Once the undisputed king of the computer and software world, Microsoft (MSFT) today is adapting to fast-moving, fierce competition.
Companies like Google (GOOG) and Facebook are chipping away at the software giant's dominance by providing users across the world an array of services that don’t require the purchase of Microsoft programs or its operating systems.
Search engines and online applications — many free — are available at the click of a mouse. Hey, why buy Microsoft Word when Google Docs is free?
Apple, meanwhile, enjoys cultishly loyal consumers, ever eager for the latest iteration of higher-end Macs, iPhones, iPads and iPods.
Then there’s the enterprise software side of business, where Oracle (ORCL) and SAP (SAP) are out to battle Bill Gates’ brainchild for business solutions.
Microsoft, however, isn’t simply retreating into its Redmond, Washington, campus, content to sit atop the over $40 billion of cash on its books.
Although CEO Steve Ballmer has developed a reputation for being shortsighted on the innovation front — he killed a promising tablet project in 2009 that had potential to rival the ultra-successful iPad, and the company’s attempt at an iPod alternative, the Zune, is reportedly being wound down — Microsoft is stepping up the battle on other fronts.
Its search engine, Bing, is gaining ground on Google and Yahoo in terms of U.S. search ad revenue.
Google does dominate, owning 71.4 percent of the advertising search market in 2010, with an expectation of increasing that to 75.2 percent in 2011. Yahoo's share of the $12.37 billion U.S. search advertising market fell to 10.4 percent in 2010 from 13.7 percent in 2009, according to eMarketer, a market research company. Yahoo's share is expected to drop to 8.1 percent for this year.
With Bing, meanwhile, Microsoft’s share of overall U.S. search ad revenues rose to 10.2 percent in 2010 from 8.0 percent a year earlier and should hit 10.8 percent this year. "Much of the decline in Yahoo's search business is a result of Bing's rise," eMarketer reports.
In the race to gain smartphone operating system market share, Google is taking the lead with its Android platform.
"Android is poised to take over as the leading smartphone operating system in 2011 after racing into the number 2 position in 2010," Ramon Llamas, senior research analyst with market research IDC's Mobile Devices Technology and Trends team, says in a statement.
"For the vendors who made Android the cornerstone of their smartphone strategies, 2010 was the coming-out party. This year will see a coronation as these same vendors broaden and deepen their portfolios to reach more customers, particularly first-time smartphone users."
Microsoft, however, hopes to close the gap, rolling out its operating system for mobile telephones and recently inking a deal with Finnish phone manufacturer Nokia (NOK) to install the system on its phones.
"We expect the first devices to launch in 2012,” Llamas says. “By 2015, IDC expects Windows Phone to be the number 2 operating system worldwide behind Android."
Worldwide, the smartphone market should to grow 49.2 percent in 2011 in terms of units shipped, according to IDC data. Vendors will ship more than 450 million smartphones in 2011 compared to the 303.4 million units shipped in 2010, the IDC reports, adding the smartphone market will grow more than four times faster than the overall mobile phone market.
Ballmer is also striving to make Microsoft a key player in the burgeoning cloud computing realm, attempting to embrace what is a disruptive force for the company’s business foundation — moving software off of individual computers and into shared data centers accessed via the Internet.
In his 2010 shareholder’s letter, he says he wants the company to not just “ride this great wave,” but to “grow it and shape it.” To that end, in 2010, “roughly 70 percent of Microsoft’s 40,000 engineers work(ed) on cloud-related products and services, and in fiscal 2011 that number will grow to nearly 90 percent.”
In the last eight years, Microsoft’s sales and profits have doubled, but the stock price has languished around $25 while competitors have made impressive, and in Apple’s case, incredible, stock price moves. Apple, in fact, passed Microsoft in stock market value to become the second-largest company in the U.S. in May 2010, although Microsoft does still hold an edge in a key profitability metric — it banks 40 cents of every sales dollar as operating profit, compared to Apple’s less efficient 28 cents per buck.
To prod the stock upward, market pundits and analysts say that Ballmer needs to dislodge the Windows-centric decision-making within the company, and set loose talented people within the ranks to do what other business peers are thriving on — product innovation.
Ramping up Bing, smartphones, and the pursuit of the cloud are smart steps, but it’ll likely take a bigger, bolder leap for the tech investors to really take notice.
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