May 2, 2008: 12:28 PM EDT
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Microsoft: Decidedly not R.I.P.

Attacks on Microsoft reveal a fundamental ignorance of what's powering the behemoth's growth trajectory.

By David Kirkpatrick, senior editor

Microsoft CEO Steve Ballmer

(Fortune) -- Oh how frustrating when the mighty haven't fallen.

For some word-jockeys it apparently seems impossible to believe that a major tech company, born a full 33 years ago, could remain on top of the heap.

Hand-wringing warnings of doom and decline for Microsoft (MSFT, Fortune 500), and for its CEO Steve Ballmer, are popping up in some quarters as the company faces a disappointing reception to Vista, its latest version of Windows, and criticism of its handling of its takeover bid for Yahoo. (YHOO, Fortune 500)

A new piece by Betsy Schiffman at entitled "Hey! Ho! Time for Ballmer to Go?" quotes people claiming Ballmer "screwed up" the Vista situation and asserting that if Microsoft buys Yahoo it will "die on the vine."

Those are hypothetical and questionable assertions. Vista is not wowing critics. Nevertheless, 140 million PCs have sold with paid copies installed. Granted, some of those buyers may in fact be clamoring to keep using XP, the previous version. (I don't have to bother clamoring myself. I have never been a fan of Windows and have no plans to switch from Apple's Macintosh - far superior for the tasks I perform, like writing this column.) But Microsoft's problems are merely normal challenges for a still-growing behemoth.

At the Motley Fool, Rick Aristotle Munarriz titled his recent article "I Spit on Vista's Grave." The best part was his lead paragraph, in which he asked "What do the future of computing, a hurricane-ravaged home, and Fred Flintstone's car have in common?" The answer, of course: no Windows. He suggests that Windows is fundamentally in trouble. Another not-understated Motley Fool article, entitled "Everybody Hates Vista" propounds the notion that Vista's problems are so grave that Microsoft is in "disarray."

Give me a break.

A fact: Ballmer has not screwed up in basic business terms.

Yes, Wall Street expected the company division that sells Windows to have higher revenue than it did last quarter. Results in the group were distorted by unusually high revenues and profits a year earlier associated with Vista's launch. And sales may have subsequently slowed.

But those dollars flowed in because the product sold a lot, not a little, albeit much later and with fewer features than originally planned. Plus, the Vista disappointments are relatively minor in the larger scheme of things. The company projects a level of operating income for the current quarter which would mean that by the end of the June 30 fiscal year the total would be a minimum of $22.6 billion. That's not only a lot of moolah by any standard, but would represent a 22.1% increase over the previous fiscal year. Your list of $60 billion companies with profit growth that healthy is likely to be rather short.

Says Microsoft Chairman Bill Gates, who retires from full-time work at the company June 30: "This has been a phenomenal year for the company financially. We've had everything going well." If that's how the chairman of the board is talking, do you really think the CEO is in jeopardy?

Let's just say for a minute that you could somehow convince yourself that the Windows business, which in the "disappointing" last quarter threw off $4 billion in operating profit, is at risk of drying up entirely. It's salutary to remember that this group only represents about 27% of company revenue. Microsoft has done a phenomenal job diversifying into a wide range of software businesses.

Says Gates: "Exchange is out there cleaning up, SharePoint is out there cleaning up, doing super, super well." He's referring to the company's messaging software product line as well as SharePoint, an unheralded and little-appreciated dark horse in the company's arsenal.

SharePoint has evolved far from its roots as a mere corporate collaboration tool. Now it encompasses a full range of functions a company of any size might need for creating and maintaining applications on the Web. That means everything from a big-time corporate Web portal to your workgroup's document-sharing site. SharePoint this year will surpass $1 billion in revenues, getting to that scale faster than any product in Microsoft's history. But don't forget - according to the blogosphere, Ballmer is screwing up.

As for Yahoo, Microsoft is resolute that it wants to expand its online advertising business, and has pursued the deal to get a big boost in ad revenue, a much better brand than the MSN one it already owns, a bunch of great online businesses, and a considerable aggregation of top tech talent. (For a bit of history about Microsoft's shift toward ad-supported software, read my 2006 profile of Ray Ozzie and how he took over many of Gates' technical responsibilities.)

Microsoft has said it would decide whether or not to proceed with a hostile bid for Yahoo by the end of this week. Now the Wall Street Journal, among others, is reporting that such an announcement is imminent.

Speculation on whether or not Microsoft will succeed in buying Yahoo, and then integrating it, is rampant. It's a gutsy move and by far the company's largest attempted acquisition ever. Such deals are fraught with peril.

But Microsoft has logical reasons to want to counter Google's (GOOG, Fortune 500) absurdly potent position in online advertising. Combining with Yahoo is by far the quickest way Microsoft could gain critical mass and become Google's peer.

Those who sneer at Ballmer's supposed ineptitude or, as Wired puts it, "mismanagement," are simply engaging in speculation and armchair quarterbacking. They also show a poor understanding of internal dynamics at Microsoft.

The real strategist behind the Yahoo assault is Kevin Johnson, who heads the group responsible for Online Services (and who also oversees Windows). Ballmer was sufficiently confident that "KJ," as he's known, could handle this project that two weeks ago he took a trip to the Amazon which put him completely out of touch with the office for days.

Ballmer, of course, remains the chief corporate strategist and the ultimate decision-maker. But the grown-up company he now heads, soon even to be sans Bill Gates, is one far more decentralized and well-managed than any version that has come before.

It is simply false to say Microsoft is in real trouble. To top of page

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