Moving sucks. Our furniture arrived late last week so I’ve been off the clock for awhile and there is a lot of catching-up to do.  We’ll start with Microsoft and Windows 8, which I’ll argue are going to be formidable competitors in the tablet space, primarily because it’s that or start spending all that cash on diversified investments to turn Microsoft into a Berkshire Hathaway. This is probably Ballmer’s last stand as a high tech CEO.

It was entirely by coincidence that I interviewed both Jon Shirley and Bill Gates in their last weeks as Microsoft CEO. In Shirley’s case it was his final day and I’ve never seen a guy more eager to get out of town. And why not?  Running any major corporation must be a huge undertaking that I don’t ever want to try, though of course I’m perfectly willing to criticize. Shirley was at the end of a fabulous run and knew it.  Gates‘ departure was a little different, since I sensed much of the incentive was to help Redmond’s anti-trust strategy at the time, removing from power the guy popularly (and properly) seen as perp-in-chief. Ballmer’s job taking over from Gates was mainly to not rock the boat while carefully turning Microsoft into a kinder and gentler company that could still crush rivals as needed. But in the process (and this is my point here) Ballmer gave up Microsoft’s ability to turn on a dime.  Now Ballmer has to regain that capability or lose his job.

Microsoft under Bill Gates was defined by his 1995 memo The Internet Tidal Wave. Prior to that time the PC future seemed to be about multimedia and CD-ROM, because that’s where Apple was heading and Microsoft was used to following that lead, having developed resources like its Encarta digital encyclopedia. The Internet surprised Gates, but when he came back from his annual Think Week that year he was up to speed and had both a plan (dominate the emerging Internet era) and a rival to crush in order to achieve that end (Netscape). Microsoft always needs a rival to crush. Now it was just a matter of telling several thousand developers that their jobs had changed.

Gates was able to do this — to turn Microsoft’s development supertanker — by force of will and example. Understand this is a guy who hadn’t written production code since the Tandy 102 shipped in 1983, but he had carefully nurtured and preserved the ability to intimidate shy developers with his Aspergerian bluntness. “I can tell good code from across the room,” and “I could write that in a weekend” still worked back in 1995.

Ballmer never had these cards to play, having ceded to Gates-the-genius all claims of technical prowess. Microsoft geeks saw Ballmer as a joke and that image was perpetuated through all the making nice-nice that followed his rise to CEO as well as by a succession of software architects starting with Gates, himself, who simply didn’t envision it being a problem and saw no need to empower Ballmer. Well it was a problem.

Over the last year or so Ballmer has done a lot of executive pruning at Microsoft, taking more control of the company’s direction. He has tried to mute his Monkey Boy image as the honey-swigging sales chief who rants at company meetings. But thanks to YouTube, that image will remain for a long time.

Last week we saw the first public results of Ballmer’s executive makeover. The version of Windows 8 shared with developers was more refined than many expected, the tablet extensions appear to be well done and the ARM support is sincere. There is work still to be done but it feels a lot like Windows NT did post-OS/2. It has to be good because Microsoft is caught in a platform shift that could see it five years from now a profitable but inconsequential company.

In order to avoid that end (and keep his job, because even as the company’s third-largest shareholder Ballmer can’t escape personal responsibility this time) Microsoft has to really push technology for the first time in years. Redmond has to embrace tablets and even use its enterprise clout to push big customers in that direction, because doing a half-assed job this time doesn’t have the saving grace of most customers just re-upping with high-margin earlier versions of Microsoft products. This time the platform transition is going to happen with or without Microsoft and Ballmer knows that.

I won’t be surprised, then, to see Microsoft succeed. They can do this. But will they?  I won’t be surprised, either, to see them fail, though I don’t think they will.

That is not to say, though, that I agree with the industry analysts who are predicting Windows Phone will eventually dominate. That train left the station a long time ago. But Microsoft has a real shot with the enterprise (notice I say enterprise) tablet market.

And this tablet orientation is going to have interesting side effects. Take Yahoo, which we discussed last week.  What evidence is there that Yahoo has a tablet strategy?  None. They need one. Every Microsoft or Apple competitor does.

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Before this week’s Lockheed Martin network breach story intervened, I wrote a column about the strategic dilemma faced by Microsoft from downward trends in both product pricing and new installations for its flagship Windows and Office products. That’s on top of an overall market transition to mobile where Microsoft does not seem to be playing a leading role. What’s Steve Ballmer to do? I think that to thrive Microsoft has to turn itself into a very different company. Fortunately there are archetypes — other companies that have faced similar pressures yet gone on to reach even great corporate success. I think the time is fast coming for Microsoft to emulate Warren Buffett’s Berkshire Hathaway.

When Buffett took command of Berkshire decades ago it was a profitable carpet company. But the writing was on the wall for U. S. carpet manufacturers: labor costs were rising while foreign product prices were declining. Berkshire could have protected its carpet business by accepting lower profit margins, but that would have just been delaying the inevitable. Buffett decided instead to turn Berkshire into a conglomerate with a difference, that difference being its decision to buy or buy into existing successful enterprises, keeping current management in place. Buffett was investing as much in the managers as in their companies.

Buffett used his cash flow to buy a share in the futures of many other companies. Like Peter, he became a fisher of men. Following such a strategy is a very real option for Microsoft.

There’s no lack of money for Redmond to diversify. For more than a decade the company has reliably thrown off at least $1 billion each month in cold cash that could be used for diversification without impacting in any way the day-to-day operations of Microsoft. But what I propose is something more than that — deliberately shaping Microsoft operations to maximize cash flow for external investments. If Microsoft eliminated its many products that don’t make money that would free at least another $1 billion per month and maybe a lot more.

I’m not saying to stop development or even to cut back on the necessities. The strategy I propose would be like that embraced by Hitler in 1943 when he canceled all military R&D that would not bring new weapons on-line within 18 months. While der Fuhrer made many tactical errors this decision was not explicitly among them.

Microsoft should look at its current businesses and commit increased funding to those where it is already first or second in market share and where the segment is showing (or likely to show) healthy growth over time. That means continued investment in a number of specialized server-based back-end products including Skype but reducing expenditures for many clients. This strategy that has served IBM well in recent years.

This means accepting a long decline for Windows and Office just as Berkshire did with carpets. It means abandoning phone handsets, for example, as Microsoft has already bailed on the Zune. xBox would continue, but with an intense concentration on integration with back end services.

Just as an aside here, I don’t expect Microsoft to jump immediately out of the mobile phone business. I didn’t anticipate Microsoft’s deal with Nokia (neither did Microsoft, I’m fairly certain) and that will get a chance to play out. If RIM drops much further I think Ballmer will try to buy the Canadian company and may well succeed. This does not mean, however, that Microsoft can buy its way to a successful mobile phone strategy. The train has already left that station. But Ballmer won’t be able to help himself and it might make the Microsoft phone business into something that could be sold or spun-off 2-3 years from now where today it literally has no value and would simply be abandoned.

What I am proposing is a dramatically smaller Microsoft, probably 25-30 percent of what it is today, though vastly more profitable. Converting corporate mass into energy there’s $70-100 billion to play with and probably another $50+ billion that has been stashed overseas, unable to be brought back to Redmond without a huge tax penalty.

Changing Microsoft into a Berkshire eliminates the downside of having all those profits stuck overseas since they can be used for international acquisitions at what’s effectively a 30 percent discount.

What could Microsoft buy with that $150 billion? A lot of the wrong stuff if the company relies on current management to find the deals. Ballmer is absolutely the wrong man for that job. Microsoft needs at the very least a Chief Investment Officer with a new vision and the clout to shout down Ballmer when it is needed… and it will be needed.

One implication of this strategy is in branding. The Berkshire strategy has emphasized buying established brands and allowing them to operate independently. For Microsoft to be successful with a similar strategy they’ll have to do the same. The Microsoft brand would become secondary over time.

Microsoft shares have been in the crapper for going on 15 years, so maybe finding different brands is a good idea. The company’s current course will not — cannot — change that. Bill Gates has played competition bridge for years as Warren Buffet’s partner. It’s time to expand that relationship. The easiest way to do that, in fact, would be for Microsoft to simply buy Berkshire.

Good idea.

Microsoft co-founder Paul Allen is out with his autobiography and Vanity Fair has an excerpt available online. As the Nth richest man in the world, Allen isn’t doing this for the money.  Maybe it’s for posterity. Maybe to settle old grudges, and he certainly does that in Vanity Fair.

The part of that excerpt everyone will be talking about this week is Allen’s story of overhearing Bill Gates and Steve Ballmer plotting to recover Allen’s Microsoft shares or dilute him into insignificance, this at a time with Allen was dying of non-Hodgkins lymphoma.  It’s a great story, that’s for sure.  But if you are a longtime follower of this column or its predecessor you’ve read it before.

Tell your friends, “Oh that. Cringely covered it back in 2006.”

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Bill Joy used to say, “not all smart people work at Sun” (he was right). Max Levchin is making a killing in Web 2.0 by resuscitating Web 1.0 projects that were too ambitious for 1999 but — thanks primarily to Moore’s Law — are just right for 2009.  Sometimes all it takes is a change of scene or season for something that was a failure the last time to be a big success today. And that’s why I’m predicting the eventual return of Teledesic or something just like it — some new form of Internet in the sky.

This is the first of probably three columns about what will be in coming months the huge story of how the Obama Administration reinvents the Internet.  They are obliged by law to do so and are required, in fact, to submit a grand plan to Congress by February 16, 2010. This National Broadband Plan is intended to accomplish the very same goals as the Clinton-era National Information Infrastructure (remember Al Gore’s “information superhighway?”) only this time it might actually succeed, again thanks mainly to Moore’s Law.

I’ve written before about the last time we went through an exercise like this.  It wasn’t pretty, with the big telephone companies essentially stealing $200+ billion in tax credits in exchange for, well, nothing.  That’s why U.S. broadband, which used to be the best and cheapest in the world is only middle-of-the-pack today.  The National Broadband Plan is supposed to fix that, though at a cost some are predicting (hoping?) will be more than $100 billion.  This time the cable TV companies will be joining the telcos at that trough.

In the broadest of terms what the Obama Administration wants to do is to bring 100 megabit-per-second Internet service to every home and business in America.  They will task ISPs to provide such a service in exchange for being allowed to continue operating as ISPs.  In places where such services can be easily provided at reasonable cost with an acceptable level of profit, which is to say in urban and higher-density suburban areas, this will be no problem.  Ramp-up fiber-to-the-home, fiber-to-the-curb, and DOCSIS 3.0 cable modem services and we’re there.  The simple business expedient of putting local TV stations out of business and grabbing their advertising income will, alone, more than pay for the upgrade costs.

Where there’s a problem is providing this same level of Internet service (100 mbps) in all the more sparsely-populated parts of America.  It is from those areas the telcos and cable companies will come, hat in hand, to ask the government to cover the difference between what they can charge and what it actually costs to provide the service.

Serving these non-urban areas is what I see driving a return to satellite projects like the ill-fated Teledesic.

For those who don’t remember it or have forgotten, Teledesic was one of a number of 1990s plans to use low-earth orbiting satellites to provide wireless Internet service almost everywhere on Earth.  By being closer to the ground than geosynchronous communication satellites, the Teledesic network could support many more low-power users (analogous to having more cell towers) and support low-latency services like Voice over IP (VoIP) which won’t work on a geosynchronous satellite link. The original Teledesic plan called for 840 satellites, later reduced to 288 satellites that would be flying in somewhat higher orbits.  Craig McCaw, Paul Allen, and Bill Gates were all involved in the project, which eventually died when the Internet bubble popped and it couldn’t be financed.

I know I am putting this all too simply, smartypants, but for the purposes of this column that is enough detail.

Teledesic died because it was too ambitious, too costly, and the people behind it made some fundamental mistakes, some involving rockets and the true cost of sending stuff into space, which I know something about.  Remember my Moon shot?  Well it is continuing and I’ve learned quite a bit about space economics along the way.

For Teledesic one key requirement was getting 840 or 288 satellites into orbit for a good price.  Toward that end they standardized on a satellite design that could be launched by any space-faring nation which was supposed to put all those nations in competition, fighting for Teledesic’s business. To set an aggressive baseline price, Bill Gates personally flew to Russia to cut Teledesic’s launch deal himself.

The Russians saw Bill coming.

Gates was negotiating for use of former Soviet SS-18 intercontinental ballistic missiles to launch scads of Teledesic satellites at a time.  Bill’s negotiating position was a tough one (or so he thought) paying no more than $7 million per launch.

Let’s pause for a moment to understand something about those SS-18 missiles.  These were (and still are) the biggest ICBMs around, each capable of lofting 10 independently targetable H-bombs over the pole at the U.S..  SS-18s were launched from underground silos that were designed with a different philosophy than U.S. Minuteman silos: SS-18 silos are hardened to survive a U.S. nuclear attack and then make a second strike.  This second strike capability made the SS-18s the scariest mothers around.  Forget about mutually assured destruction (MAD), the SS-18s made possible mutually assured RE-destruction, killing any survivors of the first wave.  In the eyes of U.S. generals and diplomats, those SS-18s simply had to go.

And they did go, or were at least intended to, as a major condition in the Strategic Arms Reduction Talks (START and START-2).  In exchange for certain favors including chopping the wings off American B-52 bombers, the Russians agreed to destroy 100 SS-18s, taking 1000 warheads out of the game.  There were a number of ways to accomplish this, but the cheapest by far was to launch the SS-18s into space.  It’s easily verifiable, almost impossible to spoof, and might even accomplish some good, like providing the world with 100 mbps Internet service.

Back to that $7 million launch price negotiated by Bill Gates. For the Russians, launching SS-18s came with a negative price, since each launch eliminated the need to disassemble, destroy, and verify the destruction of a missile, the total cost of which could easily reach $1 million.  So launching satellites, while it incurred certain costs for modifying the missiles to replace H-bombs as cargo, began with a price of negative $1 million. The cost of the missile, itself, was zero.  And Bill Gates‘ $7 million would have been nearly all profit for the Russians.

The Russians could have launched the entire Teledesic network for free and still come out financially ahead.

Had Teledesic been able to cut the right deal with the Russians, their satellite constellations would have been launched almost for nothing and we might have satellite Internet service today.

Speaking of today, a decade later, technical and political realities have changed.  Where Teledesic was a $9 billion gamble that didn’t pay off, there is right now $7.2 billion sitting in the FCC’s Universal Service Fund — money the telcos and cable companies are going to try to claim to provide National Broadband service to indian reservations and logging camps.  To serve all of America’s 110 million housing units will cost a lot more than $7.2 billion, which is where those numbers approaching $100 billion came from.  There’s going to be a financial food fight at the FCC to pay for rural broadband service.

But not if a Teledesic-like satellite system were revived.  What would have cost $9 billion in 1996 would cost less today because digital technology always gets cheaper.  Where the 1996 money was coming mainly from private capital markets, $7.2 billion could come from the FCC this afternoon.  By embracing a bold satellite initiative using low-orbiting satellites with low latency the Obama Administration could sidestep dozens of local and regional boondoggles saving tens of billions, providing a solid service that would not only reach every remote part of the U.S., but the rest of the world, too.

Imagine the international political power that would come with having such a global network.  Friendly nations could get cheap Internet, unfriendly nations would find it difficult to keep their citizens off the net.  It could be a bully pulpit in space.

And I know a thing or two about pulpits.