Microsoft’s Future: What’s the Worst that Could Happen?

And now for some pessimism and doomsday prophecies … starring software giant Microsoft!

You know Microsoft. They’re the company that ended the 2011 fiscal year with almost 70 billion in revenue — a 12 percent increase from the prior year — and $23 billion in net income, a 23 percent year-over-year increase. Yeah well, ole Microsoft is in danger of going out of business, according to serious people like hedge fund managers and Silicon Valley entrepreneurs.

The consensus is that CEO Steve Ballmer is holding on too tight and holding the company back from evolving and that the software giant is one or two bad quarters away from falling off the map.

How can this be? How can a company that generates billion and billions be toast? Well, it’s a domino effect that has been choreographed nicely in a thought-provoking slideshow by Business Insider’s Matt Rosoff. It all starts with iPad popularity continuing to cut into consumer PC sales and then the dominoes start falling from there.

When you look at it methodically, it’s easy to see how all Microsoft’s parts are interconnected. If one part breaks, particularly if that part is Windows or Office, then the whole house could come down.

Here’s a breakdown of how everything could go horribly wrong for Microsoft and put the big lug on the skids.

• Sales of the iPad keeping chipping away at the consumer PC market (iPad sales now equal about 13 percent of the PC market). Windows, which provides Microsoft with about $13 billion in profit per year, starts to lose its grip on consumers.
• Employees slowly but surely move off Windows PCs for work to Macbooks, iPads and Android tablets.
• Windows 8 tablets to the rescue, right? Well sure, that is if late-to-market Windows 8 tablets can curb the sales of iPads and Android tablets. A Big if.
• Developers start to leave the Microsoft platform.
• Windows Phone never breaks out of the bottom of the mobile pile, even with its Nokia partnership and aggressive (and expensive) Windows Phone advertising.
• Enterprises wake up and realize they are paying too much for Office, Microsoft highest revenue generating product (roughly $15 billion a year), as workers continue doing more work from non-Windows smartphones and iPads.
• Sales of other Microsoft business software such as Sharepoint, Exchange and Microsoft Dynamics start eroding as IT moves away from Windows and Office.
• Erosion of Windows Server and SQL Server follows because both are needed to run most of Microsoft’s business apps like Exchange and Sharepoint.
• All of this leads to Microsoft having a seriously bad quarter, followed by another one. And they can no longer keep investing in certain products. The first to get dumped are Xbox and Bing.
• Steve Ballmer throws his arms up and retires — which would be a relief to many but would leave Microsoft leaderless with a broken model.
• Microsoft becomes a huge consulting company.

Ok, I admit it. That was full of generalizations and embellished hypotheticals. Windows 8 could be a home run on tablets, Office 365 may triumphantly bring Office to the cloud and Windows Phone could surpass the iPhone’s market share.

But the domino effect does show how vulnerable even the biggest companies are when they rely on old ways and are slow to change with the culture. And just ask IBM — which was forced to reinvent itself in the ’90s after falling in a revenue black hole — all it takes is one big quarterly loss to set the doomsday machine in motion.