Microsoft’s Best Defense is a Good Offense, says Jackson

by StockJockey

Monday, April 07, 2008 - 1:53 pm

Eric Jackson’s grassroots effort to shake up things at Yahoo! was one of the first examples of using to internet, including Yahoo!, to wage an activist campaign.

While Jackson was on the fringe of Wall Street’s investment community, he has since gone on to found Ironfire Capital, an equity long biased and event driven activist investment firm from his Naples headquarters.

He is taking a page from Dan Loeb’s book no doubt, combining event driven situations with a swift kick in the butt when management teams deserve it.

Jackson has filed another missive on the drama at Yahoo!, and like many just wants to see the deal done. But is Microsoft getting a deal? Jackson seems to think so, and thinks Ballmer needs Yahoo! in order to take on Google. But perhaps the Street is overlooking one key deal point:

Microsoft critics mistakenly think this deal is only about beefing up the weak sister Online Services Division. It’s not. This deal is about protecting the central nervous system of Microsoft itself: Windows and Office. That’s because Web services are the new versions of Windows and Office.

The world is moving to something called Software as a Service, where your software lives on the Web, not your desktop. Google Docs is a slimmed down version of Office. There’s a free version and a pay version of the software, both with personalized ads to supplement Google’s revenue stream. Few of us use Google Docs today but that might be different in 5 years. TechCrunch recently pegged Google Docs revenue for last year at $400 million (2% to 3% of Google’s total revenue and 10 times the size of the previous year’s Google Docs revenue). Microsoft can hang on to it core business for as long as it can hoping the world won’t change or it can start preparing now for the possible day when software lives on the Web, combating what Clay Christensen calls the Innovator’s Dilemma. Sometimes, the best defense is a good offense. Yahoo! allows Microsoft to be stronger in search against Google and, more importantly, stronger in Web services.

Although Eric is somewhat dismissive of integration issues, the threat of missteps is likely to pressure Microsoft’s valuation well into 2009, assuming they can get the deal done.

But an end to the saga will allow Jackson to focus his gaze elsewhere; no doubt we have not heard the last from him.

And don’t underestimate him either. While most of Wall Street rots away in cubicles, Eric works from the beach in Naples. Good work, if you can get it.