needs to be able to compete with ubiquitous global Internet brands like Google and Yahoo!
(For more, please see a recent Cherry Hill Research publication, The Web War is Over...and Microsoft Lost, which I linked to in this post. It includes a snapshot of what the combined P&L of AOL-MSN would look like, pre- cost cuts).