Microsoft Doubles Down, Swallows MSN

For a few years, Microsoft has been standing at a fork in the road: Spin off its web and consumer businesses or integrate them deeply into the fabric of the company. The latest re-org suggests that, despite getting its head handed to it in the online business for the last 11 years, Microsoft has chosen the deep integration path once and for all.  Given what is at stake, this amounts to doubling down. 

Henceforth, MSN, et al, will be part of the "Online Businesses Group" which, itself, will be one of eight divisions within a massive Platforms and Services Group.  Yusuf Mehdi also seems to have finally been put out to pasture with the ceremonial title of chief advertising strategist, perhaps to make way for new blood.

As I've argued, I think this is the wrong route for Microsoft, at least if the company is serious about challenging Google in the search and advertising-driven web services business.  The more MSN is subsumed within the Microsoft whale, in my opinion, the more the web efforts will exist just to protect a dying Windows monopoly.  Integrating the Internet with Windows has done little to help Microsoft dominate the online business: Despite 11 years of effort, tens of billions in cash, a browser monopoly, a desktop monopoly, and thousands upon thousands of brilliant engineers, the best the company has ever been able to do is run a distant third.  I don't see anything in the latest re-org that begin to change this; instead, I think it will exacerbate it.

I also remain skeptical that a company that dominates the world of corporate IT (enterprise scale corporate software and productivity tools sold to Fortune 500 CTOs) can also dominate a media business, which is what search and portals services are and will remain.  The differences between the two businesses (and customer bases) are vast, and the conflicts will forever force compromise.

This isn't the end of Microsoft: the company's position in enterprise IT (and on some desktops) should be secure for decades.  It could, however, be the beginning of the end for MSN.

Comments

[Anon]

I often wondered if Microsoft spit or swallowed. Now I know.

[Neal Lachman]

Henry,

I do not totally agree with your observation/analysis.

The distant 3rd position has been inspite of MSN's lack of action. Good job, i'd say for something they did sleeping.

I also do not agree that media (search and advertising etc.) isn't in MSFT's street. I think it is. It's part of the value change in its consumer market services, such as the browser is.

It is also not the end of MSN. I think it is the begining, with lots of focus coming onto it from top-notch people who will dedicate their time (careers) on it.

I'd say there are many exciting days ahead! The bear is metamorphosing into a bull, watch my word.

[Bruce Hamm]

This move actually frees MSN to operate on it's own; previously it was tethered up in a worse
organizational structure. The leadership that is now in place seem to be a very sharp crew of people who
have proven they can move fast. I'd look at this not as MSFT swallowing the fast moving businesses, but
rather as the crew of people who have proven they can lead (all those who know how to operate large scale
internet services like Messenger, etc.) pulling Windows into a new services based world. Look at the moves,
the old guard is out and the Web 2.0 crew is in. Besides, MSFT has more upside in a $500B WW ad market of which
they have a $1B or $2B today than in a straight software future, so if anything these businesses become more
important than ever.

[Still Inside]

I agree with the assessment of how MSN has done, but I think you've got it backwards: pushing MSN into the core group is going to finally put the problem on the front burner for the company rather than the afterthought it has been.

You mentioned the ownership of the browser space. Remember what they did to fix the problem back when they had a 4% market share in that market?

Now they are going to do Search "the right way", which is to make it part of Windows in a seamlessly integrated, inescapable way. Instead of asking if you want MSN Search to be your home page, there won't be a "MSN Search vs. Google vs. Yahoo" decision to make at all. Windows will just search the Internet now. Every application will use the new "Windows Internet Search Framework" or somesuch, and you even won't need to open up your browser to do it. If you do, you'll come to a site that loads results way faster than Google, and it will all be customized in the traditional fast and non-privacy-scary way, which is to say on the hard drive sitting next to you not somebody else's server somewhere.

Has MSFT tried some the above before? Some of it. Have they ever put their A teams on the problem? No. Have they ever delayed a Windows or Office release because of anything MSN has ever done? Of course not.

Now Search (it's too narrow to say, "MSN" in this context) is a top company-wide priority.

I agree with Henry that this is doubling down in a way, but "double" does not even begin to describe the difference this is going to make. They are betting the company on Search. They have never lost that bet. This is going to be fun to watch.

***

As a side note, I did not start here as a cheerleader for MSFT, and I don't even particularly think their stock is a good buy (especially since they will do whatever it takes in the earnings department to crush GOOG).

Personally, I would like to see somebody else win for a change. I would love to see GOOG and YHOO not repeat the same mistakes that many other companies have made so many times. I hope GOOG can figure out how to get back to its roots and innovate in this space. I hope its not too late.

SI

[roskid]

I agree, MSN is done. Just over and completely obsolete. AOL, most hated web property in cy-space; is compared to MSN a young maid waiting for her fist date. Sweet! Why? MSFT still operates it's business within the mindset of an 1998 company that tried to land grab the monopoly of the PC. It just didn't evolve out of that thinking as it should have, enabling truly creative thinking within the company. All they do is still operate in the same old business model, being driven by rules that look back to the "good ol times" instead of focusing on fantastic innovations that might not in the first place contribute to the top line. That thinking will cause MSFT to be considered a dinosaur with little or no place in the information age within the next 10 - 15 years.

[Werner Klemperer]

Dying Windows monopoly? Remind me what alternative operating systems are getting preloaded onto 97% of PCs these days.. Remember, MS makes the money from Office mostly.

You underestimate MS.

[Neal Lachman]

And werner, if I may add, there must be some reason why MS became the behemoth OS player. Heck, there must be some reason they won al these wars and became too powerful.

MS is a force to reckon with, wishing that it dies doesn't make them go away.

[Henry Blodget]

Yes, "dying" is the wrong word. Not growing as fast as it used to, not as all-powerful as it used to be, etc., but not yet dying.

Still, I don't agree with the idea that now that search will be embedded into Windows, everyone else is toast. I think the browser and a few web sites have essentially taken over the the "start here" role of the desktop. Microsoft has had every conceivable advantage in that game--they own the desktop (link to browser), the browser (embed links), and the sign-up system (automatic messenger sign-up), they have the ability to link everything together and have often tried, they have unlimited resources, they have (or had) unlimited leverage over PC makers, and they have put a ton of effort into MSN--and, again, despite all this, they have always run a distant third. Perhaps yesterday's re-org will change something important, but if so, I don't see it yet.

[Neal Lachman]

Henry, as I said before. I think it is not despite, but inspite of a lack of focus that they are a 3rd. There is no way MS can go down, there is only an upside to this re-org story.

[Still Inside]

I certainly agree with the "not growing as fast as they used to" part. They will be hard pressed to turn the big growth engines back on and start looking like a fast moving tech company. The law of diminishing returns makes it hard to envision MSFT as a "2 bagger" let alone a "10 bagger".

I don't see where you get "not as powerful" though. MSFT marketshare in virtually all of relevant markets has increased, not decreased over the last 5-10 years.

They now own the browser, they have serious marketshare in the game console category (approaching 40% now), and they have made huge gains in servers (they are now the #1 server OS, beating Linux to the punch).

Many, many people WANT them to fail, to diminish, etc. etc. I'd love to see it myself. But the numbers don't lie and it hasn't happened yet, and there are no real signs that its going to happen anytime soon. On the contrary, if you follow the numbers and not your wishes and whims, they would indicate that MSFT "power" is increasing across the board.

This re-org is an effect, not a cause. The cause is the rage GOOG has evoked, and the effect is MSFT finally putting the A team on the Search problem, and aligning the stars to focus on a single enemy.

SI

[MattyDread]

Some nitpicks that suggest you don't quite get Microsoft or MSN:

MSN is not really part of the Online Services group. Most of MSN has been rebranded "Windows Live"--Hotmail will be WL Mail, Messenger will be WL Messenger, Spaces will be WL Spaces, and so on. That group is under Blake Irving. It will indeed report into the same large group as Windows, Blake reports to Kevin Johnson.

The "MSN" group headed by David Cole (and perhaps Yusuf will replace him when he leaves on sabbatical next month) is sales and marketing, advertising sales, and the legacy MSN properties. In other words, big short-term opportunity (advertising) and non-core products (MSN).

Interestingly, Search (Chris Payne) is in neither group: he's reporting directly to Sinofsky in what will become the main Windows group. This underscores the importance of search to Microsoft, but also the fact that it views Internet search as one small piece of a much larger and more interesting puzzle.

Personally, I think that the game will be over way sooner than people think. adCenter's going to place enough downward pressure on keyword prices at Goog and Yhoo that the death/rebranding/relaunch of MSN will be irrelevant. Go back and read Microsoft's 10-Q, the last part of the MSN section...you think that continuing downward pressure on keyword prices they talk about is going to be felt at MSN only? And do you think it's a coincidenced that both Goog and Yhoo had bad quarters at the same time?

Three years from now, Yahoo's alive as a content distrubutor (the one market MSFT doesn't want), Google's a shadow of its former self, the latest networked services threat is vanquished, and MSFT keeps selling Windows, Office, and server apps on increasingly more powerful hardware. Game, set, match.

[Neal Lachman]

I really like MSFT's latest developments, including the IE7 beta. I think they are going to win the Browser war. Oooooh, they did already?

[Patrick Chu]

I've just returned from the MIX06 conference run by Microsoft where they were pushing Windows Live and Vista (formerly Longhorn) pretty hard, and it seemed that most people were impressed with what's coming down the pipe in a few months. Currently, as a heavy user of both Google and My Yahoo, I could see myself replacing some of that functionality with Microsoft's new Live.com portal once it gets out of beta. And this is coming from someone who's never had any interest in the current MSN.

The number of NEW Internet-related projects that they were demo-ing was astounding. My sense during the whole 3 days of the conference is that here is a company gearing up for full-scale war.

So don't count out Microsoft yet. As I heard one developer say, "the sleeping giant is about to awake." Based on the demos I attended, we're going to see some pretty intense portal and search battles in the next 2 years.

[Royal Farros]

Henry--

I just returned from speaking at the MIX06 conference as well.

I enjoy your stuff, think I can bring something to this discussion.

Seems like a lot of folks have been commenting about spinning MSN out.

My company, MessageCast, was purchased by Microsoft -- actually MSN -- about 10 months ago... so it wasn't so long ago that I was an outsider.

I have long thought MSN needed to be spun-out. Focus efforts, shed reputation, unlock shareholder value, etc.

So when I got to Microsoft, I dug into this. I was surprised at what I found out... and now my opinion is no longer black & white.

I guess the best way to say this is -- for the very first time -- Microsoft really gets that MSN is the "tail wagging the dog" going forward.

That's the critical difference.

MSN won't get subsumed because:

(1) ...that's where the money is. MSFT finally gets that it will be faster for MSFT to double revs *not* by increasing Word sales 10% a year... but by taking 10% of a $400-$600 billion ad market *ripe* for the picking.

(2) MSFT is watching GOOG do this right in front of their very eyes (take 10% of ad market). Which -- for the first time in years -- makes MSFT an underdog again. MSFT secretly likes being the underdog... is most dangerous when it's the underdog. Examples: OS/2, WordPerfect, Lotus, Novell, Netscape, etc.

(3) Vista and Office are late and heads are rolling. The dev stars in the company are clearly from MSN... where Messenger gets updated a few times a year... Spaces came out of nowhere to dominate consumer blogging... Hotmail is still cranking... etc.

Long-time MSFT observers have seen the company transition before.

Internally -- my 2 cents -- feels like they're actually doing this again.

--Royal Farros.

[Neal Lachman]

Royal,

Nice! Most people are talking negative about MSFT because it has become the incumbent in this industry. They see MSN as part of their incumbency, which is wrong. I just sense that MSN and MSFT have only one way to go, and that is up.

The one-trick ponies cannot compete with MSFT circus, albeit the ponies sometimes entertain highly. I personally do NOT want to see MSFT fail. I am in an industry where we think MSFT can mean more than anyone else qua software. It is interesting that MSFT, for example, is not giving up entirely or at all on TV middleware and STB operating systems (be it CE or whatever). These guys at MSFT do not only have a great 20/20 sight on what's going on in the world, they also have vision, and to top it off they have the brains too. That's a unique combination. This is basically why I have been a positivo when it comes to MSFT.

[Jeff Nolan]

The restructuring may actually be good for MSFT and bad for Yahoo and Google.

[Neal Lachman]

On a sidenote:

I am one of the 5,000 CNBC Exhange members, and got the results on the survey "Most Interesting Dow Companies To Hear About".

Microsoft is ahead of General Electric, Exon Mobil and Intel. It seems that MSFT is favorite passtime among executives.

[Jovana]

I don't know how to sign up on MSN.Can you help me?