Microsoft's Future Looks Less Rosy

Criticizing Microsoft(MSFT Quote - Cramer on MSFT - Stock Picks) isn't half as fun as talking about badly managed companies. There's little doubt that Microsoft is a well-run, spectacularly profitable company that has already been able to extend and revamp its original product strategy a number of times.

The trouble here lies with its valuation. Microsoft is now venturing outside its cozy PC empire to look for growth that no longer exists in the PC operating system/application suite market. The company is targeting video-game consoles and mobile devices as the two new growth sectors. But Microsoft is already valued as though success in these entirely new business areas is a lock-in. But is the total assimilation of the world by the company really guaranteed? Just how likely is it that everything goes as Planet Borg is plotting?

Here are a couple of points to consider.

Microsoft's tactics could backfire. Before moving to mobile device and video-game sectors, it's worth noting that Microsoft's tactics there are a reflection of a decadelong pattern of increasing aggressiveness. The company has correctly calculated that government regulators probably won't dare to interfere in its business in any meaningful way. So it can simply stall any government lawsuits and bet that nobody will have the guts to do something about its monopolistic practices. That's pretty shrewd.

At the same time, though, Microsoft is close to pushing its corporate clients too hard. The new plan of demanding that companies upgrade to new generations of operating systems when Microsoft says so is kind of weird, and is probably going to fuel further gains for Linux. Of course, Microsoft faces an impossible dilemma in which it needs to squeeze more and more revenue out of a market that is growing more slowly than ever, so you can't fault the company for trying. Nevertheless, there is a good chance that the resulting resentment will push open-source software to new heights.

Microsoft doesn't have monopoly power in the mobile-phone market. Not too surprisingly, Microsoft reverted to its bullying tactics in the mobile-device market from the get-go. The problem here is that Microsoft does not have any monopoly leverage in this market, despite behaving as though it does. (Is there anything sadder than a high-school bully trying to keep up the act in college?)

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It's widely assumed that Microsoft initially demanded a $20 licensing fee from phone manufacturers when it tried to get Windows CE accepted as a leading operating system for phones. The company got laughed out of major vendor headquarters and is now relying on vendors like Sendo and Mitsubishi to support the Win CE initiative in the phone market.

What's the problem with relying on third-tier phone vendors in cracking the phone market, you ask? Let me count the ways. The phone market is entering a highly demanding phase in which new software applications using Java and multimedia messaging service (MMS) are combined with new display technology and packet-switched data transfer. Smaller companies already face a stiff challenge in trying to build a brand during very tough economic conditions. Now they face an additional hazard in trying to implement several new technologies simultaneously.

Microsoft has chosen to count on Asian phone vendors like Mitsubishi, which is currently plunging into unforeseen losses and facing drastic cost-cutting. Even more bizarrely, Microsoft has picked a British manufacturer with no industry track record as its initial European partner. Microsoft made its fortune by landing companies like IBM(IBM Quote - Cramer on IBM - Stock Picks), Compaq(CPQ Quote - Cramer on CPQ - Stock Picks) and Hewlett-Packard(HWP Quote - Cramer on HWP - Stock Picks) as its partners. In the mobile arena, the partners are a ragtag collection of has-beens and wannabes. That's a big difference.

Windows CE is an awful developing platform. Win CE is derided and loathed by every mobile-software development team I have ever encountered. I know what you're thinking -- Microsoft has a tendency to get things right on the third try. But as I said above, there is no monopoly position in the mobile market to grant the company the luxury of repeated attempts.

Symbian is an operating platform for mobile devices that was created by Psion, Motorola(MOT Quote - Cramer on MOT - Stock Picks), Ericsson(ERICY Quote - Cramer on ERICY - Stock Picks) and Nokia(NOK Quote - Cramer on NOK - Stock Picks). It later won support from companies such as Siemens(SI Quote - Cramer on SI - Stock Picks) and Matsushita(MC Quote - Cramer on MC - Stock Picks). If the platform takes off in 2002, it will mop up the development efforts of the industry, as it already has done in the preliminary stages.

Symbian is backed by the biggest names in the industry, and its licensing fees will always be much lower than Microsoft's fee structure because it's a vendor-driven platform. Symbian's partners don't want to charge a high licensing fee, while Microsoft lives off of high fees. Consequently, Win CE can never underbid Symbian because the competing platforms have directly opposing cost philosophies.

Microsoft's Xbox is behind its rivals and likely to become even more so. The same lazy and immoral approach to product launches (i.e., "let's not sweat the details; we'll get it right four years from now") is also haunting the launch of the Xbox. We have all heard repeated vows from Microsoft about how the box will ship on schedule and in necessary volumes, but I'm not buying any of that.

The Japanese launch of Xbox has already been pushed to next year. This gives Sony's(SNE Quote - Cramer on SNE - Stock Picks) Playstation 2 back-to-back holiday seasons in Japan without a high-volume rival. And Nintendo's GameCube is getting a hefty head start in Japan this Christmas as well. Japan is a major market for video games, but the crucial point here is the support of Japanese software houses. You cannot succeed in the video-game market without solid support from Japanese game companies, and Microsoft has created a hefty backlash among local content creators. This will stunt the platform in Europe and the U.S. in 2002.

Nintendo cleverly avoided making GameCube an all-purpose device. Since it lacks all the extra features Microsoft is cramming into the Xbox, it is always going to be far cheaper.

Also, the software selection and character franchises of GameCube are far stronger than those of Xbox. Nintendo is effectively locking up the under-14-year-old crowd. It's also trying to boost its adult appeal by venturing into survival horror and other murkier corners of the game universe.

Meanwhile, Playstation 2 is likely to hit 20 million units sold by next March. It's the de facto champion of the sector, and the second-generation games taking full advantage of the box are entering the market this autumn.

Software developers are now producing games with teams that have two years experience with the console's specifications, and so can push the envelope technologically. This will probably wipe out the theoretical edge that Xbox has on the hardware level for the next 18 months, a crucial period in the industry. Microsoft's early lineup of titles has a curiously tepid, washed-out vibe: "Halo" and "Oddworld" don't exactly sound like instant franchises.