Microsoft Has Windows 7 Tablet Dreams, XP Nightmares

Last Updated Jul 13, 2010 3:00 PM EDT

Microsoft (MSFT) CEO Steve Ballmer must stay awake on good nights and thrash to competitive slasher nightmares on the bad ones. On one hand, he says that Microsoft is "hardcore" about tablets, with a claimed 20 vendors planning models. And yet, for all the positive spin, this sounds like desperate bluster.

Microsoft badly trails Apple (AAPL) and the iPad. Traditional Windows business partners have announced plans for Google (GOOG) Android-based tablets. Windows XP is still deeply entrenched among corporate users. Yes, Windows 7 has been a success, but the pressure on a big publicly-traded high tech company like Microsoft is growth, and that will become difficult to sustain unless Microsoft can get out of the replacement business.

That's the essential business problem Microsoft has faced since its early days. Tech investors want growth, and that means expanding sales. When the overall market is blossoming, then you ride the trend. For Microsoft, that meant becoming a giant, carried by all those new PCs shipping with copies of Windows, new copies of Office for home and businesses, and upgrades from old versions of each. The company has diversified, but 80 percent of its business is still in the traditional operating systems and office productivity lines.

New and upgrade copies of Windows 7 have helped splint last year's results, which were shaky in comparison to the company's history. However, even last quarter's failed to meet the high end of analyst expectations. For the first nine months of fiscal year 2010, sales of the client, server, and business (Office) divisions were either flat or down.

To be fair, the company can now look to Office 10. But it's had some disappointments. Even though Microsoft brags about selling 7 copies of Windows 7 every second, new data shows that 74 percent of work PCs still run Windows XP. Call that an opportunity if you wish, but I'd suggest that it's also a warning sign. There's plenty of upgrade room, and yet, corporate buyers don't seem in a rush. XP was good enough to skip Vista -- heck, an abacus was probably good enough to skip Vista -- and now Microsoft has decided to keep Windows XP around for another five to ten years. The Powers That Be have read the writing on the wall.

Maybe the new version of Office will help pull the company out of a rut, but from the early reviews I've seen, this is hardly a "must" upgrade. What Microsoft needs is a new type of device that doesn't cannibalize sales of other systems and yet still runs some form of Windows. It's why the tablet is important. And it makes sense that Microsoft wants to come out with one sooner, rather than later.

Some leaked documents convinced me that Microsoft would wait for 2012 and Windows 8. I was wrong, but even so, it's still clear that it's fumbled badly.

Microsoft largely dabbled in this area in the past and its hardware partners became skittish and began to drift off. Ballmer himself touted a Windows-driven HP slate in January, and then HP dropped the project. In fact, among all the familiar names Ballmer listed yesterday -- Dell (DELL), Toshiba, Sony (SNE) -- he didn't mention HP. That's a bad sign, especially when HP bought Palm and has already said that it will bring out a tablet running on WebOS. Dell has confirmed an Android-based tablet. Toshiba will release an Android-based thin laptop. And HP and Acer are both rumored to be developing Android-based tablets.

It's not as though Microsoft were about to disappear. Far from it. However, its own poor strategy and internal politics opened the door to competitors and limit its own chances for expansion. Perhaps Microsoft becomes more of a corporate niche player, still big and important, but with a fixed focus that could well diminish over time. But it has lost its chance to maintain its market domination in the long run.

Related: Image: RGBStock.com user BlueGum, site standard license.
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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.

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