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

First Posted: 12/16/10 04:55 PM ET Updated: 05/25/11 07:20 PM ET


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.