A report from CNN serves as yet another reminder that my observations about Microsoft from a recent post are correct: Microsoft can’t buy a winner no matter how much money they trow at it (and their maintenance diet of oft-delayed Windows and Office upgrades doesn’t count).

The XBox 360 and other devices division (think Zune, etc.) is hemorrhaging money and just had to take another $1 Billion charge due to extensive hardware problems with the XBox. You’ll love this: “… the Xbox 360 return problem was getting so severe that the company was running out of ‘coffins,’ or special return-shipping boxes Microsoft provides to gamers with dead consoles.”

That’s on top of the fact that no one cares about their Zune MP3 player and iPod “competitor”, and that the Nintendo Wii and its disruptive innovation approach is running circles around the XBox and Sony Playstation.

Why am I bothering to highlight this for you? Two reasons: 1) There is a law of complexity that in essence states that complexity in an organization is directly related to its size. 2) Even mighty Microsoft cannot escape the logic of said law, regardless of how much money they throw at a problem.

The ultimate irony of everything that transpired with Microsoft in the Anti-trust domain since circa 1998 is this: Microsoft could have likely benefited a great deal from the break-up into smaller, more tightly focused companies that it fought like a banshee to avoid (and that really only got taken off the table once GWB took the White House). This is because Microsoft has grown well past the 800-pound-gorilla stage, and currently has all of the nimbleness of an aircraft carrier.

You see, entrepreneurship is concerned with what we call “arbitrage”, or the assignment – or more often reassignment – of resources to their most efficient, most profitable, highest and best uses. And the law of complexity demands that in order to continually be able to do so, we need to focus on keeping things as simple as possible.

So the only question is, would Microsoft be worth more today if you added together say three or four different, more dynamic offspring companies than in its present configuration? Given the news and products that have come out of Redmond over the last 7 years, the answer is likely yes.

Richard Koch in his seminal work “The 80/20 Principle” has an entire chapter (Chapter 5: “Simple is Beautiful”) devoted to complexity and how it relates to 80/20 thinking, which goes beyond what I will repeat here (highly recommended read though).

But to give you only the most key points: 1) Internal complexity is usually hidden but very real nonetheless. 2) It does not negate the benefits of scale (the idea that with scale, the additional cost to e.g. produce one more unit moves closer and closer to zero), but rather it “steals” from scale. 3) Studies have shown that “only one characteristic differentiated the winners from the less successful firms: simplicity.” 4) Identify and focus on the most simple 20% of your product design, service delivery, marketing message, sales channel, even customers/clients.

As with the Microsoft case, it’s usually fun to see laws in action…