Foley on Microsoft

Why Does Microsoft Keep Partnering with Underdogs?

Microsoft has a lot riding on partnerships with Yahoo!, Nokia and Barnes & Noble. Mary Jo Foley wonders why, and what the impact would be of any of these go under.

• By Mary Jo Foley
• 06/04/2012

There's a largely accurate adage about Microsoft that states 'Softies are at their best when they are -- or at least believe themselves to be -- underdogs.

Examples: It took market share erosion after years of owning of the Windows Web-browsing world to get the Internet Explorer team to finally step up its standards implementation and delivery cadence.

After more than a decade of completely dominating PC OSes, the Windows team got serious about "reimagining" Windows only after Apple began making mindshare and market share inroads with Mac OS and then, more significantly, iOS.

And it took Google Docs nibbling away at the Office productivity-suite monopoly for Microsoft to finally make much-needed moves toward a Web-based Office.

But what happens to the underdog rule when more underdogs are introduced into the equation?

Some Microsoft underdog groups have been forging relationships with underdog companies in those same markets. Back in 2010, the Microsoft Online Services unit entered into a multifaceted and complicated deal with Yahoo! in an attempt to put more of a competitive hurt on Google in search and advertising. In 2011, the Microsoft mobile team allied itself with Nokia in the smartphone space to attempt to bootstrap the Windows Phone platform in an increasingly iPhone- and Android-centric world. Last month, Microsoft formed a pact with Barnes & Noble to take on Amazon in the e-reader and slate space.

The problem for Microsoft is none of these partners has pockets as deep as the 'Softies do. All of them have been skidding financially and are in the midst of implementing salvage plans, simply hoping to keep their companies afloat.

Almost all of Yahoo!'s eggs have been in the search and advertising basket, yet the company is now attempting to refocus and realign as a content company. Nokia, which is all about phones, is rumored to be contemplating a patent sell-off to generate needed operating funds. And Barnes & Noble is separating its digital assets from its brick-and-mortar ones -- and doing a deal with the Android patent nemesis (Microsoft) -- in an attempt to survive in the rapidly shifting book business.

Microsoft made a conscious decision not to purchase any of these underdogs. (It almost made a multibillion-dollar mistake with Yahoo!, but in the end got most of what its executives wanted with its search agreement and continued talent raids.) Instead, Microsoft has opted to prop up these companies with deals that involve investments, royalty payments and other schemes to provide much-needed cash infusions. It's unclear if the 'Softies will need to come back with stronger measures to keep these flailing partners alive.

The real question is what happens to Microsoft's products and plans if any of these underdogs fail. If Yahoo! goes down, can Bing continue to make inroads against Google? If Nokia's phone business falls apart and takes down the whole company, what happens to Windows Phone, which is banking on Nokia providing the hero devices for the Microsoft mobile OS? And if Barnes & Noble's digital Hail Mary falls short, what is Microsoft's answer to the Kindle Fire and other "consumption-focused" tablets going to be?

Maybe Microsoft's plan B in all of these cases is that failure by any of its underdog partners is simply not an option. If so, does that mean Microsoft will end up buying one or more of these vendors -- or at the least, divisions or products from them? Or will Microsoft cut its losses and drop out of search and advertising, smartphones, and tablets and slates?

I really don't know which way the 'Softies will go if and when any of their underdog partners go belly-up. I thought Microsoft was in all of these key new businesses for the long haul, but lately, I'm not so sure.