Forecast for Microsoft: Partly Cloudy
REDMOND, Wash.
RAY OZZIE, the chief software architect at Microsoft, bristles when asked whether people think that new versions of his company's flagship software — like Windows and Office — are exciting.
"It's tremendously exciting," he exclaims defensively, wheeling back from an office table and allowing his hands to flail. "Are you kidding?"
Normally subdued and cerebral, Mr. Ozzie inhabits a spacious office at Microsoft's headquarters here that feels equal parts Ikea showroom and computer museum. His shelves and desks are uncluttered, and one of the first I.B.M. personal computers ever made sits centered like an artifact atop a long, squat bookcase.
If only the world — or at least the business world — were so immaculate and neatly organized. But Mr. Ozzie and his colleagues at Microsoft recognize, of course, that very little in the technology universe ever stays the same.
"What's the old movie line from 'Annie Hall'? Relationships are like sharks; they move forward, or they die," says Steven A. Ballmer, Microsoft's chief executive. "Well, technology companies either move forward, too, or they die. They become less relevant."
And according to Mr. Ozzie, we have entered an age that's a far cry from that of the PC enshrined on his altar to beige-box antiquity. Consumers and workers have been gripped, he says, by a "gizmo revolution."
But gizmos are only half the battle for Microsoft. True, fashionistas obsess over whether a new laptop will fit into their purses and what type of fashion statement the device will make. Corporate road warriors, meanwhile, exude pride as they whip ultrathin computers with exotic finishes out of their satchels. Yet the most desirable devices these days are those that also allow information addicts on the move to untether themselves from the desktop PC and communicate through the so-called "cloud."
With the arrival this week of Windows 7 and a host of complementary, slick computers, Microsoft intends to undermine those Apple ads that mock PCs and their users as stumbling bores. Mr. Ozzie, who plays the role of visionary and strategist at Microsoft, says Windows 7 will let PCs keep pace with other computing devices and, in short, finally make them sexy.
In a play for its piece of the cloud, Microsoft plans to release a software platform, Windows Azure, next month that represents its bid to lure businesses with online services. While late to cloud computing in spots and a lackluster participant in the mobile market, Microsoft, Mr. Ozzie says, has a shot at reinventing itself and moving beyond the desktop.
"This gives us an opportunity as a software vendor to refresh our value proposition," he says. "I just think it's an exciting time for Microsoft."
For many years, Microsoft and its leaders could make sweeping statements like this with little public pushback. Microsoft embodied the technology industry and was the grand arbiter of the tools people used to conduct business and navigate the digital era.
These days, however, Microsoft has legions of doubters. While it still commands a prominent and profitable position in computing, brand experts say consumers stumble when trying to define what the company stands for and whether it can create a grander technological future.
"Microsoft sort of disappeared from the scene," says Regis McKenna, a Silicon Valley marketing and strategy expert. "Every once in a while, they have a delayed Windows release or something like that. By and large, I think the marketplace is focused on what Google and Apple are up to."
Critics of Microsoft say it has hugely underestimated market changes and plotted a long and winding course toward irrelevance. It remains too fixated on its old-line, desktop-based franchises, they say — too slow, too predictable and too, well, Microsoft.
"They are trapped in their own psychosis that the world has to revolve around Windows on the PC," says Marc Benioff, the C.E.O. of Salesforce.com, which competes against Microsoft in the business software market. "Until they stop doing that, they will drag their company into the gutter."
While Mr. Ozzie welcomes the gizmo revolution, much of what it appears to entail runs counter to Microsoft's historical strengths. The revolution stretches well beyond a fascination with the aesthetic appeal of a computing device; it also marks a transition in which the consumer, not the office worker, is the dominant force shaping the tech landscape.
Consumers now buy more PCs than businesses do, and their wants and desires for better-looking devices have invaded the cubicle. The current breed of consumer has shown an ability to turn something like the Apple iPhone into an overnight sensation, then demand that companies embrace it. Google, meanwhile, uses its influential Web search and YouTube properties to introduce people to its e-mail, document and Web browser software, and Facebook now provides inspiration to business software makers.
For Google, winning over consumers is crucial to its strategy of infiltrating corporations and deflating Microsoft's core businesses. "We are the next generation," says Dave Girouard, the president of Google's business products division. "The big difference in technology here is the pace of innovation."
While the Internet and network-connected devices are anything but novel, the ability to snatch data anywhere off of the Web — so-called cloud computing — has started to catch on with consumers and businesses in a more meaningful way. As such services become more popular, Microsoft's grip on computing loosens, its critics say.
"They are not the company they once were in terms of market position," says Bruce R. Chizen, a former Microsoft employee and former C.E.O. of Adobe Systems, the publishing software maker. "They no longer have a monopoly that is critical to the future of computing."
Mr. Ballmer, Mr. Ozzie and others at Microsoft see things rather differently, and for the last year have argued that coming software releases for PCs, data centers, mobile devices and game consoles will confirm exactly how Microsoft will remain a pivotal force on the tech landscape.
Mr. Ballmer contends that Microsoft is the only company prepared and positioned to merge computing from both ends — the desktop and the cloud. "We're just investing more broadly than everybody else," he says, adding that, when it comes to software, "I want us to invent everything that's important on the planet."
Pundits and investors are ready to judge how well Mr. Ballmer lives up to these claims, and his tenure may ultimately be decided by how well his enterprise floats up to the cloud.
LIKE almost all companies in the PC industry, Microsoft has been punished by a historic decline in computer sales during the recession.
Over the past year, it has endured a string of humbling company firsts. In January, it began laying off up to 5,000 people — its first-ever broad personnel cuts. That followed its first declines in Windows sales and preceded its first yearly drop in revenue.
Despite such setbacks, Microsoft continues to produce profits that are the envy of the technology industry. In July, it ended its fiscal year with a 3 percent drop in revenue, to $58.4 billion, still bringing in a $14.6 billion profit. Microsoft has a war chest of $31.45 billion, including cash and short-term investments, and its shares have recovered from a low of $14.87 in March — its lowest price in more than 10 years — and now trade at $26.50.
Executives at Microsoft say it has gotten its house in order, putting an end to delayed, clunky products like the maligned and then ignored Windows Vista. If a broad economic recovery occurs, Microsoft's fortunes will rise as they always have in rosier times.
"I do believe that Microsoft should be able to benefit dramatically as the economy comes out of its downturn," said Marilyn J. Dicks-Riley, the chief executive of the Lynmar Capital Group, which bought more than 800,000 shares of Microsoft earlier this year. "We are of the view that Microsoft is committed to long-term innovation."
Microsoft does, in fact, have a dazzling array of long-term bets. It has earmarked close to $10 billion for research and development spending over the next year. These funds cover work in desktop software, data center software, developer tools, health care systems, video game consoles and games, music players, phones and phone software, Web properties and office collaboration products. In Internet search, Microsoft has unveiled a well-received engine called Bing and has pledged to spend what it takes to make a meaningful dent in Google's main business.
Some investors contend that Microsoft has its fingers in too many pies, developing too many products. The company is struggling to please consumers and workers at the same time. Despite its hunt for the next big thing in so many areas, Microsoft more often than not finds itself playing the role of follower, trying to buy its way into markets that other companies dominate.
"This used to be the company that everyone looked to for innovation and excitement," says James R. Gregory, the chief executive of CoreBrand, a brand consulting company. "It has lost that edginess in a fairly convincing way."
According to a new CoreBrand study, Microsoft's reputation and the perception of its management and investment potential have been declining for over a decade, with the drop-off accelerating over the last five years.
Mr. Ballmer concedes that some Microsoft shareholders take issue with its long, costly pursuit of businesses like music players and search. Still, he remains committed to a broad course of action.
"I think a lot of companies in our business do give up on things too early, in my opinion," he says.
But for Microsoft, just doing the basics has been problematic.
It released the Windows Vista operating system in 2007 to widespread ridicule. The software arrived years late and had lost many of its planned ground-breaking features.
Microsoft's primary selling point over a narrow specialist like Apple has long been that it offers choice and caters to the masses. Yet Microsoft couldn't get Vista to work well with partners' hardware and software.
"We were trying to do too much change in too rapid a fashion," Mr. Ballmer says. "And so, for me the issue isn't that we know how to make hardware and software work together and the like. The question there was I think we attempted too much."
Microsoft also faces hurdles in the mobile phone market. For many years, it has sold software for a broad array of phones, but Mr. Ballmer has been disappointed with his mobile division, particularly when devices like the iPhone blindsided his company.
While Microsoft has tried to bolster its phone business through acquisitions and internal development, it remains months away from announcing the fruits of a project, code-named Pink, to revitalize its phone technology. And former insiders contend that Pink, like so many Microsoft efforts, has been dragged down by bureaucracy and compromise.
Even worse, Microsoft's top executives have fretted recently about the potential fallout with customers when the company lost personal data tied to T-Mobile USA's phone services — especially any doubts the incident raised about its mobile, cloud and security claims.
But Microsoft can point to places where its big bets have paid off. Bing takes a new approach to search by giving customers a glossier interface and, often, more detailed results than they will find with Google. And the Xbox game console and Xbox Live service have put Microsoft at the forefront of online gaming.
MICROSOFT says the cloud acts as a natural complement to its traditional software products, and the company often talks about the "three screens and a cloud" strategy — which covers computers, phones and TVs all connected to common services.
"I would say there's clearly a change in the fundamental platform of computing," Mr. Ballmer says. "The cloud is now not just the Internet; it's really a fundamental computing resource that's getting thought about and looked at in a different way."
But the cloud presents Microsoft with a host of challenges to its time-tested model of selling desktop and computer server software for lucrative licensing fees. Fast-paced rivals like Salesforce, Amazon and Google hope to undercut its prices while adding software features every few weeks or months rather than every few years, as Microsoft has done.
Microsoft executives acknowledge that the company had perhaps stalled, licking its wounds and trying to figure out how to behave while under scrutiny after years of antitrust court battles.
"We've moved to be a mature company, but maybe too nice a guy in some senses, and not maybe moving fast enough in things," says Bob Muglia, a 20-year Microsoft employee and president of its server software business.
Rivals now simply dismiss Microsoft as a laggard rather than hitting it with the Evil Empire criticisms so familiar in the 1990s. In its place stands Google, which now has Microsoft's mantle as a game-changing technology behemoth and is also increasingly perceived as a dominant competitor whose power warrants concern.
Google's rise has cast Microsoft at least partly in the unfamiliar role of a white knight.
"Until recently, Microsoft was the only empire," says Nicholas G. Carr, an author who has chronicled the rise of cloud computing. "Now, I think there are empires of the Internet as well as of the PC, and they are colliding."
In an effort to continue remaking its image, Microsoft is courting young software developers and cloud computing start-ups. Company executives acknowledge losing touch with these crucial audiences as open-source software turned into the standard for people looking to create the next wave of applications and services.
These days, Microsoft gives away business software to students and will let certain start-ups use its software free.
"They got scared," says Bryan Trussel, a former Microsoft executive and now head of Glympse, a mobile software start-up. "I think they get it now, but the question is how far behind they are."
Microsoft executives freely take swipes at Google's online office applications and its planned operating system, Chrome OS. They're also quick to remind anyone who will listen that it's still early in the cloud computing era, and that things like Amazon's online data center services are but a nifty curiosity.
According to Mr. Ballmer, the public has a tendency to get caught up in the success of a device like the iPhone or Google's search service and to underestimate the complexities that arise from trying to connect consumers and workers in today's world.
There is a notion, he says, that "he who is strong in the one thing that works in the cloud should, by default, control the cloud. Or he who controls one device should control them all. None of that really works all that well."
Microsoft has decades of experience creating software, courting developers and interacting with businesses on a scale that competitors have yet to encounter. Its investments in software for televisions, phones and computers surpass that of all rivals. And it intends to apply these strengths across an array of software and services.
For its part, Google says that it has two million businesses using its online applications today and that the business produces a "few hundred million dollars in revenue" a year and turns a profit. Amazon, meanwhile, has customers like Pfizer and Nasdaq tapping into its data center services, while Microsoft's competing service remains weeks away.
"I think Microsoft is still moving pretty slowly as it shifts at least part of its business to the cloud," Mr. Carr says. "Some of that is due to its corporate culture, but I think most of it is due to it trying to protect very lucrative businesses with high profit margins."
Microsoft's investors have started to put the company on the clock, expecting its traditional software to thrive and pay for a grander vision that needs to materialize sooner rather than later.
"I am willing to give the present management another 15 months," says Ms. Dicks-Riley at the investment firm.
EVEN Microsoft's loudest critics consider the company itself durable.
"They won't fade away as long as there are PCs," Mr. Benioff says. "But they are not delivering the future of our industry, either."
Executives at Microsoft talk in far more pragmatic terms. Slick laptops, cloud services and fancy cellphones all play into its strengths of making software that hundreds of millions of people can use. The trends come and go, but Microsoft's reach and ability to play on the grandest scale remain constant.
"We can never become complacent, because just when the services transformation has gotten to this point, the next transformation comes," Mr. Ozzie says. "That's the way our company works."
