A modern-day Gerstner is needed to cure all of Microsoft’s ills

Time for Ballmer to move on...

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Forbes this week calculated that over the life of EDD it has lost something over $5 billion. But there is also an invisible cost here. While it is public knowledge that Microsoft paid Intertrust $440 million in settlement of its DRM intellectual property dispute, what we don’t know is what it costs to develop and keep current the Windows Media DRM. We also don’t know what kind of drain on management time this took.

The operational loss is perhaps included in the losses by EDD or disguised as R&D, but given that things like DRM, codecs and media players are given away for free, they can hardly be expected to bring in any revenue, except minimal licensing, and for the most part it turns out that Microsoft has too weak a control of the IPR asset to make that stick, as the VC-1 case bears out.

The continually successful divisions of Microsoft are the Client Division, Server and Tools, and the Microsoft Business Division which includes Microsoft Office, Access and various server pieces of software.

What we have at the moment at Microsoft is a business that was once visionary, where the visionaries have been supplanted by marketing men, and where someone with the operating and financial nous that Gerstner brought to IBM would almost certainly close or sell off the bulk of these lossmaking divisions, or better still, sell them to strategic partners so that the company can still benefit from their output without picking up their bills.

Over the years IBM sold of its printer division, which became Lexmark, its storage division was sold to Hitachi, as was its miniature hard drive business, it outsourced its low end manufacturing, it got out of PABX switches, and more recently sold off its PC manufacturing. What it bought was software, and services business, such as PWC consulting, Rational and Lotus.

What we have today at IBM is a money engine, which is dominant in services and which is plugged in to the IT departments of every one of the top 100 global accounts through vigorous accounts control. The aging mainframe technology business at the heart of IBM has flagged,but the IBM numbers have barely changed.

But similar to Microsoft, IBM’s share value rarely ever changes. It is usually worth around $150 to $160 billion, and in just the same way Microsoft has been valued at $270 to $290 billion for most of the last four to five years.

Share cropper

So from an investor point of view Microsoft has been static for a long time, rising and falling with the market, a place for investors to park their money while they sit and think about what investment stratagem to follow next.

If you look a little closer at what Microsoft is doing in its neighboring markets and take off the rose tinted spectacles, we see that perhaps it’s not doing quite so well.

Its media player dominance days are about to be over. It has been forced to unbundle software in both Europe and Korea, and yet at the same time its video technology has stood still. Adobe, which has never lost a major battle against Microsoft, is closing in on Windows Media Player with a full blown media player of its on built around the fantastic success of point and click video, delivered through its subsidiary Macromedia, and its Flash player. Funnily enough a few decades ago Microsoft fought tooth and claw to get Macromedia to switch from targeting its software at Apple environments first and Microsoft second. Perhaps it will now be regretting all the temptation it placed in the way of Macromedia.

And although Microsoft has a ten year license from Intertrust to use its DRM IPR, Microsoft has not got access to innovations that happened after the date of the deal. This includes DRM domain management, where more than one device can be allowed DRM licenses when they are part of the same home, or DRM interoperability, which Microsoft may or may not want anyway. Microsoft has had to reinvent these for itself and it is this type of problem that has led to first Zune having a separate DRM from Windows and from its PlayFor-Sure consumer electronics campaign, and once again with the launch of PlayReady, Microsoft has launched yet another incompatible DRM designed to target the handset.

All of this means that DRM is multi-flavored within Microsoft, and confusing for customers and consumers alike, opening the door for companies like Intertrust to fuel a new generation of PC DRM platforms through insightful licensing terms, clever partnerships and by bridging it to OMA, likely to become the dominant handset DRM.

This doesn’t only meant that a Microsoft media player and bundled DRM is unlikely to emerge on Symbian and Linux Smart phones and other handsets, it also means that its previously untouchable home turf of the Personal Computer, is vulnerable to invasion. This perhaps could all be avoided if Microsoft’s answer to everything stopped being to put the familiar look and feel of Windows on everything, and if it came to understand that there are many ways of building a software platform without it requiring a change of operating system allegiance.

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