Broken Windows: How Microsoft Can Pull Ahead in the Tech Game

The company reports a loss but also record revenues. How can it pull ahead of the tech pack again?

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A CES attendee tests out the Windows Phone app experience in the Microsoft booth at CES 2012 in Las Vegas, Nevada.

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Microsoft has posted its first-ever quarterly loss as a public company, of $492 million.

But beneath the headline are some very strong numbers. The company posted record fourth-quarter and annual revenue. Server and Tools business revenue was up 12 percent for the full year, and the company's business division revenue was up by 7 percent for the year. Revenue for online services, the division that includes search engine Bing, also grew 10 percent for the full year.

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Indeed, part of the loss isn't quite a "loss," stemming from $540 million in deferred revenue tied to an upgrade offer for the upcoming Windows 8 operating system. Another loss stems from a writedown of an online ad business the company purchased in 2007.

Microsoft is still here to stay, but its cracks are showing, and there are threats on the horizon. Here are three problems that Microsoft will have to overcome to keep atop the tech heap.

The Tech Life Cycle Problem

There is an established life cycle to tech products, says Pradeep Chintagunta, professor of marketing at the University of Chicago Booth School of Business.

"It takes a while for a platform to catch on, then there's a massive growth spurt, then things stabilize and slowly start to decline," he says.

The problem is that Microsoft may be stuck in that last phase, he says. With the world shifting increasingly to mobile and cloud-based computing, Microsoft should make sure they are not caught flat-footed. Indeed, the company is working to make itself more mobile, with its Windows Phone and recently-unveiled Windows 8 operating system, designed to be used on both PCs and tablets.

To move more quickly through that tech cycle, the company may have to improve its track record of being an innovator, not just an improver.

"The Microsoft model historically was not to be first. It was to be second with a better version," says Andrew Bartels, research analyst at Forrester Research. "It was not first to the browser. but Microsoft came along with the Explorer." Likewise, Apple revolutionized and popularized the iPad tablet, for example, and Microsoft is launching its competitor, with the Surface.

Microsoft has shown itself capable of being on the leading edge with its Xbox Kinect motion-sensing technology, adds Bartels. It will simply need to make more of that magic happen in order to further bolster its place against other innovators like Google and Apple.

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The Kleenex Problem

"Kleenex is considered synonymous with tissues. Google is considered synonymous with search," says Chintagunta—think about the last time you heard anyone say they were "binging" something on the internet. That gives Google a leg up with online advertisers. Microsoft did see a boost of 12 percent in its quarterly ad revenue, but Google is also showing unabated growth. Its second-quarter ad revenue shot up by 21 percent from the same period last year.

And then there's the question of scale. Microsoft occupies a small slice of total online search, with 15.6 percent share of the total search market, according to company figures. ComScore, meanwhile, has recently put Google's share at around two-thirds.

All in all, Microsoft simply has a problem of breaking down established search norms. By advertising Bing as an engine for "social search," the company is working to differentiate itself, but time will tell if that strategy can work.

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The Too-Successful-for-Too-Long Problem

Decades of being a tech behemoth can give a company plenty of advantages: brand recognition, a public widely familiar with its products, not to mention capital, human and otherwise. But Microsoft may also be finding a downside to its success.

"They do have the legacy issue associated with them. It's hard to get rid of who you are, to become something new." says Chintagunta.

One might simply say it's a problem of inertia. The company has found itself shifting more and more to serving a business audience, notes Bartels.