What's Wrong With Microsoft?

The bloom appears to be fading from the Redmond rose.

Redmond, Wash.-based Microsoft Corp., the most powerful technology company in the world, has faced a variety of legal and operational hurdles this year, leaving some observers to believe the company has peaked and has begun a steady slide from industry dominance.

Co-founder Bill Gates' announcement last month that he would withdraw from the company's daily operations over the next two years marked the start of a major shift of the face of the tech giant. But is the shift more than just a facelift?

In addition to Gates' departure, the company has seen widespread personnel shakeups, including a reorganization of the unit that produces its flagship Windows operating system, the near-ubiquitous money-maker.

The company has suffered increasing trouble getting key new products out on time. Development issues have delayed the release of its much-anticipated new Vista operating system by more than two years. The most recent delay sparked a sharp drop in the Microsoft stock price.

"It's a big problem from a PR perspective, certainly," said Michael Gartenberg, an analyst with Jupiter Research. "They've done a lousy job of managing their public persona, and a lot of these delays have made them at times appear as if they're incompetent."

And legal antitrust issues continue to plague the company in much-coveted foreign markets, including a recent European ruling that will cost the company millions of dollars a day in antitrust fines.

"They need to push themselves through these issues," Gartenberg said, "because the more people they have working on antitrust and legal issues, the less people they have working on things that actually make the company money."

Competition Grows

Adding to the concern is the increasing collaboration between rival Internet tech companies. In May, Internet powerhouses Yahoo and eBay announced a multi-year partnership to help the two companies better connect with Web users, ending speculation that Microsoft had been trying to buy Yahoo.

And Google Inc. last spring made a $1 billion investment in Time Warner Inc.'s AOL. Analysts said the pairing of powerful Web competitors intensified Microsoft's need to find an ally as it tries to become a more formidable player in Internet advertising.

The widespread use of Windows operating systems still makes Microsoft the dominant worldwide player in the personal computer. But some analysts say the enormous scope of projects like Vista may hinder Microsoft from completing new projects on time, making the company appear slow and lumbering in comparison with their Internet rivals.

"Short term, they can turn things around if they can get their products to market and they're well received," said Gartner analyst Michael Silver. "But longer term, their projects are too complex and too big and too monolithic. We really think they have a significant amount of work to do to reposition themselves in the new tech world."

Do these issues spell more problems down the road?

A Microsoft spokesman declined to comment on how the product delays and personnel issues might affect the company's overall operations.

Here's a quick look at some of the technical, operational and legal issues the tech giant has faced in the last several months:

  • March 21 -- Microsoft announces it will delay the consumer launch of its much-anticipated Windows Vista operating system until after this year's holiday shopping season. The delay is another in a series of Vista delays that send the company's shares tumbling down nearly 3 percent.

  • March 23 -- Microsoft announces major changes to the unit that produces its flagship Windows operating system just days after announcing another delay in shipping Vista. The company says the move is aimed at improving its online strategy to presumably compete more effectively with the likes of Google Inc. and Yahoo Inc.

  • March 24 -- A rough month for Microsoft gets rougher after the company announces the delay of its updated Office business software suite. The company says the roll out of the new software will coincide with the release of Windows Vista.
  • April 28 -- Microsoft shares sink more than 11 percent to a new 52-week low after the company says it plans to significantly beef up investments in many areas where it is not dominant, but refuses to provide details. Analysts say such investments, while risky, may pay off in the long term but could hurt more immediate financial results at the world's largest software maker.

  • April 18 -- A U.S. district court judge in Boston rules against Microsoft in the company's attempt to acquire information from Novell -- a software company that provided information to the European Commission for use in an antitrust case against Microsoft.

  • June 2 -- Microsoft says it has canceled plans to include an automatic way to save documents in the popular PDF format in the next version of its Office software, amid an ongoing dispute with Adobe Systems Inc. Instead, users who purchase Office 2007, due out to consumers in January, will have to download separate, free software to save documents created in Office products such as Word and Excel as PDFs. The spat with Adobe, which developed the popular PDF, or Portable Document Format, comes as Microsoft is preparing to launch its own competing format for saving documents that cannot be easily modified.

  • June 13 -- Microsoft warns of eight "critical" security flaws in its Windows operating system and Office software that could allow attackers to take control of a computer. The company released eight critical updates patch security holes holes in its Windows operating system, Internet Explorer browser, Windows Media Player and Office productivity software.

  • June 16 -- Co-founder Bill Gates announces plans to withdraw from day-to-day role at Microsoft over next two years. Gates' withdrawal will end an era at Microsoft, which Gates founded in 1975 with childhood pal Paul Allen. Gates, 50, says he is stepping back so he can spend more time on his philanthropic foundation, the world's largest. The company lays out a plan for other high-ranking executives to take on Gates' duties, but chief executive Steve Ballmer concedes there is no way to replace Gates.
  • June 29 -- Microsoft says it will cut 148 total U.S. sales jobs as part of efforts to be more efficient. The cuts are the latest in a number of organizational changes aimed at making the company more efficient. The changes come amid growing threats from companies that provide Web-based software for tasks traditionally done by Microsoft's largely desktop-bound applications.

  • June 29 -- Microsoft announces it will delay the release of its Office 2007 business productivity software to improve product performance. Microsoft had already pushed back the consumer launch of Office in March to coincide with the delayed debut of its Windows Vista operating system. Some analysts note the delay as the latest in a string of setbacks for Microsoft and suggest more delays could cost the company potential users.

  • July 4 -- A court turns down Microsoft's request for a stay of sanctions imposed by South Korea's fair trade regulator, the software company says. Microsoft had asked the Seoul High Court to allow the stay of penalties while it lodges a legal challenge to the Korea Fair Trade Commission ruling ordering it to provide two separate versions of Windows after Aug. 24.

  • July 11 Microsoft says the release of its new operating system, Windows Vista, should begin in November with roll out to businesses and broader release of the software to general customers by January 2007, nearly two years later than the original 2005 target launch. However, there has been speculation that release of the much-expected new operating system could be even further away, and Gates tells software partners that he would delay the launch if beta testing uncovered shortcomings. Gates says Microsoft is investing $8 billion to $9 billion in developing Vista and the company's next version of Office, its key cash-generator.

  • July 12 -- The EU fines Microsoft $357 million and threatens more penalties, saying the company failed to obey a 2004 antitrust order to share technical information that would allow rivals' software to communicate better with Windows. The European Union also says it will double fine rates to 3 million euros a day -- or $3.82 million, at current exchange rates -- starting July 31 unless the company supplies "complete and accurate" technical information to help rivals make software that works smoothly with its ubiquitous Windows operating system. The EU originally imposed daily fines of 1.5 million euros ($1.91 million) after a Dec. 15 deadline to June 20, when it decided that Microsoft was still violating EU law.