Initial public offering fundamentals and market dynamics

Microsoft's Future

Microsoft today is being more challenged than ever before in several major areas of its business. The most significant risk is in its server and enterprise divisions due to the widespread adoption of open source operating systems throughout enterprise accounts, which is the main source of revenue for Microsoft in their operating systems business. Second, the several threats that Google poses to Microsoft are just as significant yet have implications for the company's search, advertising revenue and increasingly, office productivity products including Microsoft Office. Third, Microsoft's lack of ability to deliver products on schedule and the scrapping of the early edition of the Windows Vista operating system in 2005 only to completely re-write and release it by 2007 illustrates the company's difficulty in synchronizing the efforts of thousands of developers according to Bear Stearns (2007). Microsoft is clearly at a crossroads in its future direction based on the escalating competitive threats externally and the apparent lack of synchronization internally. All of these factors are contributing to an uncertain future for Microsoft today.

Still Strong in Core Businesses

Despite the strategic challenges to its operating systems and application server business from open source, it's most serious financial threat; Microsoft has several key strengths intact. First there is the virtual monopoly on desktop applications including e-mail and scheduling with Outlook and desktop applications including Microsoft Office. Second, SQL Server is more competitive than competitive database server platforms from IBM, Oracle, Sybase and others in enterprise infrastructure deals. Third, the hosted series of applications titled Microsoft Live and the Microsoft Dynamics applications are showing significant growth potential (PacificCrest, 2007). Software-as-a-Service (SaaS) platforms are critical to the company's overall growth of small business software, and initial efforts show significant opportunity. Fourth, despite the major delays in Windows Vista, Microsoft did deliver Internet Explorer 7.0 with increased functionality to battle open source browser Firefox, which has been an encouraging indicator that the company has been able to re-align development resources and meet promised delivery dates of new software applications.

Microsoft's Weaknesses

First and foremost the lack of adoption for the Microsoft Windows Vista operating system, and the lack of consistent adoption across all customer segments, is a major concern within the company today. Microsoft has not successfully positioned Windows Vista as fulfilling the integration and interoperability needs of enterprises; yet it has successfully communicated security features as part of the unique value proposition of the Vista operating system. Second, both the Xbox 360 and Windows Vista product development cycles were each delayed, eroding consumer confidence in the gaming system and leading to longer evaluation cycles for the operating system in enterprise accounts globally. Third, the company's struggles in the areas ensuring its pricing models are specifically how difficult they are to implement in enterprise accounts is an area that needs to be addressed. Finally both the geo-political stance of the European Union and the U.S. Department of Justice have created difficult competitive dynamics for Microsoft, as have what appears to be organizational entropy, or the lack of being able to stay as agile as the company once was, according to Credit Suisse (2007).

Microsoft's Critical Decisions

The most critical decisions the company has is in regard to its search and advertising business, specifically how to compete against Google's AdWords success and the OEM relationships that Google is increasingly creating across enterprise, medium and small businesses. As a result, the critical decisions Microsoft has are first in its pursuit of selling OEM accounts its search engine technology followed by the re-vamping and more focused strategies regarding online advertising. Secondly, the major decisions on product direction in terms of licensed vs. SaaS need to be more clearly determined and decisions of which products to keep on this SaaS, or as the company calls it, Dynamics, platform also need to be decided on. Third, the pricing models for enterprise products need a major re-vamping and re-writing to make Microsoft easier to do business with at an enterprise level. Fourth, strategies for countering the threat of open source in their office automation, server, browser, development tool and file format areas all need much greater competitive focus and intensity if Microsoft is going to be able to continually growth. Fifth, Microsoft needs to again take a leadership position specifically in the area of new product development and lead through innovation, rather than its practice of the last three years of responding to open source and Google threats in the market. Finally, Microsoft needs to trim back the complexities of their new product development process and focus on how to be more agile in getting products to market.