Microsoft's New Building Blocks

In a buying binge, Microsoft has acquired a range of technologies that should keep it competitive.
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Is

Microsoft

(MSFT) - Get Report

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.

Teleo, which Microsoft bought at the end of August, is a VOIP software and services provider that complements MSN and its other VOIP investments. Teleo targets mobile professionals who rely on email and cell phones for communications. It was designed to be used with Outlook and Internet Explorer, and it will be integrated into MSN Messenger and other products such as MSN Search.

The software giant announced the acquisition Thursday of FolderShare, a service that allows users to create private peer-to-peer networks, enabling them to share files across all the computers and devices they use. Imagine BitTorrent, but for businesses, to share work-related files. It eliminates the need to send large files via email or burn large files on CDs.

This happens to be a very useful tool if the files are secure and space on your devices is limited. It also should integrate well with Groove Networks.

Groove, which Microsoft struck a deal for in March, allows users to share files, manage projects and track data and processes virtually. Founder Ray Ozzie has stayed on and was named CTO of Microsoft.

Groove will operate independently from Microsoft and maintain its current setup. Groove and FolderShare are critical for the Microsoft Live initiative announced earlier this week, which is an attempt to get into the collaborative Web 2.0 arena before

Google

(GOOG) - Get Report

dominates it.

In September Microsoft picked up Alacris, a provider of identification and access-management technologies for smart cards and digital certificates. Alacris had partnered with Microsoft in the past on developing IDNEXUS.

This acquisition has helped bolster Microsoft's image in security circles. "Homeland Security Presidential Directive 12 will require all federal employees and contractors to have smart cards in the next year and a half," said Conrad Bayer, vice president and chief technology officer of Alacris. "Also, the sectors where we already see great usage of our technology, such as banking, insurance, pharmaceuticals and health care, should continue to see needs increase in these areas."

Microsoft has developed a reputation as being weak on virus protection. Explorer has lost market-share to Firefox, an open-source browser that's harder for viruses to penetrate. Microsoft bought Sybari Software in February to attempt to plug this leak in the hull.

Sybari makes software products that protect servers from viruses, worms and spam. It's enterprise-focused, and Sybari has discontinued its sales to Linux-based systems.

To beef up security, Microsoft also acquired FrontBridge in July and Giant Company Software last December. FrontBridge offers software that scans for viruses and spam. It also has products for encryption, disaster recovery and archiving for email and IM.

Giant is a provider of top-rated anti-spyware and Internet security products. On Jan. 6 Microsoft announced the availability of the first beta version of MS Windows AntiSpyware based on Giant technology.

Google's roots are as a business-to-mass-consumer play. While it's attempting to sell search services to the enterprise sector, that's not Google's forte. Nor is selling products and services to individual customers.

Microsoft, with its recent spate of acquisitions and deals, still has the opportunity to hold on to its status as the most successful company ever. But Google is nipping at its heels (and the consumer is bound to benefit whatever the outcome).

That said, the fact that Microsoft seems to "get it" in terms of where it needs to build out, plus the fact that the basic valuation metrics are so cheap, make Microsoft a compelling buy.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of

Trade Like a Hedge Fund

and

Trade Like Warren Buffett. At the time of publication, neither Altucher nor his fund had a position in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;

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