Remembering Microsoft's 2007, and Looking Forward to 2008

Published: January 9, 2008

by Alex Woodie

2007 was a year of change for Microsoft, but it didn't necessarily achieve all it wanted to. The launch of Windows Vista was arguably the biggest new product of the year, and, although 100 million people are now using it, Microsoft was expecting a lot more. This year, Microsoft once again has its hopes set high as it preps new releases of Windows Server and Dynamics CRM, and looks to set Windows Live on a solid footing.

Looking Back on 2007

Windows Vista was the big headliner for the year from a product perspective, but there were other significant product launches, including the October launch of Office Communication Server 2007, the voice over IP (VoIP) server that's expected to gain traction among large businesses in 2008, and the launch of Visual Studio 2008, which was out at the end of November.

Microsoft's "software plus services" strategy, as exemplified by its Windows Live platform, made minor strides in 2007. The biggest event was the launch in May of Windows Live Hotmail, a new Web-based e-mail platform and the follow-on to its successful MSN Hotmail service. The February launch of Windows Mobile 6 provided Microsoft with a platform for integrating Windows Live services with smart phones and other handheld devices.

2007 was another good year for Microsoft financially. While the October-through-December 2007 numbers won't come out until later this month, the company's trailing four quarters have been good to Microsoft, largely as the result of double-digit growth in PCs and a healthy demand for Microsoft's Windows and Office among consumers and Windows Server and SQL Server among businesses. Over all, Microsoft brought in more than $54 billion in revenues against about $34 billion in expenses from October 2006 through September 2007, leaving about $14.9 billion in profits after taxes. As a result, Microsoft stock was pushed up to levels not seen since 2002, giving it a market capitalization of a staggering $324 billion. (Google, by comparison, has a market cap of "only" $203 billion.)

Microsoft was also active on the M&A front, where it made two major acquisitions, including the purchase in March of TellMe, a developer of voice recognition software, and the acquisition in May of aQuantive, an online advertising sales firm. It also made a move in the social networking arena with the purchase of a $240-million stake in Facebook in October.

But not everything worked out the way Microsoft wanted it to in 2007. The year started with Microsoft's legal hackles raised in its battle against the European Commission and that group's quest to make Microsoft submit to European regulators. By the end of the year, Microsoft was dealt a huge blow when it lost a court decision, forcing the software giant into retreat.

There were also grumblings from Microsoft customers about their Software Assurance contracts, including the controversial July report from IT analyst Forrester claiming many SA customers were seriously considering not renewing their multi-year maintenance agreements, which cost a hefty 25 percent to 29 percent per year, depending on whether the protected products are server or desktop products, respectively. Those predictions, however, have largely failed to come true to this point, and Microsoft has fiercely defended the customer benefits of its SA program.

While Microsoft has resisted changing SA, it was forced to rethink changes it made to its Windows Genuine Advantage anti-piracy program with the launch of Vista last January. With this program, WGA gave users 30 days to activate their products before entering the "reduced functionality mode." By September, however, Microsoft had rolled back the reduced functionality mode.

Looking Forward to 2008

2008 will be a critical year for Microsoft on a number of fronts and will determine whether the company is nimble enough to compete in an industry where disruptive change is accelerating. While the software giant will count on a steady stream of cash from its established monopoly on the desktop and its growing monopoly in the data center, it has yet to prove it can compete effectively in the Web-based software services department, and commercial open source remains a big threat to Windows dominance.

The launch of the oft-delayed Windows Server 2008 (codenamed "Longhorn") next month will be the biggest new product of the year for Microsoft. While it's not a bet-the-company type of gamble, the software giant hopes that Longhorn Server gets a better market reception than Longhorn Client, aka Windows Vista.

The most promising new feature that will debut with Windows Server 2008 (although it will also be available separately) is Hyper-V, the hypervisor layer than previously went by the codename "Viridian" and which is due to ship 180 days after Windows Server 2008. Microsoft desperately needs to plant a flag in the virtualization space and provide a capable alternative to VMWare and its market-leading ESX Server. Hyper-V provides that hope.

The upcoming release of Dynamics CRM 4.0 "Titan" provides another chance for Microsoft to carve a niche in a growing market: on-demand CRM software. Titan will provide a multi-tenant architecture that will allow Microsoft and its partners to deliver access to CRM capabilities as a service over the Web, and possibly allow it to compete with Salesforce.com . The ongoing unification of the Dynamics ERP products is also expected to make headway this year.

There are other promising growth areas for Microsoft's business IT ventures in 2008, including the PerformancePoint business intelligence software, the BizTalk service oriented architecture (SOA) software, Window Server Compute Cluster Server, the System Center tools, and application and operating system virtualization, which stands to make big inroads this year.

And we can't overlook the management changes that will arrive in July, when Bill Gates steps back from his full-time role at the company to devote more time to his charitable foundation. How well Ray Ozzie and Craig Mundie will fill in for Gates is a big question.

Obviously, Microsoft has a lot going on as we open 2008. With so many battles on so many fronts, however, the company has yet to prove that it can deliver ground-breaking innovation in any one particular area. With established software markets becoming commoditized and commercial open source alternatives becoming more viable, 2008 shapes up to be a very significant year for Microsoft.