Why Microsoft needs to buy Netflix

June 8, 2011, 5:14 PM UTC

Poor Steve Ballmer. Standing at the helm of one of the computer age’s biggest success stories while its brand withers and its stock languishes at the same level it traded at in 1998. Shareholders are increasingly unhappy with him. Not only are angry hedge fund managers calling for his head,his approval rating among his own rank and file — many of them owning Microsoft shares and options — is sinking like a rock.

This isn’t new, of course. A year ago, Microsoft (MSFT) shareholders were clamoring for founder and Chairman Bill Gates, asking him to pull a Steve Jobs and return to the company to steer it back into the center of the tech world. It’s bad enough having people pointing to your arch rival and suggesting it as a good role model for you. It’s even worse when it happens as your arch rival surpasses you in market value for the first time ever.

Gates handed over the title of CEO to Ballmer in January 2000, displaying a knack for the well-timed exit. He stayed on as chief software architect until July 2008, leaving his full-time job but remaining as non-executive chairman. Since then, Microsoft’s stock has fallen 12% as the NASDAQ rose 20%. It’s tempting for investors and others to want Gates to return, but it’s just fantasy. Although Gates’ net worth would benefit from a rise in Microsoft’s stock, he’s committed most of it to his charity, the Gates Foundation.

There are two bigger reasons why Gates running Microsoft now wouldn’t work. First, he’s not Steve Jobs. Jobs needed Apple (AAPL) — it was his best chance to achieve the vision for personal computing he had in the 1980s — and his talent lay in making that vision real. Gates’s skill lay in making an inferior operating software the industry standard through brute force. That may have been necessary in the adolescent years of PCs, but it’s antithetical to the way cloud computing is developing.

The second reason is that Microsoft simply isn’t broken. Its revenue rose 12% in its last fiscal year and its net profit rose 28%. Windows 7 is a vast improvement over previous incarnations of the operating software, just as Windows Phone 7 is a viable competitor in smartphones. The Office suite of software continues to sell well, despite Google’s (GOOG) free apps. And the Xbox and Kinect have made Microsoft a leader in gaming, and a potential leader in digital video.

The problem isn’t that Microsoft isn’t firing on all cylinders, it’s that this performance isn’t reflected in the stock’s price. Ballmer is succeeding at wringing profits from PC software that many had written off in the age of cloud computing. But he’s not very good at finding new sources of growth as cloud computing takes center stage. Which is why the answer to Microsoft’s problems isn’t firing Ballmer, but in bringing on a co-CEO.

Ballmer is the consummate chief operating officer, overseeing the day-to-day operations of a tech giant facing tough competition on many fronts. He is not a visionary, he’s blind to the ways that technology and markets are evolving. Gates served as a good counterbalance, then Ray Ozzie tried to fill that role for a few years. But Microsoft’s culture is so entrenched that it needs a visionary with a stubborn streak and a track record of success as a CEO.

Who could fill this role? Some names have been tossed around, but the best answer may be sitting on Microsoft’s own board. Reed Hastings has shepherded Netflix (NFLX) to a $14 billion market value, defying odds and overcoming obstacles to make Netflix a key player in cloud-based content. Microsoft has $50 billion in cash lying around, so it could buy Netflix and still have plenty enough left to buy Nokia (NOK) if it wanted.

Buying Netflix and installing Hastings as co-CEO would position Microsoft to return to the center of the tech industry. Netflix could speed the Xbox’ transition from a gaming console to a mainstream device connecting TVs to the Internet. Its success in creating a popular, immersive app for tablets could strengthen the appeal of mobile carriers considering Windows Phone 7 as a platform. Microsoft’s investment in Facebook could help Netflix find a strong presence in that social network. And Hastings, who has a deep understanding about the opportunities and obstacles facing cloud-based content, could focus on pushing Microsoft into the future while Ballmer oversees the traditional PC-software businesses.

Of course, the move might distress Netflix customers, who would fear the company getting lost inside Microsoft’s rigid corporate culture. But the question facing Microsoft shareholders in recent months is, what is the best way for the company to turn the stock price around? The answer to that question isn’t Bill Gates returning. It’s Microsoft buying Netflix and Ballmer sharing the CEO spot with Hastings.