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Microsoft's Cracked Windows: How The World's Technology Juggernaut Lost Its Buzz And Became The 'Underdog'

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Facebook's chief executive Mark Zuckerberg recently took the stage at a joint press conference alongside another large technology company. He described his partner using a once-unthinkable designation.

"The thing that makes Microsoft a great partner for us is that they really are the underdog," Zuckerberg said. "Because of that, they're in a structural position where they're incentivized to just go all out and innovate."

Microsoft as underdog. At the beginning of this decade, this description would have been ridiculous, like referring to the Yankees as an unsung, longshot baseball club. From the spread of personal computing through the dawn of the World Wide Web, its software governed the desktops of more than nine in ten desktop computers. Microsoft was so dominant that it became a symbol of monopoly power run amok, supposedly snuffing out innovation. Its rivals affixed pejorative labels like "Death Star" and "Evil Empire," accusing Microsoft of exploiting its control of the desktop to smother any and all potential competitors. Antitrust authorities in Washington and Brussels pursued a veritable crusade to break Microsoft into bite-sized pieces.

"Back in the 80s and 90s, Microsoft was seen as invulnerable," says Howard Anderson, a senior lecturer at MIT's Sloan School of Management.

But now, after a lost decade that has seen its fortunes sag in multiple businesses, this same company is--not without justification--referred to affectionately as the underdog by the head of a Web business that did not even exist when Microsoft first developed an Internet browser. A Newsweek columnist recently dismissed Microsoft as no longer a source of fear in the technology world, but rather "a bit of a joke." Nearly ten years ago, a newspaper had declared Microsoft a step away from "world domination."

How did such a seemingly indomitable enterprise lose its formidable grip on the marketplace? Are Microsoft's best days now behind it? Can it recover its former glory (if not its notoriety) in the twenty-teens?

Microsoft's conspicuous slide attests to the tenuous nature of power and supremacy in the Internet age, and the degree to which the product itself--technology--can radically reshape business models, creating new markets for upstarts and opening pathways around previously insurmountable gatekeepers. In an era in which innovation is perhaps more important than ever, Microsoft's experience illustrates how nothing is really certain for anyone.

To be sure, Microsoft remains huge and powerful. It stands as the second-largest technology company on earth after Apple in terms of market capitalization. It boasted record sales of $62.5 billion in the 2010 fiscal year. Still, it has clearly lost much of its luster, suffering through a decade pockmarked by a series of spectacular disappointments made all the more frustrating by the glittering ascents of rivals such as Apple and Google.

For Microsoft, failures and missed opportunities have recently come to outshine its many successes. There was the delay--and disaster--of Microsoft's Windows Vista operating system, widely considered one of the worst tech debacles of the decade. The software that came to market months behind schedule was panned by frustrated customers who found the too-expensive upgrade bloated, slower than its predecessor, and incompatible with hardware. There was its failed attempt to purchase Yahoo, which rebuffed many months of advances in what became a humiliating spectacle, depriving Microsoft of a crucial expansion into Web searching. There was Microsoft's new line of Kin smartphones--a D.O.A. product the company killed just 48 days after launch. There was Microsoft's disappointing effort to launch a digital music player, Zune--which has proven no match for Apple's iPod--and its failure, thus far, to produce a credible rival to the iPad, even though Microsoft led the way with a "trailblazing" tablet PC in 2001.

Seven years ago, Microsoft still controlled 35 percent of the market for software running mobile phones, but that share has since slipped to 15 percent. Internet Explorer, the Web browser whose dominance put Microsoft cross-wise with federal antitrust authorities, recently dipped below 50 percent of the market.

All of this has diminished the biggest number of all: After reaching a peak market capitalization of $642 billion in September 2000, Microsoft's worth has been sliced in half.

These reversals have occurred even as Microsoft has spent astronomic sums on research and development--$8.7 billion in the last year alone. Microsoft has also lost ground in key areas in which the Redmond giant had viable contenders well before the competition. Microsoft saw the potential of television in the mid-1990s with WebTV, years before companies like Apple and Google took up the battle for the living room.

In short, changing appetites of the marketplace, technological evolution and questionable decision-making inside Microsoft itself have combined to accomplish what antitrust regulators never did: rolling back the company's dominance and opening the terrain for newer, nimbler entrants.

Captive To Its Own Monopoly

In the telling of many technology experts, many of Microsoft missteps and stumbles are, ironically, the direct result of its very successes and core strengths. Its stranglehold on the desktop, while hugely profitable, helped turn Microsoft into an out-of-shape competitor focused on defending turf rather than scoring new hits. In seeking to maintain its dominance on the desktop, it failed to anticipate and plan for the spread of computing to mobile phones, handheld computers, the cloud, and Web-based services delivered by companies such as Google. Now, people can write documents, run spreadsheets and browse the Web without indulging any Microsoft software, steering right around the software giant.

"The fundamental challenge for Microsoft is that it is trying to protect an enormously profitable core franchise at a time in which alternative means of achieving same results put the core franchise at risk," says David Yoffie, a professor of international business administration at Harvard Business School.

Microsoft declined requests for comment.

For a time, Microsoft's size, market share, and clout meant it was large enough to smother challengers.

"If there was a market someone wanted that Microsoft had, Microsoft would roll over them," says Anderson, the Sloan School of Management professor.

Most famously, when Netscape offered a Web browser for free, Microsoft bundled Internet Explorer with Windows, effectively inserting it smack on to the screen of the vast majority of the world's desktop computers. Suddenly, Microsoft controlled the primary gateway to the Web, with all the attendant opportunities.

But this mode of building new markets by tying new products to Windows sowed a monopolistic culture inside Microsoft, one that has proven damaging in a swiftly changing marketplace. As the company focused its energies on defending its grip on the desktop (not to mention defending itself against high-profile lawsuits aimed at curbing its power), it was slow to develop new products to serve changing ways of computing, such as relying on the Web-based software that has been central to the rise of its competitors.

"It has an executive team that had not truly lived in a world of competition for perhaps a decade, and its performance in the years between 2000 and 2010 have showed this," says George Colony, CEO and chairman of Forrester Research, a technology and market research firm. "Essentially, the company had no competition for a decade and so it became out of shape and not ready to truly compete."

The trouble for Microsoft is that its core business is so huge that it indeed warrants defending. Its Windows operating system and Office suite of applications together generated around 60 percent of Microsoft's sales in the 2010 fiscal year. But time and again, Microsoft's focus on defending these areas appears to have come at the expense of timely strategic thinking about how to expand into promising new areas.

Web searching, for example, seemed in the 1990s like a niche service that could be found anywhere. Many companies failed to realize that search could be turned into the immensely profitable business that Google has proven it to be, using it as a way to attract Web surfers who could then be pointed toward other experiences including services that Microsoft previously dominated, from e-mail to instant messaging to digital calendars.

Many observers argue that Microsoft has never recovered from the departure of its co-founder, the visionary and fierce Bill Gates. He was so adept at steering the behemoth he's proved all but impossible to replace. His successor, Steve Ballmer, who became chief executive in 2000, has by many accounts fallen short, failing to match Gates' technical expertise and foresight.

While Gates was a coder, Ballmer is known as a numbers cruncher, a math and economics major at Harvard, where he first met Gates. Without Gates' tech knowledge, some say, Ballmer has been unable to see the competitive opportunities and threats ahead.

Ballmer is "a brilliant Wall Street tactician," says the futurist Mark Anderson. "However, he couldn't program an Xbox game. He doesn't have that tech background."

Ballmer famously scoffed at the iPhone when it first launched. "There's no chance that the iPhone is going to get any significant market share," he told a television interviewer when Apple's now-ubiquitous smartphone was first released. Today, Apple owns nearly one-fourth of the market for software powering smartphones, while Microsoft has only one-tenth, according to ComScore, a marketing research firm.

An ongoing survey of over 1,000 Microsoft employees by review website Glassdoor.com concluded that 50% did not approve of Ballmer's performance as CEO, even though the company reported record revenue in the 2010 fiscal year.

Like perhaps any major company, Microsoft has also struggled to manage an increasingly enormous and fragmented operation, one with over 88,000 current employees worldwide and five major business units. In the telling of many insiders, internal politics and power struggles have often stifled innovation and thwarted coordinated action.

"A lot of time the phone division doesn't even know what the Windows division is doing," says Mary Jo Foley, a technology journalist and author of Microsoft 2.0: How Microsoft Plans to Stay Relevant in the Post-Gates Era.

In an op-ed in the New York Times published earlier this year, a former Microsoft vice-president, Dick Brass described the company as "a dysfunctional corporate culture in which the big established groups are allowed to prey upon emerging teams, belittle their efforts, compete unfairly against them for resources, and over time hector them out of existence."

The Found Decade?

Whatever happens next, at the dawn of a new decade, Microsoft appears set for a significant makeover. In recent years, as its many of its core businesses have suffered, the company has come to be seen as a predominantly business-focused enterprise, the supplier of software and services to major American companies. Many consumers have disdained Microsoft as an unsexy brand encountered primarily at work, while giving their leisure time over to the sleek realm of Apple, Google, and Facebook.

Now, Microsoft aims to change that, regaining the engagement of the American consumer even as it attempts to build on its strong legacy in the enterprise.

Microsoft chief research and strategy officer Craig Mundie says he believes the firm's way forward is to speak directly to the consumer, a strategy no doubt informed by Apple's success in getting parents, students, designers, and others to crave its white and silver devices.

"Apple has shown that if you don't focus on the consumer in this market, there's enormous risk," Yoffie says.

But many experts are dubious that Microsoft can pull off such a transition.

"Apple builds fanatics," says MIT's Anderson. "Microsoft builds people who are sullen, but not mutinous. Their DNA is large organizations, operating systems, and applications. Their DNA doesn't understand design and the consumer mind."

Microsoft's failure to see the opportunities that Apple handily seized upon hardly means it is doomed in the consumer space. HP, Sony, Nokia, and Research in Motion are just a few of the titans that missed what the Cupertino company anticipated and developed, from the rise of apps to the demand for a digital storefront for music. Some would even have bet on Apple's demise, a sign of just how much a technology company is capable of changing course--Dell founder and CEO Michael Dell said of Apple in 1997 that his advice to the then-ailing firm would be to "shut [...] down and give the money back to shareholders."

In its strange new incarnation as the underdog, Microsoft is adopting a different set of habits than those embraced by Microsoft, the overlord of yore--a cultural shift that may lead to greater innovation.

"The lost decade of Microsoft is propelling them forward now to be more daring," says Colony.

Zuckerberg, the famously youthful chief of Facebook, said he enjoyed partnering with the Microsoft because--in contrast to its days as an entrenched monopolist--the company is "just trying to rapidly gain share by doing awesome stuff that no one has talked about doing before."

In mobile, for instance, Microsoft has demonstrated a willingness to start from scratch. Microsoft's new Windows Phone 7 mobile operating system, with its trademark homescreen made up of colorful square tiles looks little like the competition and has drawn critical praise as fresh and unique. Its latest versions of Internet Explorer and Windows, and its search engine, Bing, all stand as major improvements over their predecessors.

By some accounts, Microsoft's efforts at refashioning itself have already reaped dividends. Its new mobile phone software is the product of a previously unmanageable cross-company collaboration in which the Zune, Xbox and browser teams all worked together to create an operating system that felt unified and consistent for the user. Microsoft has also scored points with Kinect, its new controller-free gaming peripheral that allows users to play games just by moving their body, which has been praised as the "future of gaming" and sold faster than the iPad during its first month on the market.

But the positive reviews mean nothing unless the customer buys in. The mobile phone now stands as the single most important venue for Microsoft in the consumer space, the place that will determine whether the company goes down as an atrophied giant or can rise anew.

The Pew Research Center's 2010 Mobile Access survey found that 40% of adults in the U.S. now use their mobile phone to go online, compose email, or instant message--a number that will almost certainly swell.

"Phones are do or die for Microsoft," says Foley.

Microsoft's deep pockets make it impossible to dismiss Windows Phone 7's prospects. The company is trying to woo developers with free phones and cash--they offered game-maker PopCap $100,000 to create marquee apps--and are investing a reported half-a-billion dollars in a blowout marketing campaign.

As the iPad solidifies its place in the technology landscape, and as other tablet computers proliferate, Microsoft will need to catch up in that sphere as well--a painful reality for a company that launched its first tablet computer almost a decade ago.

According to research from Strategy Analytics, Apple controlled 95% of the tablet market in the third quarter of 2010. There's also Google to contend with, as a host of new tablets and laptops running its Android and Chrome operating systems will be coming to the market over the next several months. While the last decade witnessed the browser wars, the coming decade will see Microsoft battle to be the operating system of choice across the slew of new devices that have come into play: phones, tablets, and TVs.

Some argue that Microsoft's aim for the consumer's affection is bound to fail, while distracting the company from its only viable mission: building on its already dominant position in the American workplace.

"If I were Steve Ballmer, I'd be doubling down on enterprise," says Foley. "That's where they're strongest and that's where they make their money."

Microsoft is hardly turning its back on the corporations that have been so good to it for so many years. It has been refining a range of offerings intended to tempt corporate IT departments, such as Azure, a cloud computing service that launched earlier this year and has attracted clients like eBay and the Department of Agriculture, and SharePoint, a line of business software products that has been Microsoft's fastest-growing ever.

But the giant is clearly gearing up for a major run to recapture the masses--this time, not by dint of its monopolistic grip on the desktop, but by the force and appeal of its innovations, another phrase not frequently uttered in connection with the company back in its halcyon days.

The only certainty is this: Microsoft will be around in a major way if for no other reason than the dollars at play.

"They have more money than God," says MIT's Anderson.

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