Microsoft's Biggest 2010 Missteps

2010 looked like a picnic in Redmond compared to 2009, but Microsoft still fumbled a few times. It fell asleep at the wheel in the tablet and mobile phone race — and despite some pointed romancing, did not charm Wall Street.

Compared to the turbulent 2009 that saw Microsoft's first widespread layoffs and its worst quarterly revenue earnings ever, 2010 was smooth sailing.

But anything short of death would be smooth sailing compared to 2009.

2010 was still a year of highs and lows for the software giant. One of the biggest wins was in gaming with the release of Nintendo Wii competitor Kinect, Microsoft's controller-free motion technology built into Xbox 360 that sold 2.5 million units in its first month. Windows 7 adoption also remained steady, as Windows XP-weary enterprises began buying new PCs and migrating existing ones to Windows 7.

Microsoft search engine Bing continued to build momentum against Google and has grown by nearly 50 percent since its launch a year and a half ago. Microsoft also made a commitment to cloud computing with Windows Azure, a cloud services platform for developers, and the newly rebranded Office 365, which gives businesses access to Office Web apps and cloud versions of Exchange, SharePoint and Lync for a per user, per month fee.

But even with these highlights, Microsoft slipped in some major areas in 2010. It was caught asleep at the wheel with tablet PCs (hello, iPad), got downgraded by Wall Street and re-entered the mobile phone race with a whimper with Windows Phone 7.

"You have to think a little harder for the Microsoft negatives this year," says veteran technology analyst Roger Kay. "But there were still negatives."

Blindside by the Tablet PC Craze

It's ironic that Microsoft has fallen behind in the tablet PC market, because tablets were a Bill Gates vision. But Microsoft didn't see it through, says Kay, and then Apple launched the iPad to grand success (Apple is on schedule to sell 8.5 million iPads this year and more than double that in 2011, says research firm eMarketer).

"With the iPad's immediate popularity, Microsoft had a 'whoops' moment," says Kay. "They had to care about tablets again."

Microsoft CEO Steve Ballmer announced on two different occasions in 2010 that Windows 7 tablets would be available by the end of the year. But as Christmas approaches, there are no serious Windows 7 tablets to be had. The iPad is the only tablet PC on anybody's mind, with a few Android-based tablets like the Samsung Galaxy Pad vying for attention.

"While some tablets running Windows 7 are available from OEMs, you really have to hunt for them, and they are more a convertible laptop/tablet than a pure tablet," says Directions at Microsoft analyst Michael Cherry.

Both Google and Microsoft are working to respond to the iPad, says Tim Bajarin, president of tech consulting firm Creative Strategies, but they fall behind the iPad a little more every day.

[ For complete coverage on Microsoft's Windows 7 operating system -- including hands-on reviews, video tutorials and advice on enterprise rollouts -- see CIO.com's Windows 7 Bible. ]

"The iPad will have at the very least a one-year lead on Microsoft if Windows 7 tablets release in the first half of 2011," says Bajarin. "It will be a two-year lead if Microsoft waits for Windows 8 to optimize for tablets. And worse for Microsoft, by 2012, the Android response to the iPad will be in full swing as well."

Yet Microsoft may have to wait for Windows 8 in order to have a true tablet OS because Windows 7 simply wasn't designed for the tablet form factor, says analyst Cherry.

"Few Windows 7 applications can be used with multi-touch, and its short battery life make it a non-starter for tablets," Cherry says. "This may be improved by new chips from Intel, but users have decided on what key tablet attributes they want and Windows 7, in its current form on current hardware, does not hit enough of those attributes."

The Stock Price and Wall Street Skepticism

A major facet of Steve Ballmer's job in 2010 was to keep Wall Street happy — and that did not happen, despite Microsoft ending the fiscal year with the highest fourth quarter revenues in company history.

Microsoft's stock price has been the nagging problem. Since Ballmer took over as CEO in 2000 Microsoft's stock price has been dropping and drifting sideways, and there was no improvement in 2010. It is ending the year ($27.8 today) just below where it started ($30), with a dip in the middle of the year (low of $22.7 in July).

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And Wall Street took note. Twice this year, investment banking giant Goldman Sachs published reports downgrading Microsoft's value.

In October Goldman lowered its Microsoft rating from "buy" to "neutral" and cut back its stock price outlook. This month, Goldman predicted that 2011 will be a difficult year for Microsoft with top-line growth dropping from 12 percent to 7 percent due to intense competition in the smartphone space and the lack of a concrete iPad competitor.

"Microsoft is still seen as a profitable franchise," says analyst Kay. "But one that's in decline."

Windows Phone 7 and the Kin Debacle

Windows Phone 7 finally hit stores in early November, and although reviews of the phones have been mostly positive, Microsoft has been silent on sales numbers, and other sales results being tracked by other channels do not bode well for Microsoft.

Microsoft's plan to start over with the Windows Phone 7 OS simply took too long, say industry analysts. Meanwhile, the smartphone market evolved rapidly, with iPhones and Android-based phones overpowering the BlackBerry for the hearts and minds of consumers and, as a result, winning more support from businesses.

Windows Phone 7 arrived late to a very crowded party, and not many people are noticing, says Kay.

"It's a good phone, but Microsoft has been hurt by being so late," he says. "They don't have the strong relationships with the carriers that Google, Apple and RIM do, and they certainly don't have the mindshare enjoyed by iPhones and Android phones."

It was a major misstep to treat an explosive growth market like mobile so casually, adds analyst Bajarin.

"The overall mobile market is where the real growth will be over the next three to five years, and the iPhone and Android smartphones have a huge market lead," Bajarin says.

Additionally, the early death in July of the Microsoft-branded Kin flip-phones aimed at teenagers led to negative perceptions about Microsoft's mobile acumen — perceptions that are still hurting Window Phone 7, says veteran tech analyst Rob Enderle.

"The Kins had massively overpriced data plans and because they were branded 'Microsoft,' cellphone partners that otherwise might have been more aggressive with Windows Phone 7 were scared away from the platform," says Enderle.

"It was a massive belly flop on a large stage with everyone watching."

Shane O'Neill covers Microsoft, Windows, Operating Systems, Productivity Apps and Online Services for CIO.com. Follow Shane on Twitter @smoneill. Follow everything from CIO.com on Twitter @CIOonline. Email Shane at soneill@cxo.com.

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