Why Microsoft isn’t dead yet

Microsoft has picked up a few less-than-complimentary nicknames over the past 15 years or so: dinosaur, bully, even yesterday's news. Given the tech sector's propensity to turn today's giants into tomorrow's has-beens, it had become fashionable to write off the Redmond software giant.

It may be time to rethink that position.

From cool to old

The reasons for Microsoft's fall from grace are many. It seems hard to believe that barely 17 years ago, the Windows 95 launch prompted overnight, around-the-block lineups around the world, all to the tune of the Rolling Stones Start Me Up. Also hard to believe: the then-new operating system was every bit as cool as today's iPhones and iPads have become, with geeks of all flavours debating the merits of upgrading existing hardware or buying new PCs to run the sexy new software. Microsoft was an aspirational brand at a time when Apple was enduring some it its darkest days. Steve Jobs was still in exile and the company he founded was bleeding money and fans on the way to a close brush with corporate death.

We all know what happened next, and it's been mostly downhill for Microsoft since then. First it misread the importance of the Internet's rise, then spent the better part of a decade releasing one barely warmed over product after another — Windows ME and Vista were particularly galling low points. As Apple regained its own mojo, the baton was clearly passed as increasingly mobile- and social media-savvy consumers spent less and less time using Microsoft's stalwart products.

Of course, the company has continued to generate consistent profits due to its dominance of the PC-based operating system and productivity software markets. Largely thanks to its Windows and Office franchises, Microsoft has survived quite nicely on cruise control. Even as the first wave of web-based players assumed the cool-leadership-innovator mantel, Microsoft remained relevant because all those web surfers needed desktops and laptops to do their surfing. Microsoft may have failed to control the online experience, but it remained a critical gatekeeper. And for as long as it lasted, it was enough to keep investors from fleeing. Indeed, the share value has remained largely intact for the last decade.

An eroding PC landscape

The static state of the devices we used both at home and at the office continued to play in Microsoft's favour until smartphones and, later, tablets began to eat away at its conventional PC dominance. With desktop and laptop growth flatlining through much of the last decade — and finally collapsing when the recession hit in 2008 — Microsoft needed to find new markets for its products. Unfortunately, its operating systems and productivity software had — and continue to have — virtually no material presence in a mobile device playground now dominated by Apple and Google. Despite growing market support for well-received sub-brands like Bing and Xbox Live, Microsoft's online services strategy, long eclipsed by Google, remains a sideline at best. Things are even worse on the social media front, as the product-centred company completely failed to understand and respond to the emergence of powerhouses like Facebook and Twitter.

The tide may be turning, as the company is finally updating its legacy operating system products to compete in a changed hardware landscape — Windows 8, for example, will support conventional machines, tablets, and an emerging class of hybrid hardware that combines the best features of both. The company is also embracing its online and gaming divisions after years of treating them like stepchildren. The Xbox 360 has become the dominant console gaming platform, boosted by the market-leading — and margin-friendly — Xbox Live subscription service. The Kinect motion sensing device has opened up gaming to a broader, more casual audience, while the new Windows Phone operating system has been well reviewed.

The markets seem to agree, boosting the share value from a low in the $24 range last November to about $31 today, close to a five-year high following better-than-expected results from its most recently completed quarter.

Challenges remain

The company continues to face stiff headwinds as Apple cements its dominance of mobile market mindshare and Google zooms through 50% smartphone market share. The verdict is out on how receptive consumers and businesses will be to the all-in-one hybrids so critical to the Windows 8 launch. Less-than-enthusiastic market response to the Ivy Bridge chipset released by Intel last month also threatens to dampen momentum leading up to the new operating system's launch, expected this autumn. And as good as the new Windows-powered smartphones are, nothing's going to topple the Apple-Google juggernaut anytime soon.

Still, these glimmers of innovation highlight Microsoft's long-overdue return to the kind of technical leadership that allowed it to define, then virtually own the market for PC software. As it shifts into offerings that go beyond the me-too strategy that has defined the company for much of CEO Steve Ballmer's rule, Microsoft prepares itself for a more stable future as its core PC-based brands slowly fade into history.

Carmi Levy is a London, Ont.-based independent technology analyst and journalist. carmilevy@yahoo.ca