How does MSFT get its groove back?

Last week Microsoft reported its first year over year decline in revenues...ever. Although the performance could be blamed on the worldwide recession, many of its peers and competitors have reported both growth in revenue and earnings despite the recession. A decade of being second or third best (or worse) in many new innovations may finally be catching up to MSFT.

For the past decade, Microsoft has attempted to use its massive cash reserves to exploit the value of technical innovation. However, it has demonstrated a curious knack for being slow to the punch, or picking the wrong horse, as new concepts have captured the imagination of the market. The company has been responding to the market instead of leading the market, often finding itself to be a distant counterpoint to the dominant player - which costs money. Here are some examples:

- iPod -> Zune
- YouTube -> Soapbox
- Google -> MSFT Live

And in areas of strength, MSFT is beginning to lose ground:

- XBOX Live -> Wii
- Internet Explorer -> Mozilla Firefox

To management's credit, it keeps trying. The launch of Bing in June has elicited some rare positive reviews for MSFT from the tech press. After initial the curiosity associated with this direct threat to Google Search wore off, so did traffic. Microsoft shareholders are hopeful that Bing evolves more like Internet Explorer, and less like Zune.

Among MSFT fans, there remains a of lot of hope for Windows 7, which is expected to be launched later this year. Even there, danger lurks as GOOG has begun to make waves about its new Chrome OS.

Sramana Mitra offers nice synopsis of Microsoft's current situation.

This may seem like a bizarre comparison, however MSFT finds itself in the same position as GM in the late 1970s and IBM in the mid 1990s. MSFT is a long-time dominant company that is on a path towards the mushy middle. As a whole it is colossal, but in the many trenches in which it battles, it rarely dominates. Like many before it, Microsoft may need to re-assess its strengths and re-invent itself after a little creative destruction.

Looking back, GM never seized the opportunity, and ended up (albeit a few decades later) a shell of its former self. On the other hand, IBM, which struggled against the onslaught DELL, HP, Compaq, ORCL, MSFT, and countless others in the 1990s has worked hard to get out of the hardware business and turn itself into arguably the most dominant technology services company in the world.

Regardless of the pundit bashings that it has received over the past few years, MSFT is a legendary American company. It has created real wealth for a great many people. Management can choose to ignore the repeating patterns of history and fade towards a punchline a la GM, or it can choose (like IBM did in the 1990s) to redefine and refocus to remain relevant and vital 10 years from now.