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Microsoft struggles to maintain it’s slowly dwindling relevance – Here’s what to do.

Over the past weeks, Microsoft has been at the head of sites like Digg and Techmeme, with rumors of upcoming aquisitions and massive layouts of cash to companies in what seems to be a wild attempt to maintain some sense of relevance as its core businesses OS development and Office software seem to be fading into the business sunset, being replaced by OS agnostic apps and rapidly improving free to use online office apps.

The main problem with their strategy is that there really IS no strategy. Only a few weeks ago, Microsoft was willing to drop every dollar of it’s cash on hand to buy Yahoo; another company with no vision or strategy towards the future, when that fell through they set their sites on just buying Yahoo’s search, and somehow melding it with a purchase of Facebook.

The result of all of this is a company that looks far more desperate than a company in Microsoft’s position should look. As a company they have a lot to be proud of despite the general failure of Vista. The Xbox division has been providing extremely strong competition in the video game space. The Zune division has been growing to a strong second place in the media player market, despite a languishing demand in the market for mp3 players. Windows Mobile has been popular in the cellphone space, and Microsoft’s own ad-service, while not competing with Google, has done alright for itself. Last but not least Microsoft is sitting on a research division that has been producing some really interesting software like Photosynth, and hardware like Surface. The stock price hasn’t exactly been skyrocketing, but Microsoft has always been profitable. There’s no real reason for the desperate position.

What Microsoft really needs is focus. Instead of going off on a spending spree for properties that may or may not prove to be useful for Microsoft in the future, they need to put more of it’s money into hiring better engineers and product managers, who will put out a superior product. Listen Microsoft, take a page from Apple’s playbook and focus on a building and improving your core set of competencies. Let’s break Microsoft down into the divisions it should focus on:

Division 1: Windows

This is Microsoft’s bread and butter. Unless something revolutionary happens in the next few years, Microsoft will continue it’s near monopoly on the OS space. The deals they make with vendors pretty much assures that.

The problem, with which most people will agree, is that Windows Vista, at best has had a lukewarm reception. At worst, it’s an unmitigated disaster the scale of which Microsoft has never seen. Nothing but time and consumer sentiment will give us the final verdict on Vista. This, however, does not mean that Microsoft is stuck in a cycle of crappy releases. Instead of spending 40 billion dollars on Yahoo, one could certainly argue that putting even 5 billion of that into hiring some brilliant new minds for the Windows division would be a great first step to improvement.

Coupled with the complete restructuring of the division to reduce some of the bureaucracy, the start towards a total rewrite, or at least a MAJOR revision of the OS, could allow Microsoft could finally leave its 20 year old legacy code in the dust, and emerge with a fantastically modern OS that would impress even the most ardent skeptic. The only problem here is that Microsoft has to learn how to be adventurous again. In my opinion, one of the major problems with Windows is, that Windows XP didn’t really NEED much in the way of improvement. For all intents and purposes it worked pretty reliably. Vista seems like an update for the sake of updating. What a new version needs is someone who isn’t a part of the Microsoft culture and isn’t afraid to reinvent the wheel. Shock people! Make Windows interesting again. People are interested in OS X and Linux, why not Windows?

Division 2: Office

Office has been a big business for Microsoft for many years, but with the rapid growth of free tools like Google Docs and OpenOffice, Microsoft Office is under siege. Unfortunately, no matter how many times I look at this I can’t see any way Microsoft can maintain dominance with it’s current model. As web technology advances, the best thing Microsoft could do would be to discontinue Microsoft Office in it’s current incarnation, and to use it’s Silverlight technology to create a free, ad supported, full featured version web AND desktop version of Microsoft Office. One could log in from any computer on the net, save the files to the cloud, and open them again on their desktop client at home. Same goes for Outlook. A web based outlook service with Calendaring and E-mail would eliminate the need for the majority of Microsoft’s Live services. The name recognition alone would give it almost monopolistic marketshare overnight, and would assure that Microsoft Office won’t fade into the sunset.

Division 3: XBox

Perfect as it is, leave it alone. Although one could argue for the inclusion of more Media center functionality in the device. Perhaps allowing it to act as a cable set top box with cablecard support could make for an interesting bit of service that the competition doesn’t provide. Also, HD downloads just aren’t there yet. Put a blu-ray drive in the thing.

Division 4: Zune/Windows Mobile

In this world of growing convergence between media players and small palm sized computers, there is no need for The Zune team and the Windows Mobile team to be separate. It’s silly, and it’s a waste of resources. As I said in a previous article, what Microsoft really needs to do here is to spend some of those billions to buy Taiwanese phone-maker HTC. They seem to be the only company capable of producing really good Windows Mobile handsets, and devices like the HTC Touch Diamond only prove that they are going to get better at it. Scoop them up before they go all android!

Also, there’s no reason why Microsoft couldn’t integrate the Zune software into Windows Mobile, so that no matter What Microsoft powered device you own, you get Zune support. They could of course design small media players to compete with Apple’s, as long as the phone and media player divisions are all speaking the same design language. This is exactly why they should be merged. I’m sure HTC would have no problem putting together a sweet looking media player, to compliment it’s in house designed Microsoft phones.

Eventually I could see this whole division being folded into the Windows division in general, as more and more pc’s become smaller / more portable and the lines between PC and mobile device blur.

Thats it. You’ll notice that the Windows hardware division (mice, keyboards), and all of the Windows Live services are nowhere to be found. The reason is simple. They haven’t produced anything that holds traction with consumers. While Microsoft’s hardware division has done alright for itself, there are plenty of other companies producing good mice and keyboards. Sell off the hardware division to a company like Razor and move on.

In the web services space, Microsoft needs to be spending it’s time and money on things it’s good at instead of trying to compete with Google in the web space. Smaller start-ups, and to a less extent companies like Google, are far more nimble and able to innovate. Microsoft is simply too big of a company to do this anymore, and the feeble attempts at innovation they have produced in the past few years do nothing but enforce the notion that Microsoft is behind the times.

Microsoft needs to put it’s media-conglomerate mindset to bed. Instead of putting out hundreds of mediocre products to see what sticks with people, they should focus on putting out just a few really awesome products that are sure-fire hits.

The only problem with that is the person driving the ship isn’t exactly a man of vision. Steve Ballmer needs to go. Simple as that. As a CEO he has presided over some of the biggest Mistakes in Microsoft’s history, foremost of which is Windows Vista. What is needed is someone with a strong enough personality to bring the ship in line with a direct vision of where the company needs to go. Who that person will be, I have no idea.

Though I have a theory that I’m sure will be unpopular with everyone. But try to look at it with an open mind.

Steve Jobs.

If his options backdating scandal does at some point get him removed from Apple as CEO, Microsoft should spend every dollar it can to get him on board as CEO of Microsoft. It’d be the coup of the century, and would set the press ablaze. No doubt It’ll be an unpopular decision from all sides of the discussion, but no one can argue with the fact that it would turn people’s heads. Keep in mind also, that he took Apple from a position similar to where Microsoft is today as far as consumer apathy goes, and turned it into one of the biggest success stories of the century.

As far as I know, he’s one of the few people with the ego and strength to rip out the companies guts in the worst, messiest way possible and to put it back together the right way. The amount of bad blood would be difficult, probably impossible to overcome, but a Microsoft at the hands of Jobs, would be a lean, reborn company with an absolute razor sharp focus. And no one could doubt that.