Forecast for Microsoft: Partly cloudy

Ray Ozzie, the chief software architect at Microsoft, bristles when asked whether people think that new versions of his company’s flagship software — like Windows and Office — are exciting.

According to Ozzie, we have entered an age that’s a far cry from that of the PC enshrined on his altar to beige-box antiquity. Consumers and workers have been gripped, he says, by a “gizmo revolution.”

But gizmos are only half the battle for Microsoft. True, fashionistas obsess over whether a new laptop will fit into their purses and what type of fashion statement the device will make. Corporate road warriors, meanwhile, exude pride as they whip ultrathin computers with exotic finishes out of their satchels. Yet the most desirable devices these days are those that also allow information addicts on the move to untether themselves from the desktop PC and communicate through the so-called “cloud.”

With the arrival this week of Windows 7 and a host of complementary, slick computers, Microsoft intends to undermine those Apple ads that mock PCs and their users as stumbling bores. Ozzie, who plays the role of visionary and strategist at Microsoft, says Windows 7 will let PCs keep pace with other computing devices and, in short, finally make them sexy.

For many years, Microsoft and its leaders could make sweeping statements like this with little public pushback. Microsoft embodied the technology industry and was the grand arbiter of the tools people used to conduct business and navigate the digital era.

These days, however, Microsoft has legions of doubters. “Microsoft sort of disappeared from the scene,” says Regis McKenna, a Silicon Valley marketing and strategy expert. “Every once in a while, they have a delayed Windows release or something like that. By and large, I think the marketplace is focused on what Google and Apple are up to.”

Critics of Microsoft say it has hugely underestimated market changes and plotted a long and winding course toward irrelevance.“They are trapped in their own psychosis that the world has to revolve around Windows on the PC,” says Marc Benioff, the CEO of Salesforce.com, which competes against Microsoft in the business software market. “Until they stop doing that, they will drag their company into the gutter.”

The current breed of consumer has shown an ability to turn something like the Apple iPhone into an overnight sensation, then demand that companies embrace it. Google, meanwhile, uses its influential Web search and YouTube properties to introduce people to its e-mail, document and Web browser software, and Facebook now provides inspiration to business software makers.

For Google, winning over consumers is crucial to its strategy of infiltrating corporations and deflating Microsoft’s core businesses. “We are the next generation,” says Dave Girouard, the president of Google’s business products division. “The big difference in technology here is the pace of innovation.”

“They are not the company they once were in terms of market position,” says Bruce R Chizen, a former Microsoft employee and former CEO of Adobe Systems, the publishing software maker. “They no longer have a monopoly that is critical to the future of computing.”

Ballmer, Ozzie and others at Microsoft see things rather differently, and for the last year have argued that coming software releases for PCs, data centres, mobile devices and game consoles will confirm exactly how Microsoft will remain a pivotal force on the tech landscape.

Ballmer contends that Microsoft is the only company prepared and positioned to merge computing from both ends — the desktop and the cloud. “We’re just investing more broadly than everybody else,” he says, adding that, when it comes to software, “I want us to invent everything that’s important on the planet.”

Microsoft does, in fact, have a dazzling array of long-term bets. In Internet search, Microsoft has unveiled a well-received engine called Bing and has pledged to spend what it takes to make a meaningful dent in Google’s main business.

Some investors contend that Microsoft has its fingers in too many pies, developing too many products. The company is struggling to please consumers and workers at the same time. Despite its hunt for the next big thing in so many areas, Microsoft more often than not finds itself playing the role of follower, trying to buy its way into markets that other companies dominate.

“We were trying to do too much change in too rapid a fashion,” Ballmer says. “And so, for me the issue isn’t that we know how to make hardware and software work together and the like. The question there was I think we attempted too much.”

Facing hurdles

Microsoft also faces hurdles in the mobile phone market. For many years, it has sold software for a broad array of phones, but Ballmer has been disappointed with his mobile division, particularly when devices like the iPhone blindsided his company.

Even worse, Microsoft’s top executives have fretted recently about the potential fallout with customers when the company lost personal data tied to T-Mobile USA’s phone services — especially any doubts the incident raised about its mobile, cloud and security claims.

But Microsoft can point to places where its big bets have paid off. Bing takes a new approach to search by giving customers a glossier interface and, often, more detailed results than they will find with Google. And the Xbox game console and Xbox Live service have put Microsoft at the forefront of online gaming. Microsoft says the cloud acts as a natural complement to its traditional software products, and the company often talks about the “three screens and a cloud” strategy — which covers computers, phones and TVs all connected to common services.

But the cloud presents Microsoft with a host of challenges to its time-tested model of selling desktop and computer server software for lucrative licensing fees. Fast-paced rivals like Salesforce, Amazon and Google hope to undercut its prices while adding software features every few weeks or months rather than every few years, as Microsoft has done.

Microsoft executives acknowledge that the company had perhaps stalled, licking its wounds and trying to figure out how to behave while under scrutiny after years of antitrust court battles.

“We’ve moved to be a mature company, but maybe too nice a guy in some senses, and not maybe moving fast enough in things,” says Bob Muglia, a 20-year Microsoft employee and president of its server software business.

Rivals now simply dismiss Microsoft as a laggard rather than hitting it with the Evil Empire criticisms so familiar in the 1990s. In its place stands Google, which now has Microsoft’s mantle as a game-changing technology behemoth and is also increasingly perceived as a dominant competitor whose power warrants concern. Google’s rise has cast Microsoft at least partly in the unfamiliar role of a white knight.

“Until recently, Microsoft was the only empire,” says Nicholas G Carr, an author who has chronicled the rise of cloud computing. “Now, I think there are empires of the Internet as well as of the PC, and they are colliding.”

In an effort to continue remaking its image, Microsoft is courting young software developers and cloud computing start-ups. Company executives acknowledge losing touch with these crucial audiences as open-source software turned into the standard for people looking to create the next wave of applications and services.

Microsoft executives freely take swipes at Google’s online office applications and its planned operating system, Chrome OS. They’re also quick to remind anyone who will listen that it’s still early in the cloud computing era, and that things like Amazon’s online data centre services are but a nifty curiosity.

According to Ballmer, the public has a tendency to get caught up in the success of a device like the iPhone or Google’s search service and to underestimate the complexities that arise from trying to connect consumers and workers in today’s world.

Microsoft’s investors have started to put the company on the clock, expecting its traditional software to thrive and pay for a grander vision that needs to materialise sooner rather than later. “I am willing to give the present management another 15 months,” says Dicks-Riley at the investment firm. Even Microsoft’s loudest critics consider the company itself durable. “They won’t fade away as long as there are PCs,” Benioff says. “But they are not delivering the future of our industry, either.”

Executives at Microsoft talk in far more pragmatic terms. Slick laptops, cloud services and fancy cellphones all play into its strengths of making software that hundreds of millions of people can use. The trends come and go, but Microsoft’s reach and ability to play on the grandest scale remain constant.

“We can never become complacent, because just when the services transformation has gotten to this point, the next transformation comes,” Ozzie says. “That’s the way our company works.”