Microsoft in 2010: Four Challenges That Lie Ahead

For Microsoft, 2010 will be a critical rebuilding year where the software giant must maintain Windows 7 and Bing momentum, resuscitate Windows Mobile and prevent businesses from "Going Google."

When you're a technology mongrel like Microsoft, challenges are constant — and 2009 was chock full of them. It was a tumultuous year that saw the software giant's first widespread layoffs and its worst quarterly revenue earnings ever.

Yet there were some rays of sunlight flickering through the clouds. Windows 7 survived its many pre-launch milestones and launched successfully in October; search engine Bing debuted with aggressive marketing and innovative features; the launch of Windows Azure pulled Microsoft's cloud computing strategy together; Office, Exchange and Sharepoint software continue to own the enterprise; and Microsoft's public presence on television improved with the Laptop Hunters, Windows 7 and Bing ad campaigns.

But still, due to its massive size, Microsoft has been more affected by the global economic downturn than tech companies of smaller stature. So 2010 is likely to be a rebuilding year for Redmond as the economy slowly improves, say industry analysts.

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

But Microsoft cannot merely wait out the economy. It must stave off competition and improve on many fronts. Here are four challenges for Microsoft in the year ahead.

Don't Fall Further Behind in the Mobile Race

Windows Mobile 6.5 was met with harsh reviews when it launched in early October, widely regarded as a ho-hum refresh on the road to Windows Mobile 7.

The key mobile question for Microsoft is this: How do you win over and keep customers when there are so many established and well-regarded choices?

It doesn't help Microsoft's cause that Windows Mobile runs on generic smartphones that lack brand recognition and loyalty. Microsoft could change the game by branding its own smartphones. RIM, Apple and Palm have proven that buyers want smartphones from one maker with one name. Microsoft's alleged Project Pink is a plan to develop Microsoft-branded phones that will reportedly include Zune services and be built on top of Windows Mobile 7. But waiting for Windows Mobile 7 means it will be a year until consumers and businesses see these "Windows" phones.

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The bottom line is that Microsoft has not been able to compete with the iPhone, BlackBerry, Palm or Google Android. Redmond will need to keep WinMo 6.5 from fading into obscurity in 2010 and deliver on the promises of Windows Mobile 7.

"If Microsoft delays much longer on producing a decent mobile platform with software, services and partners," says veteran industry analyst Roger Kay, "then it will be out of the game."

Keep Up Windows 7 Momentum

One thing you can say about Windows 7 so far: It's not Vista. And that's a very good thing for Microsoft.

Vista has been the bane of Redmond's existence for the past two years. At first, Vista was criticized for slowness and incompatibility issues, which gave way to negative perceptions that never let up — with no help from snarky Apple TV ads.

Windows 7 has entered a more diverse PC landscape than Vista, with different Win7 versions designed to run on everything from tiny netbooks to mammoth all-in-one touchscreen PCs. It has received mostly positive reviews, and its early sales are better than those of XP and Vista in a comparable time frame.

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The challenge for Windows 7 is to keep marketing Windows 7, even if that means a protracted and expensive slugfest with Apple's "I'm a Mac, I'm a PC" commercials. Windows 7 also must contend with frugal consumers and businesses that are hesitant to spend money on computers in a bad economy.

But with research firm Gartner forecasting that PC sales will actually make modest gains this year, Windows 7 is in a good position for growth and new sales when consumers and businesses start spending again.

Watch Out for Google Apps

It's debatable whether Google's productivity suite, Google Apps, or other free offerings like OpenOffice and Zoho are true threats to Microsoft's cash cow, Office.

There has been growing enthusiasm for Google Apps among consumers, but businesses, most of which are built around Exchange servers, still largely prefer Microsoft Office desktop tools.

But this gravy train will not last forever. With Google aggressively going after enterprise business and cloud computing becoming more prevalent, corporate fears about storing company data in a cloud environment are likely to subside even further.

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This trend, in turn, puts more pressure on Office 2010, scheduled for release in June of next year. Microsoft is all too aware of the Google Apps threat and has been emphasizing Office Web Apps — stripped-down, Web-based and ad supported versions of Office desktop apps that will launch in tandem with Office 2010.

The challenge for Microsoft is to highlight the corporate advantages of using Office Web Apps without downplaying the desktop version of Office. If an enterprise wants go completely Web-based with their productivity apps next year, Microsoft will have to deliver. Or else it's, Hello Google!

Grow Bing Grow

The goal in 2010 with the Bing search engine is simple: Grow ad revenue and market share. Achieving that could be a different story, of course.

Bing was dubbed "the decision engine" when it launched in June and promised to redefine search engines by organizing more information on a results page than Google and making it easier for users to book flights and purchase retail items.

Bing hasn't revolutionized search, but it is holding its own. Microsoft recently released useful, new Bing features such as full-page weather reports, expanded hover previews showing a snapshot of Web sites, and the integration of Wolfram Alpha, a computational technology that returns deeper search queries.

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Bing's market share has grown almost two percentage points since its launch, currently at 9.9 percent, according to October data from online market tracker comScore. Expect a big market share jump when Bing is rolled into Yahoo as part of the search deal between Microsoft and Yahoo.

Microsoft needs to keep rolling out new features in Bing and market the heck out of them in 2010. Apparently, the checkbooks for Bing will be wide open. Microsoft CEO Steve Ballmer has said that he plans to spend $5.5 billion to $11 billion on Bing during the next five years.

And then there are content partnerships. Rupert Murdoch and other publishers are fed up with Google's purported revenue-hogging practices. Microsoft stands to gain some ground on Google by signing exclusive content partnerships, such as the proposed deal to pay News Corp. for the rights to index the publishing giant's content.

Microsoft has denied there is a deal to pay News Corp. for search rights to content, but revenue-sharing deals with publishers could increase Bing's profit and market share.

But Microsoft execs might want to remember that they will have to share the ad revenue, or those publishers will get very, very mad at them.

Shane O'Neill is a senior writer at CIO.com. Follow him on Twitter at twitter.com/smoneill. Follow everything from CIO.com on Twitter at twitter.com/CIOonline.

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