Microsoft's 2010 Will Rely on Windows 7 Sales, Yahoo Deal, Cloud

By Nicholas Kolakowski  |  Posted 2010-01-03

Microsoft's 2010 Will Rely on Windows 7 Sales, Yahoo Deal, Cloud

With declining revenues and robust competition in many of its product areas, 2009 was not exactly a banner year in Microsoft's history. Will 2010 be any better? Redmond can certainly look toward a few bright spots: Both Windows 7 and Bing, its search engine, experienced disaster-free launches followed by solid early adoption rates, which could translate into greater success in the coming year.

However, Microsoft also faces substantial challenges. Despite a search-and-advertising partnership deal with Yahoo that could see Bing's market share nearly triple, Google remains the dominant force in online search. Microsoft's mobile division remains weak and is faced with substantial competition from the likes of Apple and RIM. And if the economy doesn't pick up, then there'll be no rising PC sales to buoy sales of Microsoft software.

So how will 2010 fare? The following traces out Microsoft's prospects in certain key areas.

Microsoft-Yahoo Deal Goes into Effect, Presenting Bigger Google Challenge

Microsoft poured millions of marketing and development dollars into Bing, its search engine that launched in June 2009, but the biggest increase to its market share in 2010 will likely come courtesy of the search-and-advertising agreement struck between Microsoft CEO Steve Ballmer and Yahoo CEO Carol Bartz.

On July 29, Microsoft and Yahoo jointly announced a 10-year partnership that would see Bing powering search on Yahoo's sites, while Yahoo assumed exclusive worldwide sales duties for both companies' search advertisers. The deal is expected by both parties to be cleared by antitrust regulators and should go into effect in 2010.

When that happens, assuming that Yahoo's market share ports over to Bing's with a minimum of attrition, Microsoft's share of the U.S. search-engine market could rise to close to 30 percent. Google continues to occupy roughly 70 percent of that market, so even a more robust Bing won't present a survival threat. Nonetheless, 2010 will likely be the year where the world of online search narrows down to two engines whaling at each other for market share. Yahoo, meanwhile, seems intent on giving up the search game entirely for becoming a Web applications provider.  

Bing and Google will also likely continue their grudge match over features. In November and December, Microsoft rolled out several new Bing features, including a beta version of Bing Maps that made it a more robust competitor to Google's Street View. Additionally, Bing now features a more robust video-search page and results from Wolfram Alpha. In 2010, expect both companies to go through several new rounds of competing feature tweaks and add-ons.

Microsoft will also spend 2010 trying to push Bing into foreign markets, notably China; but with Google's robust presence overseas, and the Yahoo deal restricted to the United States, Bing could have some trouble increasing its market share in those areas.

A Possible Revenue Rebound, Powered by Windows 7

The economic recession battered Microsoft. For the fourth quarter of fiscal 2009, the company reported a 17 percent decline in year-over-year revenue, with earnings arriving at $1 billion below Wall Street estimates. Results for the next quarter offered a somewhat shallower decline of 14 percent year-over-year, with operating income, net income and diluted earnings all continuing to fall by double-digit numbers.

Both Microsoft and its OEMs hope that companies with Windows-based IT infrastructure will use Windows 7 as an excuse to upgrade their systems, and buy the next generation of Microsoft products, in 2010. In both interviews with eWEEK and larger conference calls with investors and media, company executives have suggested that any uptick in sales of Windows 7 and associated products will be roughly in line with any rise in PC purchases through 2010 and beyond, irrevocably linking Microsoft's fortunes to those of the wider tech industry.

A number of analysts seem to think a tech-refresh scenario is possible.

"It looks like the Win7 inspired upgrade cycle can start in late 2010 and run through early 2013," Katherine Egbert, an analyst with Jefferies & Co., wrote in an Oct. 12 report. "We expect new hardware purchases to precede the software upgrades by about 6 months."

But the economy could certainly hit the skids again, in which case a tech refresh would be necessarily blunted as companies battened down their budgetary hatches. In any case, Microsoft executives seem intent on curbing expectations: in an Oct. 23 earnings call, Microsoft Chief Financial Office Chris Liddell suggested that the company would remain "reasonably cautious" about the prospect of a tech refresh, echoing comments earlier in the year from Steve Ballmer.

A Hail Mary Pass for Mobile

Microsoft Throws Its Hail Mary Pass for Mobile

By the second quarter of 2009, Microsoft's share of the mobile operating system market had declined to around 9 percent. October saw the release of Windows Mobile 6.5, but even the company's executives admitted that the update to Microsoft's Mobile OS was just a placeholder until 2010, when the company is expected to roll out Mobile 7.

Mobile 7 is supposedly a major upgrade to Microsoft's operating system franchise, and the company has thus far kept details under wraps. However, continued pressure from a variety of competitors in the space, including Google, Apple and Research In Motion, makes Mobile 7's quest for market share a decidedly difficult one.

Some have declared that quest an impossible one. "It's time to declare Microsoft a loser in phones. Just get out of dodge," Mark Anderson of the Strategic News Service told The New York Times on Dec. 10, in comments widely circulated. "Phones are consumer items, and Microsoft doesn't have consumer DNA."

But 2010 will ultimately determine whether Anderson's comments prove accurate, and Windows Mobile becomes an also-ran, or if Mobile 7 allows Microsoft to retain or gain incremental share in the market space.

Microsoft Plunges into the Cloud, Again Facing Google

Microsoft built its business primarily on the desktop. However, it has taken steps to embrace the paradigm shift inherent in the rise of cloud computing, some of which will bloom to fuller life in 2010.

Jan. 1, 2010 marks the full "switch on" of Microsoft's Azure cloud platform, composed of three parts that work in symphony to create Web applications and services: Windows Azure, an operating system as a service; SQL Azure, a cloud-based relational database; and .Net services, which provide both secure connectivity and federated access control for applications.

Customers will have three payment options for the service: a pay-as-you-go model, subscription format or volume licensing. Microsoft's competitors in the space include Amazon and Google.

Given that cloud services represent a potential $150 billion market opportunity, according to research firm Gartner, it's unsurprising that these companies are all fighting for market-share. For its part, Microsoft could help increase the acceptance of cloud computing within the enterprise.

"There are many enterprises that consider themselves Microsoft shops that have people that only know Microsoft tools and APIs," Gartner analyst Ray Valdes told eWEEK in 2008, when the Azure platform was first announced. "Amazon and Google have been chipping away at these, but Microsoft is firmly entrenched."

Microsoft may be positioned well for the enterprise cloud market in 2010, but its other cloud-based endeavors may prove a riskier bet. In a bid to compete with Google Apps, Microsoft will introduce browser-accessible versions of OneNote, Excel, Word and PowerPoint for Windows Live subscribers. Although these Web-based applications will lack the full functionality of the upcoming Office 2010, Microsoft is evidently hoping that enough users will gravitate toward their own cloud productivity suite in place of Google's offering.

Given that Google Apps have attracted attention among consumers, municipal governments and businesses, however, Microsoft could find itself in a bit of fight when it comes to spreading its own brand of Web-based productivity. But Redmond also doesn't have much of a choice; in 2010, Google will attempt to spread Google Apps even further among the enterprise and consumers via the propagation of Google Chrome, its upcoming browser-based OS for netbooks and-potentially-more robust PCs. Browser-accessible versions of Office may blunt some of Google's impact.

Rocket Fuel