What should Microsoft do now?

Clearly, it is fighting a rear guard action where search is concerned.  Any deals with Yahoo are stopgap at best.  Microsoft probably believes they only need to slow the erosion to buy time for their own technologies to kick in against a large enough installed base, but that isn’t it.   That’s an incremental strategy that won’t get them anywhere very helpful.  Google will just keep peeling away share.  This strategy of hooking up with Yahoo is a classic violation of Sun Tzu’s (and every strategist since) ideas.  When you are the weaker player, don’t attack the strong one in their strength!

It’s about out flanking.  Doing the unexpected.   And realizing that your days of leveraging existing monopolies to reach into new spaces are about done.

Think about what the reaction would have been if Microsoft had bought Sun instead of Oracle.  For starters, they could have bought them for cash using a little more than 1 quarter of EBITDA.  Yes, Microsoft is cash machine.  But just imagine the signal they could have sent:  We are tearing down our walls!

No more anti-open source.  No more anti-Java.  Can you imagine what a ripple that would have sent?  That would have been some outflanking. 

And because it would be such a radical move, you’d have to believe it, unlike Oracle where it is easier to assume they’re just the glue factory and the race horse is done.

Think what such a move could have done in terms of reseating Microsoft at the head of the development tools table, which is where they started.  A jumpstart on Cloud Computing.  Throw in RedHat, market cap half that of Sun’s purchase price (another 1/2 quarter of cash generation for MSFT) and you’ve got Linux too.  Now Microsoft would’ve had a truly amazing platform story.  Almost scary amazing, in fact.

How can a Yahoo search deal even begin to compare to that?

Lots of strategic upset in such a move.  Imagine putting the internals of SQL Server behind MySQL.  Microsoft has always staked out the low end.  The don’t risk nearly so much cannibalization as Oracle does with MySQL.  Lots of organizations would love to have a paid (though admittedly still cheap) version of MySQL that just ran a lot faster when they needed it too.

But that deal is done.  Oracle got Sun.  It’s not something to be unwound.  It was a once-in-a-few-decades strategic alignment of the stars that went unnoticed in Redmond.  The old strategic religion is too strong for them to have ever considered it seriously.

What else should they be looking at with similarly game changing?

Twitter  ($1B might do it).  Clearly Twitter is pretty darned game changing, and some are saying its just the right thing for Microsoft.  But it will be awesomely expensive, and it isn’t clear how to use it as a beachead to build out nearly so horizontally as Google has. 

Facebook  ($10B?  Less?).  Another good example, even more awesomely expensive.  Would Microsoft build something out of it that would ever justify the cost?  Unclear.

Amazon (Too much!).  This would’ve been my favorite from a technology perspective, but it has all sorts of problems though  Hard to catch Microsoft + Amazon for Cloud Computing.  Their market cap is $35B, which is probably too painful to swallow, and it would take a significant premium above that.  The Cloud business is still a tiny portion of that, so MSFT is buying the world’s most successful e-tailer.  Margins are lousy on this stuff compared to MSFT’s core business, so it is dilutive to the franchise.

How about a bevy of SaaS Companies?

I like this idea.  They are not cheap, but the most expensive of all, Salesforce.com, is $5B or so.  Say they wind up paying $7B, but they’ve now bought by far the biggest SaaS player.  Let’s pick up a few more to round out the suite.  I’ll take Successfactors for HR at $500M (peanuts with Microsoft’s cash flow).  Let’s add RightNow for Customer Service at circa $300M.  We’ve got room for one more, and I’d round out the CRM suite potential with either Xactly Corp or Callidus Software.  Xactly is a pure play and cheaper, but might not be willing.  Callidus has a lot of baggage, but has built a good sized SaaS business.  Let’s kick in NetSuite for another $1B (or a little less after they somewhat missed).

Whoa!

Salesforce, SuccessFactors, RightNow, Xactly, and NetSuite.  In one fell swoop Microsoft becomes the biggest SaaS player on the planet.  They block Oracle and SAP from acquiring these companies, and I’m not too sure they wouldn’t love to annoy those companies anyway.  As a matter of fact, there should be any antitrust issues here because of SAP and Oracle.  These SaaS companies would totally sew up MSFT’s domination of the low end business software world too.  And the total price tag?  Maybe $9B and they totally dry up the well of companies that have any scale at all in the business model that is the coming thing.  Heck, round up to an even $10B and pick up whatever remains of the SaaS world.  Then launch a classic Microsoft all-out hypercompetitive battle against Oracle and SAP for world domination.  It’s a clear opportunity to destroy the fat maintenance margins of this group while maintaining their own margins in unrelated business units. 

That would liven up the Enterprise world again for sure!  Best of all, it’s got nothing whatsoever to do with Google.  Let them eat cake over there, trying to grow a market they already own most of.  Wait for Carol Bartz to show up with her metaphorical hat in hand.  You can still buy that search business a whole lot cheaper. 

Not bad for a few months cash flow.  Mr Ballmer, when are you going to get on with doing something exciting over there?  Or will Oracle steal a march on you again?