Microsoft Finds Itself at a Crossroads

Microsoft is an economic powerhouse that turned 30 this year. But in the important and increasingly lucrative Internet market, Microsoft has been eclipsed by rivals such as Google and eBay. Microsoft still earns most of its profits from the Windows operating system and its "Office" software. Many on Wall Street are not impressed, and want to see something new. Microsoft has released fresh products and says more are on the way. Wendy Kaufman reports.

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The business news starts with a software giant trying to toughen up. Microsoft turned 30 this year. It still dominates the software industry, but in the Internet market, Microsoft has been eclipsed by Google and other rivals, and that's driving demands from Wall Street that the company come up with something new. NPR's Wendy Kaufman reports.

WENDY KAUFMAN reporting:

Microsoft CEO Steve Ballmer is the company's most vocal cheerleader. In recent days, he's been out drumming up support among customers, analysts and the company's shareholders.

(Soundbite of speech)

Mr. STEVE BALLMER (CEO, Microsoft): We have a choice as a company. We can focus just on our core products and grow modestly, or we can set our sights higher and aim for greater growth. We are choosing that path of higher growth. Now is really the time for us to make the big, bold bets that we can uniquely afford to make.

KAUFMAN: The big bet that Ballmer outlined at last week's annual shareholders' meeting is a new focus on the Internet services market, creating new products and rethinking old ones for use via the Web. It's an area where Microsoft has been trounced. Think Google, Apple, Yahoo!, even eBay. In a 1995 memo, company co-founder Bill Gates urged his troops to focus on the Internet. He specifically mentioned search, but his company didn't move quickly enough and has been clobbered by Google. Similarly, says analyst Rob Enderle, Microsoft was working with its partners to develop an audio player when Apple launched the blockbuster iPod.

Mr. ROB ENDERLE (Analyst): This is a case where a company with a fraction of the resources took out a company with massive resources in a very short period of time. This would be like Switzerland declaring war on the US and then declaring victory on day two.

KAUFMAN: So how could a company with annual revenues of $40 billion and the same amount of cash on hand have missed out on the Internet boom of the past few years? Some industry observers, company insiders and former employees believe that Microsoft is too bureaucratic. They suggest that so much time and energy goes into the basic products that innovations get lost.

Mr. STEPHEN WALLI (Former Microsoft Executive): I think it's very difficult for them to act beyond the success of Windows and Office.

KAUFMAN: Steven Walli is a former high-level manager at Microsoft.

Mr. WAHLE: If you ask your customers what you should be doing and you try and show them something outside of that branded space that you're known for, your customers look at you, kind of confused, saying, `Why would I care about that? I buy Windows and Office from you.'

KAUFMAN: Walli, who left Microsoft a year ago to work for the consulting firm Optaros, said working at the software giant just wasn't fun anymore. And, he says, it took far too long to get things done.

Mr. WALLI: The scarcest resource is executive bandwidth. It's just getting on the calendar and getting enough time on the calendar with the people that are actually going to give you the sponsorship to get things done.

KAUFMAN: The company bristles at such criticism. It points to a recent reorganization that streamlined management and made it easier for developers to collaborate. At the same time, Microsoft urges naysayers to look at what's coming.

(Soundbite of video game)

KAUFMAN: Race car drivers speed through the streets of London and New York on the Next Generation video game. Microsoft's Tom Peller(ph) says the widely anticipated Xbox 360 will be released at midnight on Monday.

Mr. TOM PELLER (Microsoft): And we'll be doing that several months in advance of the competition. We're super excited about that.

KAUFMAN: Microsoft says the number of new products slated for release over the next 18 months is unprecedented in its history. The Xbox team--young, hip gamers--are reminiscent of Microsoft's early days when employees often worked nearly 'round the clock on what they hoped was the next best thing.

Mary Jo Foley has been following Microsoft for more than a decade. The editor of the Microsoft Watch newsletter says that as the company has grown to more than 60,000 employees, the work style and environment in much of the company has become less entrepreneurial and more corporate.

Mr. MARY JO FOLEY (Microsoft Watch Newsletter): It's a job. It's a job. I mean, I think it would still be a pretty cool place to have a job. But again, if you're one of these hotshot, young computing superstars, I'm not sure you'd look at Microsoft as your first choice of somewhere to go now.

KAUFMAN: The company has lost some high-profile employees to rivals, especially Google. But Microsoft points out that industry innovators continue to join the firm. It gets some 600,000 job applicants each year. Lots of stock-option millionaires continue to work there, even though they no longer need the money. And, the company says, in a recent internal survey, 84 percent said they love the work that they do for Microsoft. Wendy Kaufman, NPR News, Seattle.

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