Microsoft surprise reorganization aimed at online woes

Microsoft has built its massive software business by watching other companies take the lead in emerging technology markets and then following fast with competitive products that eventually become dominant once those markets begin to pay out.

The company did it against IBM during the birth of the PC, Netscape during the browser wars, and is currently making a strong showing against Sony and Nintendo in the game-console market.

However, Microsoft's inability so far to capitalize on online advertising and services and its inability to make any headway against Google shows that, despite its huge cash reserves, this strategy may no longer be effective.

On Wednesday in an unexpected move, Microsoft reorganized its Platform and Services division, which oversees its Online Services Business (OSB) and its lucrative Windows OS business, into two groups to separate its distinct online brands. It also announced the departure of the president of the group, Kevin Johnson, who is reportedly leaving the company to join Juniper Networks.

Both the new organizations -- one that oversees its online advertising and search properties and another that runs Windows Live services and Windows OS -- will report directly to Steve Ballmer.

This move shows the CEO taking firm control of a part of Microsoft's business that has been searching for an identity since the company launched Windows Live services in late 2005 -- in part as a complement to its MSN and search businesses and in part as a rebranding of previous online efforts.

"For the past two years, I've been totally confused about [the difference between] Windows Live, MSN and Windows," said Charlene Li, an independent technology industry analyst. "The messaging and product features don't pull together."

She said splitting up businesses is "a good thing" for the company because it will help clarify Microsoft's online strategy. "You start seeing some differentiation between what Windows Live brand stands for and what online services is trying to do," Li said.

The move to divide its online brands follows the news last week on a financial conference call that Microsoft would invest "hundreds of millions of dollars" in OSB in light of its failure to close a deal to purchase Yahoo or at least its search business. OSB has operated at a loss for years and has shown only meager signs of life despite Microsoft's best attempts to revive it.

For Microsoft's fiscal 2008, OSB showed a year-over-year revenue gain of 32 percent, from $2.44 billion in 2007 to $3.21 billion in 2008. For the year, however, OSB lost $1.23 billion in operating income; a nearly 100 percent increase over the $617 million loss in operating income in fiscal 2007.

Last Thursday, Microsoft Chief Financial Officer Chris Liddell sketched out some vague plans for Microsoft's investment, which mainly will go into its search business to bolster online advertising revenue.