Microsoft Could See Consumer Comeback, Says Analyst

Microsoft’s new wave of products, including Windows Phone 7 and Project Natal, have the potential to help the company regain market share in the consumer segment, according to a new report from research firm Jefferies & Co. In addition to representing a potential source of future revenue, that report adds, these products are significant because they represent the fruits of Microsoft’s R&D spending following its “Dark Ages” from 2004 and 2007.

“Microsoft was historically a successful fast follower, but the anti-trust era brought a dip in R&D and several weak product cycles,” Katherine Egbert, an analyst with Jefferies & Co., suggested in an April 5 research note. “Bing, Azure, WP7 and Natal are the first post anti-trust products. Their success will be key in determining if Microsoft can recapture the consumer’s imagination.”

Egbert suggests that the period between 2004 and 2007 represented “Microsoft’s Dark Ages,” years in which “anti-trust litigation that was marked by dramatically reduced R&D investment, extensive fines and management turnover.” The percentage of revenue during this period dipped below 15 percent, and the products launched—including Vista, Zune and Live—refused to maintain a beachhead in either the popular imagination or market share. Meanwhile, companies ranging from Google and Apple to Facebook and Research In Motion were managing to take substantial market share in their respective marketing segments.

“It seems reasonable to assume that the EU and other litigation was a major distraction, which diverted significant resources away from R&D and caused some rethinking of the company’s business strategy,” Egbert wrote. “However, based on what we see with Azure, Windows Phone 7, and Natal, it seems that perhaps Microsoft is again comfortable in its skin, retracing its roots as a fast follower.”

The resolution of Microsoft’s EU antitrust case in the beginning 2008 also marked an uptick in investment in “non-desktop based services” that directly translated into products such as Natal, Azure, Office 2010, Bing, Windows Phone 7 Series and Xbox 360.

While Windows 7 has sold some 90 million copies since its October 2009 release, according to Microsoft, Egbert suggested that many of these new products coming on line will not “significantly impact revenue growth for several years.” In her estimation, though, the new products increase Microsoft’s addressable market, or the total potential market for a particular products or services, by 53 percent. The question remains whether Microsoft can make up ground lost during its “Dark Ages” to competitors such as Google.

“They must rely on only on innovation and a traditional fast follower strategy to try and stay relevant,” Egbert concluded. “They have a lot of market share to protect and their competition is well-entrenched. We don’t know yet if this new crop of post-litigation products can help Microsoft recapture the imagination of consumers and shift the attention of application developers back to its platforms.”

In addition to Project Natal and other endeavors, Microsoft has been exploring new technologies with companies such as Ford. On March 31, the two companies helped open the New York International Auto Show by announcing that future Ford electric vehicles would be able to leverage Microsoft Hohm, a cloud-based energy-management tool, to determine optimal times and places to plug in a vehicle.

Microsoft is attempting to expand the reach of Windows 7 into businesses, where uptake has been slower than for the consumer market. On March 30, Microsoft announced that it will extend its Windows 7 Enterprise Trial program until Dec. 31, 2010, allowing IT pros a 90-day period in which to test the operating system.

However, Microsoft also finds itself embroiled in legal drama that again has the potential to distract it from its main lines of business. On April 1, a federal appeals court declined Microsoft’s request for a multiple-judge review in its intellectual property lawsuit against small Canadian IT company i4i, which alleges that Microsoft Word 2003 and 2007 violate its custom X M L-related patents. That case already resulted in a nearly $300 million judgment against Microsoft, which the company is fighting to overturn—even as it battles other small companies, including VirnetX, over other patent-infringement suits.