Microsoft , which has been struggling to find a long-term strategy for its Internet content businesses, has confirmed that it is considering issuing a tracking stock for its MSN portal and related properties. The disclosure came just after Microsoft announced a deal to sell its Sidewalk city guides to rival Ticketmaster-CitySearch for 7 million Ticketmaster shares -- worth about US$240 million -- and the option to purchase another 4.5 million shares.
There's nothing new about creating a tracking stock, which has become a popular way for companies to gain recognition in the public markets for the value of their Internet businesses. Shareholders of a tracking stock have no voting power. The parent company uses the proceeds from selling the tracking stock as it wishes, with no mandate to shovel the cash back into the "tracked" division. When Ziff-Davis broke out ZDNet's stock, for instance, it acknowledged that the proceeds would be used to help pay the parent company's debt.
For well over a year, Microsoft officials have fretted that the company has not enjoyed the same sky-high valuation its Net-only rivals have received. What's not clear is whether issuing a tracking stock -- which would force Microsoft to reveal MSN's financial performance for the first time -- is the best way to achieve it.
For some companies, the motivation for separating out Net operations is to create a currency for acquisitions. But Microsoft has the deepest of pockets, with a strong currency in its own shares and $17 billion in the bank.
Another motivation for issuing a tracking stock is to attract new hires. Microsoft, as it happens, has had trouble filling its top new-media slot. And shares of Amazon, Yahoo, AOL and other Net companies have outperformed Microsoft in recent years, despite the fact that Microsoft is far more profitable.
Then there's the pain of showing the world MSN's financial data. Since Microsoft President Steve Ballmer took a more active role last summer, bottom-line emphasis has taken hold. But a peek into the books could reveal some ugly truths, which Microsoft might not want exposed.
At a meeting with analysts in Seattle this week, Microsoft CFO Greg Maffei showed a chart forecasting growing losses for the company's consumer and commerce group, with a projected loss in the June 2000 fiscal year roughly double that of fiscal 1997. However, there were no dollar figures on the chart. "We were too shy to put numbers on it," Maffei said. The company did disclose that the consumer and commerce group had fiscal '99 revenues of $800 million.
A tracking stock won't change Microsoft's size, which was 31,000 employees at the end of June. The mothership's Windows-and-Office agenda makes MSN a second-tier consideration at crunch time. Microsoft is betting the company on Windows 2000, not Expedia or CarPoint.
The city-guide sale was public notice of a shift in Microsoft's strategy toward Web operations with better potential profitability. This started in March, when Microsoft bought CompareNet, a San Francisco-based online shoppers' guide. Unlike the Sidewalk buyer's guides that made their debut last fall, CompareNet charges a fee each time a merchant and buyer hook up via the site.
"They're all about pageviews; we're all about commerce," says CompareNet founder Trevor Traina, who's now helping to integrate CompareNet and its transaction-revenue-minded approach into the broader MSN network. That signals a big shift for MSN, which until now has been reluctant to take a cut of the transactions it brokers.
But it's that kind of cold-eyed business assessment that's made Microsoft such a daunting competitor. Making a splash at its annual financial conference last week would have been good theater. But with plenty of cash, a surging portal site and more emphasis on being in the black, Microsoft could find that staying the course is better business.