It's the year 2000, and Microsoft is in rude health, enjoying an unchallenged position at the top of the tech world. Its annual revenue has just grown 16 per cent to $22.96bn, its workforce is 39,000 strong, and it's preparing to launch Windows XP, an operating system that will dominate the coming decade.
Meanwhile, Apple can barely be considered a rival. Despite having recently regained profitability, it accounts for just 2.8 per cent of the computer market. It has just reinstalled Steve Jobs, the company's co-founder, who left the company in 1985 after a power struggle.
Fast forward to 2010. Under Jobs's watch Apple has scored a string of hits — iPod, iPhone, iPad — which have transformed not only the company's balance sheet, but also the way we live and work. And the worm really has turned: this April, Apple knocked Microsoft into third position in the S&P 500 index, overtaking its rival's market capitalisation by $2bn to stand second only to Exxon Mobil.
But what does that really mean? "The signal being sent by the capital markets is that Apple's growth prospects both in terms of top line revenue and bottom line profits are much better than Microsoft's at this stage," explains David Yoffie, professor of international business administration at Harvard Business School. "The upside for Apple looking forward in the next several years seems to be much more optimistic than Microsoft's."
That said, Microsoft appears unfazed. "Market caps go up and down," says Cynthia Crossley, Microsoft's UK consumer and online services director. "It's a big world, the technology world. Apple has some great innovation, as do we. Interestingly enough, if anything I think what it says is that the opportunity for technology is very bright. Investors at the moment continue to invest in us so we're pretty happy where we are."
Indeed, Microsoft's business is much bigger than Apple's, but the company is seen as less sexy than its competitor. To stay ahead, though, Microsoft will not rebrand. Instead, says Crossley, the strategy is to "listen to consumers more".
And where that conversation has led them, it seems, is to "the cloud": a computing model where content is stored online rather than saved to your personal machine. That makes your spreadsheet, say, or photos accessible from anywhere and more easily shared. In May, Steve Ballmer, Microsoft's chief executive, told students at the University of Washington that over the coming year Microsoft will dedicate 90 per cent of its employees to cloud projects. "For the cloud, we're all in," he said. "This is the bet for our company."
Microsoft's commitment is evident in many of its upcoming launches. Take Windows Phone 7, an operating system for smartphones due out at Christmas. It's the company's power play in a market where its current offering, Windows Mobile, has held Microsoft down in sixth place. This — at last — is a worthy iPhone competitor.
"We've been active in Windows Mobile for ten years and been very successful on the business side," says Oded Ran, head of consumer marketing for Windows Phone. "But when it came to competing against Apple and Google, amongst other competitors, we had to rethink how we do that, and that rethink is Windows Phone 7. It's a complete rewrite of our strategy."
Sure, Windows Phone 7 boasts a cleaner interface (some handset manufacturers felt they had to develop their own for Windows Mobile) and presents information more immediately (the icon for the weather app displays the temperature), but its smartest features are cloud enabled. For instance, the operating system pulls together information about your contacts from online platforms such as Facebook — photos, status updates — and displays it on one page alongside their details.
And if you have an Xbox games console, Windows Phone 7 can access your Xbox Live online account, so gaming can continue beyond the TV screen without any loss of continuity. "There are hardcore gamers, they love to see their [Xbox Live] avatar, and get achievements for games they play on their phone as well as on the console," says Ran. "But we've tried to go broader than just the hardcore gamers. Xbox Live will expand to casual games too. That will mean that you could take a phone and invite someone to play a game with you — whether you're on the web or on Windows Phone 7, it's your turn. And maybe if you play a game on Xbox you can interact with some elements of the game on the phone." So imagine you have bought the cowboy game Red Dead Redemption for the Xbox — it might contain a mini poker game that you can play on your phone and how you fare would affect your character on the console.
Windows Phone 7 will also be compatible with Office 2010's cloud features, meaning that the changes you make to slides, documents and spreadsheets on the go will also show up when you reopen the files from a computer. This kind of cloud productivity has meant a radical shift for Microsoft: it will provide a version of Office for free on the web (accessed through a Windows Live account) and bundled with new PCs. Pared-down though it is, it will allow users to seamlessly upload their work to the cloud rather than manually moving it over to another service such as Google Docs.
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