Microsoft Is Losing Some Of Its Elbow Room

By Jonathan Krim
Washington Post Staff Writer
Thursday, December 22, 2005

Rob Enderle, a longtime Silicon Valley analyst and observer of Microsoft Corp., remembers what used to happen when a tech start-up sought funding for a business that might brush up against the software giant's universe.

"It would be hard to get a meeting" with venture capitalists, Enderle recalls. "It would be harder not to get laughed at in the meeting. And to get any money, you'd have to get them drunk first."

The danger was that if Microsoft felt threatened by, or even jealous of, a new or rival technology, it could create something similar and fold it into its Windows operating system. Since Windows powered just about every personal computer on the planet, Microsoft's version of the new program would get unassailable, worldwide distribution.

Windows is still the brains of nearly every PC, and Microsoft remains one of the most profitable, powerful and storied companies ever created. But the shadow cast by the colossus of Redmond, Wash., is looking less imposing today.

Its financial growth is slowing -- in the single digits in sales growth for fiscal 2005 over the previous year, for the first time in the company's history -- and its stock has been flat for five years. It missed some of the most popular technology advances in recent years, such as searching the Internet and downloading music. It continues to fight antitrust battles in Europe and Asia and has had to divert resources to confront persistent security holes in its software.

Meanwhile, a handful of Internet companies such as Yahoo Inc., eBay Inc. and most particularly Google Inc. have matured into well-financed rivals challenging Microsoft in several areas. In the most recent example of Microsoft's fall from almighty status, Google outmaneuvered and outbid it for a stake in America Online Inc., a combination Microsoft hoped would boost its own MSN online service.

Today, Google is the verb for search. AOL's instant-messaging service still dominates the landscape. File-sharing software and Apple Computer Inc.'s iTunes have redefined how the digital world gets and listens to music and videos. Yahoo is the most trafficked Internet portal.

"Now," Enderle said, "it's Google" that worries venture capitalists eyeing software start-ups.

These might seem like mere speed bumps for a 60,000-employee company that in the 2004-05 fiscal year generated $1.4 million in profit every hour. But they speak to what many analysts say is the most significant challenge Microsoft has ever faced:

The center of the computing experience is rapidly moving from the desktop of the PC, which Microsoft largely owns, to the Internet, which it does not. With Internet connections getting faster and more able to handle large volumes of information, whole software programs can be delivered or used online.

Thus, in what is known as the Web 2.0 world, a start-up aptly named Upstartle LLC offers an online program for creating, writing and sharing documents. Whereas the Microsoft Office suite that includes such tools costs more than $140, Upstartle's service is free, with add-on features to be made available for a subscription fee later.

"Where I do my word processing, how I collaborate, maintaining my social network . . . those things are shifting away from Microsoft," said Tom Bittman, a research fellow at Gartner Inc., a market research company.

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