And to the extent that such a model would produce a steadier revenue stream and less volatile earnings, Maffei says Microsoft's stock multiple and price might begin rising again. (For the most part, the stock has been going sideways since last April.) What's more, the new model might allay analysts' and SEC concerns about Microsoft's accounting. To create such a model, "Greg's challenge is to put into place the right assets," says WebTV's Pimentel, who has no doubts Maffei is capable of doing that.
Long before the deal with AT&T, Microsoft began investing in a host of content-oriented Internet properties, including the MSNBC news site, Hotmail E-mail service, Expedia (travel services), and CarPoint (car shopping). Its more-recent forays have stressed the underlying technology that helps distribute such services, including stakes in several European cable TV companies as well as in AT&T and Nextel Communications Inc. All told, Thomas Hensel projects Microsoft's Internet business to account for 10 to 15 percent of Microsoft's revenue next year, and the Wall Street firm of Warburg Dillon Read estimates the business is currently worth about $50 billion.
Granted, "Microsoft has more money than time" to get all the necessary assets into place, according to Esther Schreiber, a former analyst for CS First Boston. But Maffei isn't prepared to overpay for them. His poker- playing skills may have been reflected in the AT&T deal, observes another analyst, since it preceded a flurry of subsequent transactions, including a $600 million investment in Nextel and the $127.5 million acquisition of Swedish Internet software maker Sendit A B. (Talks are also reportedly under way for stakes in the cable TV operations of Cable & Wireless and Deutsche Telekom AG.) This analyst, who asked not to be identified, suggests that Maffei may have held off on some of these subsequent transactions until he had closed the AT&T deal, for fear of "showing his hand" to AT&T--which thus would have been able to negotiate a higher price.
Maffei dismisses such speculation. "I wish I were that smart," he says. Hindery declines to comment on it, noting only that both AT&T and Microsoft benefited from the deal.
Happily Challenged?
The fact that Maffei's dealmaking efforts are so nuanced leads Hindery to suggest that Maffei is "eminently capable of being a CEO of a lot of things." Indeed, press reports a few months ago suggested that Maffei was interested in running Road Runner, a high-speed cable-modem joint venture in which Microsoft invested a reported $425 million in June 1998. But when the company asked Microsoft founder, chairman, and CEO Bill Gates for permission to hire Maffei as its chief executive, it was turned down. Maffei reportedly then lobbied to be named head of Microsoft's new consumer and commerce group, which encompasses the Internet business, and was disappointed that the job went to vice presidents Brad Chase and Jon DeVaan instead.
A company spokeswoman is quick to point out that Microsoft has since promoted him from vice president to senior vice president, named him to a new "business leadership" team, and given him the additional titles of head of procurement and real estate. But this may not be enough to keep him in the CFO spot for long. "There's some truth to the Road Runner rumors," says Hindery.
For his part, Maffei maintains he's happy in his current job. "Most CFOs look to the idea of being a CEO or to run something at some point. That said, I'd be hard-pressed to think of a [better] job in finance or as a CFO. This is a great job, with tons of intellectual challenge."
The transition to the new business model is weighty enough. Ideally, says Hensel, such a rental scheme would apply to consumers as well as to corporate customers. To win contracts at present, Microsoft often tailors terms to individual customers--another reason its revenue isn't as predictable as Maffei would like. To reduce the volatility of Microsoft's revenue, the new pricing structure "needs to be consistent," says Hensel, but he contends it will be difficult to establish one that's acceptable to all. Maffei says the company has begun testing standardized rental arrangements with small companies, but adds that it's too early to judge their success.
The company's recent reorganization may help, though it will be difficult for outsiders to tell. Microsoft president Steven A. Ballmer has realigned operating divisions to reflect groups of customers rather than products, a change Microsoft says is designed to stimulate innovation and streamline development. But the company will not alter its internal reporting system to reflect the new setup, according to Maffei.
He won't say why, but it may be because he doesn't want to run afoul of the SEC's new disclosure requirements for business segments. Basically, these require companies to disclose in their financial statements the same information about their business segments that they report internally. And many CFOs don't want to report their company's results this way for competitive reasons (see "Sliced, Diced, and Still Obscure," CFO, February 1998).
Of course, the results of Microsoft's business segments would become abundantly clear if its biggest antitrust fear came true. In the widely anticipated worst-case scenario, the company would be broken up along the lines of its various product segments. Yet analysts say that might not be so awful, simply because they could add back the pieces for purposes of valuation. And the sum of the disparate parts may even be greater than the whole if separation unlocks any value now hidden.
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