Microsoft's New Building Blocks

Is Microsoft(MSFT) the proverbial slumbering giant awakened too late to fend off the onslaught of the Googles of the world? I don't think so. Let's take a look.

My main concern about Microsoft is that its business model for the next decade may move away from software and into online services -- services that Microsoft competitors will be able to cheaply replicate, driving customers and revenues away from the Microsoft platform.

It seems like a paranoid fear, but when I look at services like www.writely.com (which will eventually be as good as an online Microsoft Word) or Zimbra (an online Outlook), it seems to me that the largest segment of Microsoft's revenue -- the segment that sells Office -- is in danger of being poached.

And, if all services, and then files, are ultimately stored online, the need for Windows, as opposed to just a souped-up Google Deskbar lying on top of Linux, will be less. People say Microsoft has met difficult challenges in the past and survived, citing Netscape as a great example: Microsoft introduced Internet Explorer and drove Netscape out of business (well, to AOL and then Time Warner).

But Netscape was a software company and Microsoft dominates software. The new world is about services, about collaboration, about community. Microsoft has never really figured out how to break out of the pack with its MSN.

That said, a billion dollars in cash flow a month can go a long way. Microsoft has never been a first mover -- once focused, it can reposition itself through strategic acquisitions. This is what it's been doing, and I'm betting it will succeed. It wasn't a first mover in operating systems, in word processing, in spreadsheets or in browsers. But through strategic acquisitions, it eventually dominated these fields.

Microsoft's acquisitions over the past year fall under the rubric of three initiatives:

VOIP, which is the direction all communications are heading as phone call prices drop to zero.

Collaboration (announced as "Microsoft Live" earlier this week).

Security, ranging from homeland to the desktop.

Microsoft announced the acquisition Thursday of media-streams.com, a Swiss software developer that makes applications based on VOIP technology. Microsoft will use media-streams' software, staff and intellectual property to accelerate its push into advanced VOIP. Combined with the acquisition of Teleo and the recent deal with Yahoo! (YHOO) to link their instant-messaging services, Microsoft is making huge steps toward becoming a one-stop communications company.