Microsoft at the Crossroads: IBM or AT&T?

Microsoft today reminds me of two tech powerhouses than rad into deep crises in the mid 1980s, AT&T and IBM. Both companies had been so dominant that their names were virtually synonymous with their industries, but both were being severely buffeted by changing technology that threatened their core businesses. But had recently survived serious antitrust assaults by the government. And both enjoyed enormous cash flows that gave them plenty of time to work out their problems.

What was profoundly different about the two companies was how they responded to the challenge. IBM went through a painful reinvention and emerged as a formidable competitor–and innovator–in the 21st century. AT&T squandered its riches, made terrible acquisitions and strategic decisions, and ended up a husk that was swallowed by one of its former subsidiaries (which was smart enough to realize that damaged as it was, AT&T was still a better brand than SBC.)

Microsoft’s Frank X. Shaw made some waves recently with a blog post in which he detailed the financial strength of the software giant. He certainly describes a company with a balance sheet and income statement that just about anyone would envy. But read another way, there is weakness in that very strength because the numbers show just how dependent Microsoft is on two lines of business, Windows and Office.
These two cash cows are going to be delivering milk for a long time to come. Windows 7 is selling well and I expect Office 2010 to launch strongly as well. Microsoft’s domination of the enterprise should continue for years, perhaps decades. The problem is that outside of the enterprise, the world is changing very fast, and in a way that is not good for Microsoft. The PC as we have known it is becoming less important to consumers every day as new devices, smartphones, the iPad, and soon competitive tablets, take over many functions of desktops and laptops. Windows has proved impossible to scale successfully to mobile devices. And Microsoft has joined Nokia in a race to the bottom of the smartphone market.

To be a vibrant force and not just a survivor in the coming decade, Microsoft has to commit its vast resources into becoming a top-rank player in mobile because that is where the growth is going to be.While the demise of the PC has been greatly exaggerated, there is not doubt that this is a mature, and perhaps over time a shrinking, market. Right now, the signals of both its willingness to go all-ion in mobile and its chance of success are mixed.

Windows Phone 7, unveiled last winter and expected to ship this fall, looks could be competitive with Google’s Android and Apple’s iPhone. But the recent death, in infancy, of Microsoft’s Kin phone is a troubling sign. Engadget’s Josh Topolsky has done a thorough story on the demise of the Kin that suggests there is continuing management turmoil in Microsoft’s mobile devices group, an organization that needs an all-hands effort to to make sure the Windows Phone 7 is on time and as good as promised.

Even more worrisome are credible reports that Microsoft has rebuffed requests from manufacturers who wanted to use the Windows Phone 7 software in tablets. The brilliant success of iPad is the fruit of Apple;s decision to scale iPhone software (now renamed iOS) to run on a larger device. Google has encouraged the use of its Android phone operating system on tablets and small notebooks, and while current versions of Android don;t actually work all that well on larger devices, Google is attacking the problems.

The biggest danger to Microsoft is that it is the powerful Windows group’s internal opposition that is responsible for the restrictions. Windows 7 is marginally better on small devices than XP (saying it’s better than Vista really says nothing) but with Apple leading the way and Google coming on strong, a kludgy touch-enabled Windows 7 is not remotely good enough.

Cash cows are wonderful things to have. But you have to use the revenue to invest in the future, not to protect the legacies.