How many times yesterday did you do a web search that led you to a Wikipedia page that then didn’t load because of that site’s SOPA protest?  I didn’t notice the effect immediately but once I did I was later able to go back through my browser history and see that I tried and failed to open a total of 13 Wikipedia pages so far.  Whether you give a damn about SOPA or public protest, this experience has given me a whole new respect for the role Wikipedia has come to play in my life and probably yours.

As a result I made a small donation to Wikipedia around lunchtime then cursed it the rest of the day for failing me seven more times.

As for the SOPA/PIPA protest itself, I sympathize. But in my view what we have here is mainly a conflict of business models, dying industries, and really, really poor design that will work itself out over time.

Remember the record album — the LP?  Some were great, most were not. Too many B tracks if you ask me. The music industry has long had a problem of value.  The groups I liked sometimes didn’t have many good songs.  The record companies would put one or two good songs on an LP or CD, then throw in 10 more that weren’t so good.  There were no warning labels which matter to me now that I am a parent.  All we wanted were good songs at a reasonable price, which didn’t mean the 15-20 percent yield we were getting from albums.

Then came iTunes and all those problems went away.  iTunes did more than just sell the songs the record companies were pushing: they sold whole collections of music.  As a result, more, not less, music was sold, most of it the good stuff. Music — if not the recording industry — is better as a result. Steve Jobs proved thinking about the consumer is very good business.

Now we have SOPA and PIPA.  I would like to have the same ability to build an online movie library as I have done with music, but there are big problems with this, starting with Windows Media Center and, yes, even iTunes — pretty good products in their own right that protect the copyrights of stored content.  That part is okay.  But they have very little third party support.  Then there is the problem of content.  I can buy only a fraction of what I’d like to get and it is scattered over several suppliers.  If the movie and TV industries think I am going to subscribe to 5-10 services for $10-25 a month each, they’re nuts.

The movie and TV industries are doing now exactly what the recording industry did before iTunes.  SOPA and PIPA will die but they’ll be replaced with something just as bad because lawmakers are stupid and producers are afraid of the future — a future that’s coming no matter what the entertainment industry does.  For the money they are spending on lobbying, a design team could develop a new system that would make more money by exposing more content, not less, enabling new business models in the process.  At least that’s my take on it.

Changing subjects, Jerry Yang recently got his choice of replacement CEOs again (Jerry’s fourth CEO — fifth if you include choosing himself in 2007) then almost immediately bailed from his every Yahoo connection: what’s up with that?  I wish I knew, but I have some suspicions.  An intervention, perhaps?  Jerry was such an obstructionist to Yahoo moving forward in almost any direction that someone on the inside may finally have told him to sit down and shut up, which I am sure Tim Koogle wanted to do many times.

I can see Jack Ma making a preemptive move like that, saying he’ll pay $1 billion more for Yahoo’s Alibaba stake if Jerry takes a hike first.

Nah, sounds too simple.  More likely Yang finally got tired of playing the bad cop and decided to retire to his private golf course.  I’ll be very interested to see what his next career move will be.  Off the board and owning less than five percent of the company (no SEC reporting requirements) it could be trying to make money trading on what’s sure to be a wild ride for Yahoo over the next several months.

Another change of subject — remember my problem just after Christmas trying to upgrade Windows 7 Home Premium to Windows 7 Professional using one of those instant upgrade cards I bought at WalMart? Though I tried to do the upgrade every day, it wasn’t until this past weekend — two and a half weeks after I started — that the Windows Instant Upgrade website was no longer down for maintenance. I’m not making this up nor can I be the only person with this particular problem, yet run a Google News search and you’ll see I’m almost the only person to write about it. What’s with that?

Well it is certainly humbling for me: I’m clearly not the hotshot reporter thought I was or possibly use to be. But it also brings into question the whole idea of viral growth in news stories and why one story gets picked up and another doesn’t.  It beats the crap out of me why it happens.  One thing I don’t suspect, though, is any concerted effort by Microsoft to shape the news other than by simply ignoring me. I certainly felt no pressure from them.

Frankly, I wish I had been pressured by Microsoft.  That would have been fun.

And now that I have Windows RDP service to my thin clients from a brand new Windows 7 server, how is it working out for my trio of young users?  Terrible. Even elementary school gamers overload this system despite first 8 and now 16 gigs of DDR3 RAM. Thin clients (and thick — I’ve tried both) fail the FusionFall test.

Steve Ballmer has always been nice to me. I can’t say we have much of a relationship, but the half dozen times I have interviewed him have always gone well and he tries to please, which I appreciate. But (there’s always a but, isn’t there?) Ballmer has failed at Microsoft and I believe 2012 will see him replaced as Redmond’s CEO.

During Ballmer’s term Microsoft’s stock has gone nowhere and it lost to Apple its position as America’s most valuable technology company.  While the company is wildly profitable and will remain so for years to come, those profits still come, for the most part, from two stalwart products from the 1990s — Windows and Office — both of which will fade as the mobile conversion proceeds.

Very little else has worked for Microsoft.  I know, I know there are 50 million xBox game systems out there and hundreds of millions of games have been sold, but how much money did Microsoft actually make on all that hardware?  The company would be in a better position today, frankly, had it simply shut down everything but Windows and Office.

Ballmer tried and failed and it is long past being time for him to go. Unfortunately most of the internal candidates who might logically have succeeded him are no longer with the company.  And it is my belief that once you leave Microsoft you don’t come back.

Besides, Ballmer probably doesn’t want to give up the job.

But it’s time, Steve.  You know it’s time.

Now we’ve reached the part of the show where I tell you who I believe will be the new Microsoft CEO.  I could have put it in the headline above but I wanted you to keep an open mind at least this far. Because there’s a cynical cadre of readers who apparently come here mainly to get angry and feel superior and those readers are about to accuse me for the second or third time this week of having jumped the shark.

I think the next CEO of Microsoft will be Eric Schmidt, who happens at the moment to be chairman of Google.

For something this crazy to happen it has to work for both parties and I think this does, so please read to the end.

Schmidt is, at this point, a billionaire drone at Google. Larry Page is back firmly in control and there is little for Schmidt to do but go around the world hinting at new products. Not only that, Page is pointedly dismantling the organization Schmidt built, seeing it as inefficient.

It is no longer Eric Schmidt’s Google.

I’ll get back to Schmidt’s motivations in a moment, but now let’s look at why Microsoft might do this. It’s a tactical move for one thing and Microsoft thrills to tactical moves. Google has been identified as Microsoft’s top enemy and Schmidt certainly knows Google.  Apple is a big enemy, too, and Schmidt knows that company from his several years on the Apple board.

If Microsoft wants to send Wall Street and the technology market a clear signal that something has changed, hiring Eric Schmidt would be that signal.

And for his part I think Schmidt would do pretty well at Microsoft. It’s a very techie company that presently lacks technical leadership and is adrift as a result.  It lacks the cultural problems Schmidt faced at Novell and the cult-of-personality problems at Google, where Schmidt had too much of a free hand with the result being the dysfunctional culture Larry Page is currently dismantling.

More than anything else, though, sometimes just firing the manager can turn a team around. In this instance I am referring to Ballmer.

Now back to why Schmidt would want to even do it.  For one thing he can prove Larry Page was wrong.  For another — and this is vitally important — this is about the only way Schmidt can sell his Google stock, which may be not far from a historic high.  As CEO of Microsoft there’s no onus against selling that stock or putting it in a foundation which then sells it, or maybe even selling it to Microsoft.

Call me crazy but that’s how I see it.  Who would you choose?

This Christmas I added a Windows server to our home network because my kids were finding some favorite programs were unplayable over their RDP (Remote Desktop Protocol) thin clients. So I bought a very inexpensive Windows 7 desktop and for $89 at Walmart added Microsoft’s Anytime Upgrade to Windows 7 Professional, which is needed to support remote RDP desktops.  No luck with the RDP deployment so far, though, because MICROSOFT’S ANYTIME UPGRADE WEB SITE HAS BEEN DOWN FOR THE LAST TWO DAYS.

This is no way to run a business, Microsoft.  My kids want their FusionFall.

I would have understood had the site really been down for maintenance as it says, but two days isn’t maintenance.

It would have made better sense, too, had the fail screen not required me to every time submit all my information before telling me the site was unavailable.

People who are headed to www.windows7.com/getkey are there for only one reason and if Microsoft knows that reason is unavailable, why not just put up a big OUT OF ORDER sign at the door and save us all some work?

So far I have wasted an hour of my time on this.  Multiply that by the thousands (maybe tens of thousands) of would-be Christmas upgraders just like me and you have a prime example of how companies fail to respect their customers.

I was speaking recently at a software company very interested in mobile apps. One of their concerns had to do with which operating systems to support.  Should they do them all?  Just a couple? My advice was that three’s a crowd.

Technical markets tend to divide like bettors at the racetrack where five percent win, 10 percent break even while 85 percent lose. Turning these numbers on their head and applying them to mobile OS revenue, IOS (iPhone, iPad, iGizmo to be named later) will generate 85 percent, Android 10 percent (because it is Open Source and free) leaving only five percent max for mobile OS number three, which could be Blackberry or Windows Phone 7 but can’t be both.

Notice this is all about revenue.  I’m not saying Android won’t have more phones in use than Apple, just that Apple will make a lot more money from its phones.

Since Microsoft feels it can’t afford to miss the mobile transition, they’ll do anything to hold at least the third spot, which is why I expect Redmond to eventually acquire RIM. That would actually be a better than usual deal for Microsoft. RIM has (residual and fading) market share as well as incredible talent at its Waterloo, Ontario HQ, not to mention a bootload of cash. What they don’t have is a clue, which is why they need Microsoft, which is clueless, too, but will at least provide desperate new leadership, mass, and marketing clout.

Hey, I think that was my first prediction for 2012!

Another option for Microsoft would be to embrace Android and reposition Windows Phone as a shell, making Android apps look and function like Windows apps. This is not as stupid as it sounds. Thanks to its aggressive legal department, Microsoft already makes more money from Android than does Google, so Android’s success can be seen as Microsoft’s success if you squint a little. Microsoft could specialize in Android services where Google might be letting users down a bit and the Microsoft/Android Application Store could sell apps for both OS variants, undercutting Google.

That’s prediction #2: If Microsoft doesn’t buy RIM they’ll license Android.

If they are really on their game Microsoft will do both (buy RIM and license Android) which would be a true game changer.

This potentially leaves a little room for other candidates for mobile OS position #3, but I’m at a loss for a good business case for even trying. Consider, for example, Intel’s new mobile OS project called Tizen, which replaces the failed Meego.

Tizen looks to me like a bad bet. Intel even championing a mobile OS against IOS and Android is spitting in the wind. The best that Intel can hope is to grab third place, which would still take a miracle.

Is a potential five percent market share worth Intel’s time?  I don’t think so.

Prediction #3: Tizen will fail in 2012.

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.

Who will buy Hulu, the IPTV streaming service and why should we care? I’m not sure I do care, now that Lie to Me has been canceled, but in case you are an American who feels the future of series television is important, here’s what I think is going on.

The Wall $treet Journal says Apple is thinking of making a bid for Hulu and Seattlepi.com says Microsoft’s is no longer interested, which leaves Amazon, Apple, Google, Yahoo, and any unnamed parties. I can’t think of any unnamed parties, by the way, so I’m guessing one of these will walk with Hulu, which went into play a couple weeks ago following an unsolicited (and still unidentified) bid.

Of course the three big network owners of Hulu will guarantee five years of continued program access with the first two years exclusive. That’s because they have no money in Hulu and each stands to walk with $600+ million from the sale, but only if there is a sale. Without such an exclusivity period there will be no sale and no $600+ million. None of these networks can buy out the others for antitrust reasons so the “networks might balk” story is just to sell newspapers (or electrons). Hulu will be sold.

It will be interesting to see how much Hulu will cost the winner, though. The company appears to be managing the press brilliantly to generate buzz. Any of the interested parties could do the deal all in cash, no problem. But who will end up with it? Here’s my score sheet.

Apple will buy Hulu if the price is right, but how much higher than $2 Billion they will go? I suspect Apple may actually be just meddling here, trying to make it more expensive for the eventual winner.

Microsoft has already telegraphed that $2 billion is too high, but since they probably can’t afford to not be in this business that suggests they will put some smaller amount (still $1+ billion) into content deals.

For that matter, all the losers will be looking for content, so I’d say $4+ billion is up for grabs in Hollywood beyond Hulu. New cars all around!

Amazon just did a content deal with CBS (so did Netflix — remember them?) so buying Hulu would round out their content for Amazon Prime, likely bringing-in millions more customer accounts. But there, too, it depends on what is Amazon CEO Jeff Bezos’ price target. He and Jobs are very similar in that they will have a maximum in mind and probably won’t go higher.

My gut suggests that the auction will finally come down to Google and Yahoo, if Google can get this past the feds despite its dominant position with YouTube. Yahoo CEO Carol Bartz probably sees this as her best chance to avoid being fired so I think she’ll bid high. I suspect, too, that Yahoo’s unsolicited interest was what started Hulu in play in the first place, though that’s just a guess on my part.

Buying Hulu could also be Bartz’ undoing, though, because she could blow half her cash or more (I suspect Google will go to $3 billion and Yahoo will beat that) and then find herself in a position where she can’t make a profit on her purchase, especially since she’ll have to do her own CBS deal at that point and CBS CEO Les Moonves won’t make that cheap. Amazon reportedly paid $100+ million to CBS, but Moonves will try to hold out for closer to the $600+ million he would have received had CBS been a Hulu owner, seeing anything less as charity.

The fascinating scenario here, of course, is that Yahoo way overpays, damaging itself fatally in the process and ends up being acquired by one of the others, probably Microsoft.

No wonder Ballmer pulled out of the bidding, he’s playing the long game.

Roger with his axe

Roger McNamee is a smart guy and a very successful investor as a co-founder of Elevation Partners. He made a breakfast presentation last month at the Paley Center for Media in Los Angeles that is well worth watching. I could probably get half a dozen columns out of this one speech, but the part I want to concentrate on here is McNamee’s claim that when it comes to social media, Facebook (in which he was an early investor) has already won. I’m not here to say Roger is wrong, just that I am not exactly sure what Facebook is winning.

The core of McNamee’s speech didn’t have to do so much with Facebook as with Microsoft, Apple, Google, and HTML5. His point was that Microsoft is going down and that is freeing-up money from a decaying enterprise software business that can go to support new businesses based on HTML5. Google won’t be the beneficiary of Microsoft’s fall, according to Roger, because they’ve lost, too: the mobile transition effectively eliminates Google’s tollbooth on the Internet because smart phone users hardly search at all. So Apple wins by providing all the devices and Facebook wins, I guess, by providing the most popular destination.

Again, I’m not saying he’s wrong, but what I took away from this speech was first an image of Microsoft as the Roman Colosseum being mined for marble after the barbarian invasion, and second a sense that while Facebook is certainly a huge social, cultural, and business phenomenon, I just don’t see it being around for very long.

Facebook is a huge success. You can’t argue with 750 million users and growing. And I don’t see Google+ making a big dent in that. What I see instead is more properly the fading of the entire social media category, the victim of an ever-shortening event horizon.

Each era of computing seems to run for about a decade of total dominance by a given platform. Mainframes (1960-1970), minicomputers (1970-1980), character-based PCs (1980-1990), graphical PCs (1990-2000), notebooks (2000-2010), smart phones and tablets (2010-2020?). We could look at this in different ways like how these devices are connected but I don’t think it would make a huge difference.

Now look at the dominant players in each succession – IBM (1960-1985), DEC (1965-1980), Microsoft (1987-2003), Google (2000-2010), Facebook (2007-?). That’s 25 years, 15 years, 15 years, 10 years, and how long will Facebook reign supreme? Not 15 years and I don’t think even 10. I give Facebook seven years or until 2014 to peak.

Does this feel wrong to you?  Listen to your gut and I think you’ll agree with me even if we don’t exactly know why.

Roger may not care since he will have already made his Facebook fortune and then some. But I think this foreshortening is important because it makes Facebook the winner, yes, but the winner of what? Super-IPO of the decade? Yes. Dow-30 company of 2025? No.

My interest is in what follows Facebook, which I think must be its disintermediation by all of us reclaiming our personal data, possibly through our embracing the very HTML5 that Roger loves so much. The trend is clear from “the computer is the computer” through “the network is the computer” to what’s next, which I believe is “the data is the computer.”

You’ll notice I didn’t mention Apple. Black swan.

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Nortel Networks, the bankrupt Canadian telecom company, came that much closer to disappearing completely yesterday with the cash sale of its portfolio of 6000 patents for $4.5 billion to a consortium of companies including Apple, EMC, Ericsson, Microsoft, Research In Motion (RIM), and Sony. The bidding, which began with a $900 million offer from Google, went far higher than most observers expected and only ended, I’m guessing, when Google realized that Apple and its partners had deeper pockets and would have paid anything to win. This transaction is a huge blow to Google’s Android platform, which was precisely the consortium’s goal.

Google is the youngest of these companies and has probably the smallest patent portfolio, most of which isn’t mobile or telecom related. This puts Google and Android at a legal disadvantage and explains the 45 patent infringement suits that one analyst says Google in presently facing in the mobile area alone.

Google would have preferred to win the auction, but with the consortium sitting on more than $100 billion in cash, the outcome came down to determination, not resources. Google stayed in it only long enough to make sure of the consortium’s intentions and to make the purchase more painful for them, if that mattered.

It certainly mattered to Google, because that $4.5 billion number will be at the heart of the inevitable anti-trust lawsuit Google will file almost immediately. Every good anti-trust lawyer in America just cancelled his or her July 4th holiday to prepare their pitch for Google, which will probably claim Restraint of Trade as well.

Given that the courts will shortly be involved, Google can probably operate unfettered for another 2-3 years, during which they’ll try to build their own mobile patent portfolio. Google may well be able to use the courts to slow the actual Nortel transaction, too, according to my lawyer friends.

So the “Android is dead” story here is way premature.

In the long run, remember, Google will probably be able to use its legal strategy to force the consortium to at least license some or all of the patents. They’ll get a royalty from Google, I suppose, and thus benefit from Android’s success, but then Google is unlikely to be completely deterred, either.

The story everyone seems to be missing here is who gets what in this consortium deal? Most journalists and bloggers seem to assume the winners will all share equally in the IP spoils. But I have people who know people and the word I am hearing it that’s not the way the consortium works at all.

Some consortium members get patents, some get royalties, and some just get freedom from having to pay royalties.

Notice Nokia isn’t in the consortium? The Finnish company is apparently covered by Microsoft, tying Nokia even more firmly to Windows Phone.

Here’s the consortium participation as I understand it. RIM and Ericsson together put up $1.1 billion with Ericsson getting a fully paid-up license to the portfolio while RIM, as a Canadian company like Nortel, gets a paid-up license plus possibly some carry forward operating losses from Nortel, which has plenty of such losses to spare. For RIM the deal might actually have a net zero cost after tax savings, which the Canadian business press hasn’t yet figured out.

Microsoft and Sony put up another $1 billion.

There is a reportedly a side deal for about $400 million with EMC that has the storage company walking with sole ownership of an unspecified subset of the Nortel patents.

Finally Apple put up $2 billion for outright ownership of Nortel’s Long Term Evolution (4G) patents as well as another package of patents supposedly intended to hobble Android.

At the end of the day this deal isn’t about royalties. It is about trying to kill Android.

Note — Here’s a pretty good account from Reuters of the Nortel patent auction. You’ll notice they don’t include the participation breakdown of the winning bid (who gets what) that so far appears no place but here.

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Apple’s announcements yesterday about OS X 10.7 pricing (cheap), upgrading (easy), iOS 5, and iCloud storage, syncing, and media service can all be viewed as increasing ease of use, but from the perspective of Apple CEO Steve Jobs they perform an even more vital function — killing Microsoft.

Here is the money line from Jobs yesterday: “We’re going to demote the PC and the Mac to just be a device – just like an iPad, an iPhone or an iPod Touch. We’re going to move the hub of your digital life to the cloud.”

Just like they used to say at Sun Microsystems, the network is the computer. Or we could go even further and say our data is the computer.

This redefines digital incumbency. The incumbent platform today is Windows because it is in Windows machines that nearly all of our data and our ability to use that data have been trapped. But the Apple announcement changes all that. Suddenly the competition isn’t about platforms at all, but about data, with that data being crunched on a variety of platforms through the use of cheap downloaded apps.

What this requires from Apple is a bold move that Microsoft would never make: Jobs is going to sacrifice the Macintosh in order to kill Windows. He isn’t beating Windows, he’s making Windows inconsequential.

Having been shown the way by Apple, I expect Google to shortly do the same thing, adding automated backup, synchronization and migration to Android and Chrome.

Both companies will be grabbing for data, claiming territory, and leaving Microsoft alone to defend a desktop that will soon cease to exist.

And what happens once all our data is in that iCloud, is there any easy way to get it back out? Nope. It’s in there forever and we are captive customers — trapped more completely than Microsoft ever imagined.

Apple and Google will compete like crazy for our data because once they have it we’ll be their customers forever.

This transition will take at most two hardware generations and we’re talking mobile generations, which means three years, total.

With no mobile market share to speak of and Windows 8 not due until 2013, Microsoft is likely to be too late to the party, with much of Redmond’s market cap transplanted eventually to Apple and Google.

Some will say this is unlikely because of Microsoft’s grip on enterprise sales, but consumers have been leading the IT market for the last decade and the mobile transition will only accelerate this trend.

The quicker Microsoft can turn itself into IBM the better for Redmond, because that appears to be their only chance.

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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.