Microsoft at War: Grading Redmond's Battle Record

Microsoft's Internet Explorer debuted in 1995 at a time when Netscape Navigator utterly dominated the browser market (and the future of computing). It was an uphill struggle for the company to gain feature parity with Netscape, but the real tipping point in the contest did not have much to do with feature sets, browser speeds, or anything we might use as a metric in the browser wars of today.

When push came to shove, Microsoft flexed its tremendous muscle and began to freely bundle Internet Explorer with every copy of Windows. The ubiquity of the operating system translated to ubiquity of the browser. Netscape simply could not compete; the company was dependent on Navigator as its primary revenue stream. Internet Explorer was free and pre-installed, Netscape was neither. Game, set, match.

Though the battle Microsoft wages against open source software has turned decisively towards Android, Redmond still spiritedly fights Linux as well. It's obvious that Windows hasn't faced a serious threat from Linux in the consumer market since the early days of the netbook. Even then, once Windows was (somewhat) tuned for Atom processors, it crushed the life out of Linux's commercial toehold in the market. That was before Microsoft saw fit to misinform certain blue-shirted employees about Linux.

The same cannot be said of the server market, where Linux decisively leads Windows in market share, if not revenue. Microsoft wrings extra revenue from the market by completing behind closed doors patent deals with smaller companies that utilize Linux on servers. These smaller firms cannot afford litigation with Microsoft and are essentially forced into paying for patent licensing agreements for Microsoft patents that are allegedly infringed by the open source software. Admittedly, Microsoft is far from the only company fighting its battles in the courtrooms these days.

In 1999, an independent music software called Napster changed the world. But it was Apple who reaped huge profits from the discovery years later. The iPod's smart hardware design, deep software integration and powerful iTunes store combined into a value proposition and convenience factor that was unmatched in the industry. Microsoft had no answer to the revolutionary product. It took Redmond four years to answer the iPod. The Zune was like iTunes and the iPod in that it was a PMP paired with a powerful, proprietary piece of desktop software. The similarities ended there, despite strong effort, Zune never made much headway in the consumer market.

While the hardware limped along until it was discontinued last year, the Zune brand was quietly killed just this week. There was upside to the venture. The final piece of Zune hardware, the HD, was the coming out party for the 'Metro' user interface that will fully arrive next week with Windows 8. Zune may have been a business failure, but it laid the bedrock for the company's current transformation.

Microsoft's search strategy was decidedly confused until 2009. Early efforts and iterations of MSN Search and Windows Live Search failed to gain much traction in the market. A new brand and an ambitious deal with Yahoo! that would see Microsoft powering Yahoo's search results. When Live Search was replaced with Bing, the newly repositioned product was decent and gifted with a thunderous marketing campaign. Bing is a growing search engine, but sits at roughly 16% market share, when combined with Yahoo's take (which Microsoft sees little revenue from) Microsoft commands near half of Google's about 66% market share in desktop search.

Google is even more dominant in mobile, commanding more than 90% of the growing market. Microsoft's best chance here is the Search button that ships on every Windows Phone. That button leads straight to Bing. We all know where the hot-selling Android devices send their queries. iPhone users also search with Google in near universal fashion.

Microsoft's first foray into smartphone operating systems, Windows Mobile, was derived from the Pocket PC market. Windows Mobile turned out to be a niche successful, enterprise focused OS. Redmond was slowly but surely edged from the market by RIM's BlackBerry and the iPhone. By the time it met its end in early 2010, Windows Mobile was hopelessly outdated. Redmond knew it was time for a reboot.

Microsoft had two products cooking. One was eminently promising, and would end up taking shape as Windows Phone 7. The other was the pet project of the Danger team, veterans of the highly successful Sidekick messenger phones. That project, Kin, would end in embarrassing failure. The Kin phones and OS attempted to split the difference between feature phones and smartphones, pleasing no one. The folly cost Microsoft a $240 million write-off after an abortive launch on Verizon Wireless in the Spring of 2010.

Windows Phone 7's performance has been less clear cut. Launched in the Winter of 2010, the OS was praised by critics, but initially saw lukewarm hardware and a tepid response from consumers. Windows Phone's hardware woes were related to the popularity of Android OS as there were no manufacturers that made Windows phones exclusively; this led to designs that were derivative of their Android cousins. Windows Phone 7 was given a second lease on life when Microsoft scored a coup and convinced Nokia to sign on as an exclusive WP7 manufacturer.

Windows Phone sales have picked up since then, and Nokia's strong hardware has pushed other manufacturers in the ecosystem to step up their game. Market share still lags, but is growing. Importantly and ominously, Windows Phone has yet to turn Nokia a profit. The next generation of the operating system, Windows Phone 8, is set to be launched only days after Windows 8. This Winter is Microsoft's biggest opportunity to break out of the mobile doldrums and become a true challenger to Google and Apple in this arena.

Xbox began life as a skunkworks project in the late 1990's. At the time, Microsoft was beginning to understand that convergence was the future of computing. The original Xbox combined gaming and multimedia capabilities deftly. It wasn't an easy start though, a deeply flawed original controller and a dearth of games, aside from Halo: Combat Evolved, left the console a bit slow to start.

While the original Xbox could be counted as a success, the Xbox 360 would be a breakout hit. Buoyed by strong first party software like Gears of War, Forza Motorsport and the incredibly successful Halo series, the Xbox 360 flew off of shelves. Third party games proved even more popular than Microsoft's own offerings. This lead the company to build lucrative exclusive partnerships with companies like Activision (Call of Duty), Capcom (Resident Evil) and others that led to Xbox customers seeing exclusive content for the same purchase.

More importantly though, the Xbox 360 is leading the charge of Microsoft's assault on the living room. With an Xbox Live Gold account, customers can access a wide range of free and subscription based services that would otherwise be dispersed across the living room's myriad devices. As Microsoft has proven, having Madden football and Netflix on one device makes for a powerful pitch to consumers.

Apple has a penchant for transformative products. While this is news to no one, Microsoft was caught flat footed by the iPad. For those keeping score, it was the third time in a decade that Cupertino had embarrassed Redmond. Microsoft and HP could front that PCs like the Slate 500 were credible competitors to the iPad, but the jig was up. Windows 7 was not made for touch, so any tablet products based on it were doomed to failure. It was, again, back to the drawing board.

Microsoft took a pragmatic approach to the nascent tablet market dictated by the fact that it would be incredibly late to market. The company made a smart investment in Barnes & Nobles' spun off company that was responsible for the successful line of Nook e-readers. Microsoft holds a 17.6% equity stake in the firm that makes one of the most popular Android based tablets.

That's not the only way Microsoft makes money off of Android. The company has struck licensing agreements for Android handset and tablet manufacturers that account for more than 70% of the Android device market. That's right, Microsoft makes money from seven out of ten Android devices sold. Some have even speculated that the company's Android agreements net more income than Windows Phone licensing. The company has arguably made lemons into lemonade.

Microsoft's pragmatic streak continued. Windows 8 is forked between x86 (Pro) and ARM (RT) versions. This allows hardware manufacturers to further differentiate their products, an important consideration as these partners scramble to differentiate and compete with the iPad. Windows 8 looks to be a compelling, competitive tablet OS in all its iterations, this is scary enough for Cupertino, but Google is the company that should truly be worried. Android did not take off on tablets the way that it did on smartphones. Windows 8 could quickly capitalize on pent up demand for non-Apple tablets. The pricey, but gorgeous Surface is set to launch this week. It will be Microsoft's first true entry in the industry's fastest growing sector.