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Microsoft vs. Google and Apple, Part 2

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Microsoft doesn't inspire change, it reacts to it. Unfortunately its management doesn't seem able to fix that.

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Editor's Note: This is Part 2 in a multi-part series. Click here to read Part 1. Also, Michael discussed this topic yesterday on the Stanberry & Associates Investor Radio podcast with Frank Curzio. Check out the interview here.


In Microsoft vs. Google and Apple, I laid down the case that Goopple -- a combination of Google (GOOG) and Apple (AAPL) -- is the biggest threat to Microsoft (MSFT) in its 35-year history.

To recap, here's the situation:

Google is wreaking havoc in the smartphone business by giving its innovative Android software to developers for free, happy to benefit from a bigger advertising market down the road.

Apple either figured out or stumbled onto the fact that making iconic consumer devices is a pretty good way to get people interested in your computers.

And Microsoft's less-than-stellar reputation for quality wasn't enough to get consumers to stray to Apple's superior offerings -- but products like the iPod, iPhone, and iTunes got folks comfortable with the idea of change.

As I've stated, Microsoft has heeded the quality call. Windows 7 is by far the best operating system the company has ever developed, and there's some buzz out there for Windows Phone 7 and CE7. They both look pretty snazzy, at least in their pre-release forms.

But here's the problem: Quality isn't enough. Quality alone doesn't make people care about your products. Google and Apple are successful because their products changed the way we lead our lives. When has Microsoft last done that?

You're a consumer, so I'll ask you: Do you care about Microsoft?

The Management Issue

Microsoft's Steve Ballmer is clearly driven by numbers and research. He looks for large markets to play in, but that forces Microsoft to play catch-up with faster, nimbler competitors that already have consumers' attention. Windows Phone 7 looks good, but it's coming years too late. The Bing search engine has some great features, particularly for shoppers, but again, it was years too late.

Microsoft doesn't inspire change, it simply reacts to it.

It's not as if Microsoft is incapable of succeeding with big, bold bets. The Xbox looked like a pretty bad idea at the time, but Microsoft gambled that console gamers would embrace online play, and it paid off, assuming you don't count the Xbox 360 recall fiasco. People now pay Microsoft for access to online gaming -- something other companies give away for free. That's big.

A Trio of Bad Omens

I harp on mobile because it's the next big computing market, and Microsoft has simply not kept up. In just the past couple of weeks, Microsoft got three new reasons to frown.

First, Apple announced the new iPhone. Ignore the feature and spec-obsessed critics -- this phone is an absolute stunner. If you don't think this fourth-generation model is enough of an upgrade from the 3GS, think about this: Apple was already building on the best smartphone platform ever made, and as always, expectations were exceedingly high. As an Apple shareholder, I applaud the company for sticking to its strengths: brilliant industrial design and elegant-software engineering. Translation: the iPhone 4 looks hot, it feels good in the hand, and it's easy to use. People don't buy features. They buy what feels right.

Second, AT&T (T) announced in late May that 40% of iPhones are sold to business users. That's a sign of major crossover appeal and true acceptance by IT departments, which are now handing enterprise market share to Apple.

And finally, demand for Android-powered phones just went into high gear. The exclusive-to-Sprint (S) HTC EVO 4G is completely sold out, and the HTC Droid Incredible is now back-ordered at Verizon (VZ) with a three-week wait time. I just placed my own order for Droid Incredible, and I recommend you do the same if you want one before July.

It sure looks like Google and Apple are splitting up the smartphone world, while Microsoft won't unleash Windows Phone 7 until the holidays. By that time, the Android complex will have even better phones and software, and the iPhone will still be the technological zeitgeist of our time.

Would Firing Steve Ballmer Fix the Problem?

There's a legitimate argument for ousting Steve Ballmer. Over the past decade, Microsoft has spent more than $60 billion on research and development without anything groundbreaking to show for it beyond the Xbox business.

Quality control has improved, but why did it take so long? And shouldn't Microsoft's new business ventures and products go beyond playing catch-up with the competition?

Job one at Microsoft must be to captivate the public, and the current management team just hasn't done that. It's not in their blood. Ballmer is very close to Bill Gates, and institutional investors have shown Microsoft infinite patience through the years.

So yes, it's been a long time coming, but I don't think a change is going to come.

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