For all its success as the world's biggest maker of PC operating systems and office programs, Microsoft's position as the dominant provider of software to consumers is at risk.
While Windows still powers the vast majority of desktops and laptops, the emergence of mobile devices and increasing reliance on the Internet have shown consumers and businesses alike that much of what we call personal computing can be done without touching a single Microsoft product.
COMPETITION: Microsoft's top 12 rivals
Microsoft is still a giant, with $70 billion in annual revenue and an amazing 11 products that earn at least $1 billion a year. But it faces challenges in search, Web browsing, mobile devices, Web server software, and even the desktop operating system market.
In this article, we will examine what we think are Microsoft's five biggest weaknesses, a list we came up with in conjunction with the analyst firm Directions on Microsoft. We provided the list and supporting facts to Microsoft's public relations firm on Aug. 15. Microsoft declined to make executives available for interviews, but provided responses to some of our questions via email. We'll include Microsoft responses at the end of each section.
Let's start with the easy one. If you use the word "Google" as a verb, you know how far Microsoft's own Bing search engine has to travel before it can be called a success. Microsoft's earnings reports break the business down into five product divisions, and the Online Services Division powered by Bing and MSN is the only one that consistently loses money, including $2.6 billion lost over the past 12 months.
Bing, which also powers Yahoo and offers a fancy iPad app, often gets high marks in studies that rate the effectiveness of search engines, yet Google captures about two-thirds of U.S. market share and more than 80 percent of the global market.
Microsoft rarely masks its hatred of all things Google, which makes most of its money on search advertising while investing in other products that eat into Microsoft market share, like Chrome and Android.
But with Bing, "They're so far behind, it's a long slog," says Wes Miller, a former Microsoft Windows program manager who is now research vice president at Directions on Microsoft. "People innately think of Google for search. How do you replace Kleenex? They're going to have to keep burning money for the foreseeable future until they can come up with something that out-Googles Google."
Microsoft cares about search because of advertising revenue, and also because Google has become synonymous with the Internet in almost the same way Microsoft became synonymous with personal computers.
Microsoft's response: "This is a long-term game for Bing," Microsoft said via email. "Bing continues to be focused on creating a great consumer experience, solid execution and steady market share growth. The most recent comScore market share report shows that Bing is continuing to make gains in the U.S., reaching 14.4 percent explicit core search share in June. Overall, Bing increased market share by more than 50 percent since launch."
Once upon a time, Microsoft's Internet Explorer commanded greater than 90 percent market share, dominating the Web browser market as much as Windows dominates PCs today. The Microsoft monopoly earned itself antitrust penalties by beating Netscape into submission, but it wasn't until the rise of Mozilla's Firefox (a descendant of Netscape) and Google's Chrome that the monopoly would be broken.
Nowadays, Microsoft loses browser share almost every single month, dropping to 52.71 percent in total number of users, according to Net Applications, and to 42.45 percent in total page views, according to StatCounter. The discrepancy between numbers of users and amount of usage suggests that the Web's heaviest users are the ones who replace the default Internet Explorer with Firefox and Chrome.
Microsoft's Internet Explorer 9 took steps forward in speed, the user interface, and ability to display sophisticated content like HTML5, and Microsoft is moving to a faster release schedule that brings improvements to users on a more regular basis. Perhaps just as important, Microsoft has made IE9 available only on the newest versions of Windows, arguing that creating browsers that work across all types of computers drives quality down by appealing to the lowest common denominator.
In other words, Microsoft says Google's Chrome and Mozilla's Firefox are hobbled because they run across Windows, Mac, Linux, and older, less capable versions of Windows such as XP. Microsoft wants you to believe that unless you buy a new version of Windows, you won't get the best browsing experience.
"In the future, the browser is only as good as the operating system and the device it runs on," IE Senior Director Ryan Gavin argued several months ago. "We have to think about these things as being integrated."
Internet Explorer itself isn't a moneymaker for Microsoft, although it can be used to direct consumers to Microsoft's online services. Theoretically, someone who tries out Chrome and likes it better than IE is a potential customer for other Google products, and someone who tries out Safari and likes it may become enamored with Apple.
Because of the move from locally installed applications to the Web, the browser is becoming "the portal into your world," says IDC analyst Al Gillen. "The reason Microsoft wants to fight movement is if you can wrestle the browser away from Microsoft, the more your interface to the rest of the world becomes your browser, and you worry more about what browser you're running than what operating system you're running."
Microsoft's response: Microsoft declined to answer questions about Internet Explorer, but pointed to a blog post by executive Roger Capriotti, who notes that IE9 is gaining popularity among Windows 7 users and business customers.
3. Mobile phones and tablets
Microsoft CEO Steve Ballmer famously laughed at Apple's iPhone in 2007, saying, "It's the most expensive phone in the world and it doesn't appeal to business customers because it doesn't have a keyboard, which means it's not a very good email machine. ... We have great Windows Mobile devices in the market today. I look at that and say I like our strategy, I like it a lot. We're selling millions and millions and millions of phones a year. Apple is selling zero phones a year."
Obviously, Ballmer underestimated the iPhone's appeal, at least publicly. Three years later, when Microsoft unveiled Windows Phone 7, company officials admitted they had to start from scratch. After a botched Windows Phone 7 software update broke devices that were already in the hands of consumers, Microsoft's Windows Phone VP Joe Belfiore said Microsoft was still learning how to push out phone updates, a bizarre situation for a company that had been building phone software for years.
Windows Phone 7 has posted strong customer satisfaction ratings, but it doesn't have all that many customers. It turns out Windows Phone Q2 sales dropped from 3 million last year to 1.7 million this year, making the device even less popular than Bada, a smartphone operating system developed on the side by Samsung, which puts most of its mobile efforts into Google's Android.
Things look even worse in the tablet market, which is utterly dominated by Apple's iPad. Windows 7 tablets aren't optimized for touch screens, and Windows 8 won't be out until sometime next year.
A partnership with Nokia (which dumped Symbian in favor of Windows Phone 7) and the demise of HP's webOS may help, but predictions from analyst firms IDC and Gartner that Windows Phones will top the iPhone in market share by 2015 were surprising to many. Even after the Bada numbers came out, Gartner stood by its prediction that Windows will become the No. 2 mobile platform behind Android by 2015, although it said the turnaround will not start immediately and will happen mostly outside of the United States. Even this optimistic scenario depends on the vast majority of Nokia Symbian users switching to Nokia Windows phones, instead of the more popular iPhones and Androids.
"The question, again, is Nokia Windows Phone 7's white knight?" Miller says. "I think Nokia makes some brilliant hardware, but I'm not sure it's really enough to pull consumers in."
Developer interest in the platform will, as always, be crucial. One challenge is that instead of scaling its phone OS up to tablets, Microsoft has chosen to adapt its desktop OS to potential iPad competitors. This means applications built for Windows phones will be difficult to port to Windows tablets. Microsoft is set to release more details about Windows 8 in September at its BUILD conference, and this is one question Miller believes the company should address. "My hope is we will see something about app unification at BUILD," he says.
Microsoft's response: Microsoft declined to comment about Windows 8, and did not answer questions about Windows Phone 7 market share or the application development issue. Instead, Microsoft released this statement:
"*IDC has forecasted that Windows Phone will be the number two operating system worldwide by 2015. (IDC, March 2011)
*The Samsung Focus running Windows Phone 7 was voted the favorite AT&T smartphone in PC Mag's Readers Choice Awards. 'The Samsung phones had better reliability and call quality and were also noted as being the best for gaming: Windows Phone 7 devices come with Microsoft's excellent Xbox Live.' (PCMAG.com)
*There are more than 45,000 registered Windows Phone developers.
*Customers have access to nearly 30,000 apps and games on Windows Phone Marketplace, with an average of 100 added each day."
4. The desktop
Arguing that Windows is a weakness takes some work. Really, it is a potential weakness, but an important one because it is also Microsoft's greatest strength. The 80 percent to 90 percent market share Windows holds on desktops and laptops is the reason Microsoft has direct access to most of the personal computing users on Earth, so even small percentage drops in sales are problematic. Windows 7 has sold more than 400 million copies, but revenue declined 2 percent in the fiscal year that ended June 30.
While Windows 8 will be optimized for both PCs and tablets, Microsoft is holding off on any big announcements regarding the next OS until the BUILD conference in mid-September.
"With a $32 billion chunk of Microsoft's business (Windows Client and Office combined) dependent upon Windows 8's long-term success, it is a fair statement that Windows 8 may well be one of the biggest bets any company has made in a long time," Gillen writes in a new IDC paper titled "Getting Back in the Game: Can Windows 8 Reverse Microsoft's Position?"
There have been various arguments that the PC is dead, but a more accurate description comes from 41-year IBM veteran Irving Wladawsky-Berger, who says the PC is the new mainframe: still profitable, but no longer the center of innovation.
Innovation is happening in cloud computing, and smartphones, and tablets. With Microsoft struggling to gain any foothold in mobile devices, the biggest immediate danger to the Windows franchise is that smartphone and tablet buyers will delay the purchases of their next PCs.
It's hard to imagine large segments of the population doing without PCs entirely, but someone who spends hours each day with a smartphone or tablet might wait five to seven years to buy a new desktop or laptop. The 10-year-old Windows XP is still the most widely used version of Windows, after all. And as more people buy Androids, iPhones and iPads, Microsoft's share of all Internet-connected devices will erode.
"All the competitors would like to have you think that next year Microsoft hits the wall and the PC business is cut in half," Gillen says. "That is not what's going to happen. What is happening is we have a proliferation of other devices that are competing with Windows for mindshare. But at the end of the day, users, especially business users, need PCs."
Microsoft should position the PC as the hub for all other devices to connect to, from phones to television sets. The company should also consider building more software for non-Microsoft platforms, if it wants users to interact with Microsoft software no matter which device they are using. One key change Microsoft is embracing is the ARM chip architecture, popular in mobile devices and which Windows will now support in addition to Intel x86 processors.
One rumor is that Microsoft and hardware partners will build an ARM-powered laptop with a removable screen that becomes a tablet when separated from the keyboard. One Microsoft advantage is that all the rich applications running on Windows will be available to tablets. But Microsoft will need a user interface that is a compelling alternative to the simplicity of the iPad, and provide strong battery life and quick if not instant startup time.