Microsoft said earlier this month it will spend billions to make MSN more competitive with Google and Yahoo. It shouldn't bother. Its strategy to capture more online advertising by enhancing search functionality across Windows, expand its partnerships and make acquisitions to build up online inventory will improve its current position but won't be nearly enough to catch its rivals. That's because MSN's best interests will always be subjugated to the financial and operational needs of Microsoft's main cash cows, Windows and Office.

Yahoo CEO Terry Semel suggested that Microsoft just give up. Things aren't that bad, but drastic action is required if the software giant does aspire to anything but a distant third or fourth place in the online search and advertising market.

The solution is not to form a similarly sized Internet subsidiary with comparable funding and head count, but rather to spin out MSN as an independent company. Microsoft could retain close ties to MSN, just as InteractiveCorp maintains a close relationship with Expedia, however the spun out division would have more freedom to pursue whatever path that would better enable it to give Yahoo and Google a run for their money.

For more on why Microsoft should spin MSN out, read:
The Deal

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