Microsoft Is Losing Some Of Its Elbow Room

George F. Colony, chief executive of Forrester Research Inc., which analyzes market trends, argues that companies that serve consumers via Web pages will begin to do so using actual software programs, to increase the services they provide.

Dubbing the trend "X Internet," for executable Internet, Colony said it is a revolution being led by Google, at the expense of Microsoft's hegemony.

"I predict that Microsoft, under attack from advertising-funded software," Colony wrote, "will lose its monopoly-driven 25 percent net profits over the next several years, having to settle for 13 percent to 15 percent nets (still astronomical compared with the average for most large corporations)."

Perhaps as troubling for Microsoft, Bittman added, is that "the typical teenager five to eight years ago knew a lot about Microsoft, and lived and breathed their stuff, a lot more than they do now."

Microsoft bristles at this kind of talk and refused to make a top executive available for this story.

"We are a company focused on the future," according to a written statement from spokesman Vivek Varma. "Regrettably, the premise of this article is a rehash of stories previously published in other publications. Microsoft is operating on all cylinders, delivering breakthrough products this year including Xbox 360, Windows Vista and Office 12. And we invest in the future, we are breaking new ground in areas like search and services and we continue to aim at best in class for each category of product we develop. In short, we are extremely bullish about our future."

Yet early last month, Microsoft founder, chairman and chief software architect Bill Gates issued one of his periodic calls to arms to his troops, warning them that the industry and their company were at a pivotal, "sea-change" moment:

Microsoft's software must operate "live" and online, Gates announced, to engage users in today's always-connected world. Gates and the company's chief technology officer, Raymond Ozzie, outlined how the coming versions of Windows and its Office suite would incorporate online components such as instant messaging, mobile telephony and search.

"Even beyond our large competitors, tremendous software-and-services activity is occurring within startups and at the grassroot level," Ozzie wrote in a blunt and lengthy October memo to company executives titled "The Internet Services Disruption." Failure to take leadership of this change, he said, would put Microsoft at risk.

Essentially, Microsoft hopes to straddle the fence: extend its software with online features but lead its rivals by continuing to leverage its power over the PC. Gates and Ozzie said the company's advantage would derive from a "seamless" computing experience with Windows still at the core, enabling users to do more than if they cobbled together alternative, Internet-based software or services.

Similarly, the strategy for the just-released Xbox 360 gaming platform is for it to become an Internet-based hub for home entertainment and communication, working with other Windows-based applications.

Some analysts are confident Microsoft can pull this off, and even its most ardent detractors say it is foolhardy to write the company's obituary, or even to consign it to aging, slow-growth status more akin to an old-economy company.