MSFT’s Web Missteps = Corporate Trouble?

Here’s a critical review of Microsoft’s search and Web strategy and its internal executive shuffling from BusinessWeek. The gist of the piece is that Microsoft’s Internet and search missteps may make its core (Windows and Office) businesses vulnerable over the long term:

Microsoft’s search problems present it with a huge quandary. The company’s revenue from online advertising is relatively small–just $836 million in the first six months of the fiscal year ending in June, vs. $5.9 billion in sales of the Windows PC operating system. But the Web is increasingly the place where computing gets done. Everything from e-mail to customer-relationship management applications is moving from programs on a PC to services on the Net. Meanwhile search advertising is exploding: Piper Jaffray & Co. (PJC ) says it should hit $44.5 billion by 2011, up from $15.8 billion in 2006.

If Microsoft can’t keep pace, it risks seeing its Windows and Office software franchises erode as Google and others launch Web-based rivals. “It behooves Microsoft to be there,” says Charles Di Bona, an analyst with Sanford C. Bernstein & Co. (AB ). “If they don’t get there, it gives others a platform from which to attack Microsoft’s core business.”

Just as troubling, Microsoft’s search problem reflects its approach to new markets in general. It spends little time focusing on tiny, emerging niches that generate little, if any, sales. But those are precisely the markets that can quickly blossom on the Net into meaningful businesses. “Bill [Gates] and Steve [Ballmer] and the leadership don’t understand the value of small things,” says Robert Scoble, a former Microsoftie whose blog recently took the company to task for its Web missteps. “That cripples their entire Internet strategy from the start.”

Microsoft has some cool products and is being innovative in certain areas but the company has numerous, well-funded competitors (and startups) that are at least as motivated to succeed. Microsoft may be seen, in some sense, like a well-heeled, traditional media company responding to threat of the Internet to its ad revenues. The company has largely played defense and been reactive to date.

A couple of former Microsoft personnel whom I was recently speaking with said the software giant is now largely a “me too” company. And some have suggested to me that the decision to have TellMe report in to Jeff Raikes and the enterprise group implies that TellMe may not be used in the most strategic way for the company, which is providing an edge in consumer Mobile Search.

The challenging thing for any once-innovative company that has become an “incumbent” is to remain innovative and to not become complacent and then defensive in the face of potential disruption. Google ultimately shares this risk online too.

If the internal culture of Microsoft is such that the kind of needed innovation is no longer possible, I might get out my checkbook and start buying. The TellMe acquisition reads like something of an admission in that sense. Buying sprees of course create their own challenges: integration and management of acquired companies. That’s an issue Yahoo! recently had to look closely in its own reorg.

But the big problem might ultimately reside with Steve Ballmer himself.