The dog days of Microsoft

For years I watched Microsoft penetrate new markets and each time it was the same drill -- release a substandard product, market it hard, play rough, and improve the product in subsequent releases. It worked for Windows, it worked for Word, it worked for Excel and it worked for NT.

Microsoft succeeded because all these were extensions of the market Microsoft was already in -- business software.

But lately that selfsame strategy in other markets has failed to come up with the goods. The Microsoft Network has been battling AOL for about a decade, to little avail. The once-tiny Palm has made Windows CE devices look like amateur hour. And now Microsoft wants to take on game console powerhouse Sony with the upcoming Microsoft Xbox.

Microsoft, and in particular Microsoft stock, is facing two problems. One is the company's seeming inability to penetrate new markets. The second is the company's inability to capitalize on markets it already owns.

Put together, this means slower growth for the software giant, and a rapidly diminishing P/E.

Let's look at the new-market conundrum first. One of the hottest technology areas right now is the home/consumer market. That's why Microsoft is so desperate to have a successful game console. Not only would it help drive revenue, but in the future, a range of paid services, such as video on demand, Internet access and music, will flow into consoles. Microsoft is loath to let Sony and Sega grab all these dollars.

Moreover, a successful game console could help protect the Windows franchise. Unlike the Sony PlayStation and Sega Dreamcast, which use specialized chips, the core of the Xbox is from the good old Intel Pentium family -- assisted heavily by a dedicated graphics chip. The Intel legacy means the Xbox will be relatively familiar to Windows programmers, especially those used to building PC games.

A successful game console also boosts Microsoft’s consumer electronic reputation, helping Microsoft execute plan B -- making a Windows PC the center of the networked home. The key here is Whistler, a consumer version of Windows 2000 that can deliver content such as video and sound to a range of devices distributed throughout the home. Microsoft and Intel desperately want the PC to drive home entertainment and information systems of the future, while consumer electronic companies want to start fresh -- just like they did when they built consoles like the Nintendo 64.

Microsoft has a huge uphill battle in the consumer market. Its reputation has been tarnished by the antitrust suit, and its systems have not be renowned for the ease of use and reliability that are so important in the consumer space. For instance, Window CE/Pocket PC, a scaled-down version of Windows, lacks stability and can be tricky to operate.

Meanwhile, the Windows franchise is being attacked on all sides. On the server side, Linux and battle-hardened versions of Unix such as Solaris are keeping Windows 2000 in its place. On the desktop, Internet appliances, mobile devices and perhaps even Linux will soon be taking their toll.

And perhaps worst of all, the applications business is poised for a major shift as application logic moves away from the hard drive and onto the network. Microsoft Office, in this environment, is no longer a sure bet.

Don't get me wrong. Microsoft is a phenomenally stable and vibrant company. But Wall Street rewards growth over all else, and it is here that Microsoft faces the biggest challenge in its 25-year history. And I, for one, would never bet against the consumer electronic giants.

This story, "The dog days of Microsoft " was originally published by Network World.

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