Kneale: How to Fix Microsoft? Smash It Up!

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Something sad emerges in the embarrassingly abrupt demise of the Kin, the new social-networking smartphone from Microsoft that died at the end of June. It is sad to see two years of development effort, and tens of millions of dollars in new TV ads, get obliterated in less than two months on the market.

But more than that, it’s sad to see the most powerful software company in the world reduced to pursing life as an Apple Wannabe. Sad to witness an aging giant—in its Fat Elvis stage, still great but way outta shape—trudging cumbersomely after a fickle, youth-is-wasted-on-the-young market.

What to do? Smash ’em up! Microsoft should look at spinning off its consumer businesses—an $11 billion-a-year, red-ink-stained amalgam—and refocusing on its real core: internal software and the apps that run on it.

Tonight on CNBC’s “Fast Money,” we launch a four-part series prosecuting the case for breaking up tech and media titans that simply have gotten too big for their own good. In too many cases, these conglomerate-contraptions get in their own way. The promised synergy almost never gels, and the debt pile swells up without getting repaid.

A gaggle of Gullivers could benefit from a smashup. Sony should split software from hardware. Verizon and AT&T should secretly yearn to shed wirelines in favor of all-wireless. News Corp. should look at cleaving off print publications to focus on TV shows and movies. Heck, even Disney—the one media & entertainment titan that truly has made synergy work—should look at unlocking the underappreciated value of ESPN by spinning off a 15 percent chunk to shareholders.

We offered a preview of the “Smash ’em Up!” series on “Fast Money” a week ago, when I made the case for breaking up Microsoft. You can see that segment here.

Among Microsoft’s struggling consumer lines only the Xbox video-game business is thriving; it might make a lovely billion-dollar shop on its own account. Meanwhile, setbacks or the worst thing of all—utter disinterest—continue to afflict the Xbox’s siblings: MSN online, the Zune music player, a faltering mobile-phone platform that is getting swamped by Google’s Android design, and more.

Note to Microsoft chief executive Steve Ballmer: It’s not your fault. Big-company software, linking and serving thousands of worker bees in corporate accounts, is what you’re good at. Productivity and housekeeping, not spontaneity and horseplay.

Microsoft should just own up to it: This nerd never has been good at the consumer end of the business. It once gave us one of the more embarrassing avatars ever, “Bob,” an irritating and hokey on-screen how-to cartoon character to help users navigate through Windows. As the Internet boomed in the 1990s the company hoped to be a powerful force in online banking but got nowhere.

E3 Electronic Entertainment Expo - A CNBC Special Report
E3 Electronic Entertainment Expo - A CNBC Special Report

The software powerhouse should have been able to leverage a massive Windows customer base to dominate e-mail and the booming online market, but America Online clobbered it. It has failed in search, it totally missed the rise of social networking, and the hottest hotbed of software development—apps for the iPhone and iTouch and for Android—has left Microsoft out of the fray.

A smashup would free Microsoft to serve corporate accounts, make Windows salient in the Internet Age and focus on a new generation of mini-apps for business users on mobile devices. Its earnings would get an instant boost of 10% or more after shedding the consumer losses.

Even better, this venerable software company could stop lusting after MP3 players (like the Apple iPod) and consumer search (like Google) and watering-hole Web sites (like Yahoo) and video games (like Sony and Nintendo). And Microsoft could return to being itself.

And if that doesn’t work, another option would loom for what’s left of a smashed-up Microsoft: a reverse-smashup. That is to say, someday a slimmed-down Microsoft could always sell itself. Bet ya Larry Ellison of Oracle would love to take it over.

See more of Dennis' take on Microsoft tonight at 5pm ET on "Fast Money" and look for his "Smash 'Em Up" reports all week on-air and online.