Self-Mutilation at Microsoft May Hold Key to Success

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Alexander Natruskin / Reuters

Microsoft Corporation Chief Executive Officer Steve Ballmer speaks during a news conference in Moscow.

Microsoft (MSFT) has never had much success in the businesses of creating and marketing hardware. Why should it? Microsoft is the world's largest software company. The firm has tried to become the GE of technology for over a decade; a conglomerate in several loosely related businesses that support one another even if that support is only tangential.

Intelligence often breeds ambition, and this combination has harmed Microsoft. It has an over-abundance of smart people who have far too little to do. The company's core software divisions require a large number of software engineers and product development staff, but these people are primarily updating products in Microsoft's PC, server, and office Windows products. There may be some innovation in the creation of new versions of these offerings, but a great deal of the work is the equivalent of maintenance. (See pictures of Bill Gates: The Early Years.)

Microsoft's efforts to expand fall primarily into two businesses. One is online content and search and the other is the development hardware devices. The company has not been able to duplicate the level of success that it has had in its software operations. The list of stories about Microsoft's failure to make progress in the search engine business stretches on and on. Not quite as well-chronicled are Microsoft's efforts to compete in the video game and portable multimedia player business. The Xbox has only started to make money recently and the margins are small. It was first introduced in 2001 and Microsoft has invested hundreds of millions of dollars in development and marketing, money that it may never earn back. It looked at Sony's (SNE) success with the PlayStation and believed it could take away some of that business. Once it started to make some progress Nintento came into the market with its Wii. The global console business cannot support three highly profitable competitors. (See pictures of the history of video game consoles.)

Microsoft tried to get part of the portable media player business from the Apple (AAPL) iPod. It launched its Zune product and after an initial marketing push, the product is still available but posting only modest sales. Microsoft now wants another piece of Apple's success. It apparently is in talks to launch a smartphone with Verizon (VZ), which competes with AT&T (T). AT&T has the exclusive sales franchise for the Apple iPhone in the U.S., so, in theory, Microsoft and Verizon would each benefit from creating competition for one of the most successful cell phones in history. (See pictures of the iPhone.)

Microsoft is still trying to get its Windows mobile operating system into as many handsets sets as it can, but there is plenty of competition in the field particularly from Symbian, Blackberry, and Apple's software. An alliance with Verizon, which is the largest cellular carrier in the United States, could help Microsoft's efforts to become a significant presence in the mobile software market. Microsoft's problem is that there is no reason to believe that it, or any other company, will be able to launch a phone that will break the chokehold that the Blackberry and iPhone have. Samsung has tried with its Instinct model, and Google (GOOG) provides its Android software for a handset sold by T-Mobile, the No.4 U.S. carrier. The Samsung and Google-powered products have barely made a dent in the market share of the Apple and Blackberry products.

The conventional wisdom is that the Microsoft phone launch with Verizon will be a failure before the first handset is shipped. This is a case where conventional wisdom is almost certainly true. Microsoft's Zune could not compete with the iPod because it did not offer any important new features and Apple has been in the market long enough to dominate it.

Where does that leave Microsoft? It now endlessly invents new products in the hope of breaking away from its reliance on its original software businesses. The company's forays into hardware have been expensive and have not produced a breakthrough product. Its search engine business ranks No.3 in the market and there is no evidence that is going to improve.

But, while Microsoft may not have been successful in its efforts to diversity, it is right to continue to invest billions of dollars a year to keep trying. If it does not, the company will, over a period of many years, lose its dominance in the software market it created and have nothing to replace it with. It may be a long shot for the company to create the next important consumer electronic device or online search tool, but Microsoft has as good a chance, if not a better one, than any other company in the world at success. It has that better chance because it has tremendous cash flow to put into new enterprises and it employees thousand of smart people, who, without any hope that the company will ever move beyond Windows, might simply elect to leave.

Microsoft's future may not be in its new phone or its new search technology or anything the public is aware of now. The next product that comes from the company's ingenuity may be hidden from the eyes of Microsoft's customers and investors. The odds of that product being successful may only be 100-to-1. That has not seemed to deter the company one bit. Microsoft repeatedly launches new products and initiatives that fail. And, that is Microsoft's strength. It may be a huge company and in the world of technology it may be an old one, but it proves each year that it is willing to invest incalcuable sums of money to build the next Windows. Not many companies are willing to go up against such long odds over and over again.

Douglas A. McIntyre

See pictures of Bill Gates: The Early Years.

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