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Microsoft's Dismal Future

Adam Hartung, 04.12.10, 02:55 PM EDT

Its best years are behind it--because it doesn't understand white space.


Ever notice how often a new technology fails to make it from a company's research department to market? The company may have lots of great ideas and lots of good people, but insurmountable obstacles arise. As you probably know, Xerox, at its Palo Alto Research Center, developed the graphical user interface that became standard on personal computers--but the company kept selling copiers and missed the PC market, which initially went to Apple.

Worse are companies that blaze a trail into new markets and then limit their growth and let later upstarts overtake them. Kodak pioneered digital photography, inventing many of its elements but then let much smaller competitors like Canon ( CAJ - news - people ), Casio and Sharp eclipse it in digital camera sales.

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Microsoft ( MSFT - news - people ), under Steve Ballmer, has gobs of R&D and innovation. But little of it gets to market, and even less gets any real support. Microsoft had 35% of the smartphone operating system market in January 2003, and only 15% in 2010, after Research In Motion ( RIMM - news - people ), Apple ( AAPL - news - people ) and Google's ( GOOG - news - people ) Android slaughtered its market share. Why couldn't Microsoft keep up?

Although Microsoft was early with its MSN Web portal and early to launch Internet Explorer, it was extremely late in bringing out its search engine, Bing. And Bing is getting its growth almost exclusively from Yahoo! ( YHOO - news - people ) users, whom Google is also poaching. Like Xerox ( XRX - news - people ) and Kodak, Microsoft has been horrible at effectively moving truly new products from development to the marketplace.

Instead, since 2008 Microsoft has busied itself launching two very expensive operating system upgrades, Windows Vista and 7, in an effort to defend and protect its historical PC operating system business. They've been a huge investment, but both have won a less than enthusiastic response from the vast majority of users. Microsoft has turned to forcing new computer buyers to purchase them, since almost no one chooses to buy them. Additionally, it is in the midst of planning Office 2010, an enormously expensive upgrade of Office 2007, even though a huge number of customers still use Office 2003, completely ignoring or rejecting 2007 since it came available.

Instead of working hard to get into new growth markets, Microsoft, in the tradition of Xerox and Kodak, pours its talent, energy and money into trying to defend its PC operating system and office products markets, which have much slower growth and are under attack from new mobile devices.

Some companies manage to pump out new solutions with apparently few obstacles. Look how quickly Apple moved into and dominated digital music with its iPod and iTunes launches. Observe Apple's rapid success with mobile phone and application sales. The iPhone became a legend with only 3% market share and had its 2 billionth app download in its first 18 months. Apple now has more cash equivalents on hand than the entire value of Dell ( DELL - news - people ). It has moved from near bankruptcy to within striking distance of Microsoft's valuation within this decade--while Microsoft's value has gone nowhere.

Similarly, look at how quickly Google has gone from being just a search company to broadening into advertising placement, new software solutions (Chrome, Wave), a new mobile operating system (Android) and new approaches to mail and social media (Gmail and Buzz).

Apple broke out of defending and extending the Macintosh platform, and Google avoided falling into merely defending the search business (unlike Alta Vista and AskJeeves). They did so by strategically using white space, meaning they've supported unfettered, unencumbered opportunities to pursue entirely fresh ideas and move them into solutions and then to the market quickly and effectively. Fundamentally, both companies are very different from Microsoft, because Microsoft hasn't learned to use white space teams.

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