I'll tell you something about Microsoft

The year 2011 will be make or break.

Early year, make or break will be one of perception, whether or not customers and shareholders see the glass as half full or half empty. From the half-full perspective, Microsoft has bet big on the cloud, and at the right time. From the half-empty viewpoint, Microsoft muffed mobile, by first fumbling smartphones and later tablets. The company started pushing the latter category a decade ago, only to lose it to Apple during 2010.

The half-empty soothsayers aren't waiting until the new year to predict doom. Goldman Sachs analyst Sarah Friar penned a nasty note over the weekend. Her already sour outlook turned bitter. For 2011, she predicts year over year growth of 7 percent, not 12 percent. For fiscal 2011, which ends June 30, Wall Street consensus is 9.8 percent sales growth and 10.9 percent earnings-per-share growth. Friar faults Microsoft's tablet fumbling, weak consumer strategy and uncertain cloud computing future. She's prognosticator of doom.

Get the Fire Hose

Many of the news reports about Friar's note focused on her comments about Microsoft's execution with tablets. I had to laugh. A year ago, the tablet was a struggling category without clear market focus and to which Apple was rumored to soon enter. Sure, Apple's iPad proved to be a fast sales success, and What? That's reason to suddenly write off Microsoft? Oh, please, someone fire hose these analysts. In early November I asked: "Why won't Wall Street give Microsoft a break?" One answer is a question: Where else are Friar's clients invested?

Sure, Microsoft muffed the tablet opportunity, and surely it's no coincidence that late-afternoon yesterday New York Times reported that Microsoft CEO Steve Ballmer would debut new slates during next month's Consumer Electronics Show. Of course, Microsoft and its OEM partners will announce new tablets. It would have been news had Microsoft nothing to show. You can bet the story was leaked to counteract all the bad buzz generated by Friar.

How bad was the buzz? Geez Louise, at ZDNet Sam Diaz likened Microsoft to Titanic -- "we all know how it ends":

Like the Titanic, Microsoft was once the darling among its peers. But unless it starts positioning itself to be more reactive to new trends, technologies and competitors, it too could find itself alone in the middle of the ocean, left to perish because it couldn't move fast enough.

Titanic had two sister ships, Olympic and Britannic. Germans sunk Britannic, while Olympic served the White Star Line until 1935 (the steamer launched in 1911). Microsoft could easily be "Old Reliable," as Olympic was nicknamed, as it could be majestic but doomed Titanic.

'Old Reliable' sails

Microsoft has bet its business on the reliability of Office and Windows and extending them to cloud. Along that strategy there is a case to be made for "Old Reliable." As I explained in mid-October post "It's a shame about Ray Ozzie," the economic downturn put an end to the struggle between cloud doves, who sought to build an interoperable datacenter-based operating system, and hawks, who sought to extend the Office-Windows-Windows Server applications stack to the cloud.

From the half-empty perspective, Microsoft has bet on the PC past rather than embrace the cloud-connected device future. But by the half-full viewpoint, Microsoft has done something seemingly impossible even 12 months ago. The company's biggest challenge is success -- enterprises use its products everywhere, and they've got little reason to buy again and again. By extending the Office-Windows-Windows Server apps stack to the cloud, Microsoft gives existing customers in established markets something new to buy -- and there are many benefits, such as anytime, anywhere access on anything. Customers also can benefit from lower upfront pricing, lower long-term costs (which includes maintenance and hardware) and access to the newest Microsoft software (with no physical upgrade required). These benefits apply most when customers adopt hosted software.

Analysts offer mixed predictions about 2011 PC sales. In November, Gartner lowered its 2011 PC shipment forecast to 15.9 percent from 18.1 percent. Other analysts put growth in the single digits, in part because they claim corporate upgrade cycles are over and tablet sales will surge next year. Goldman Sachs analyst Bill Shope wildly predicts that because of growing tablet sales, with iPad the big beneficiary, Apple's global PC market share will grow from 4 percent to 12 percent.

Doomsayers are Icebergs

Slowing PC sales won't impact Microsoft as much in 2011 as 2008. I predict they'll be a positive. Just because companies aren't upgrading new PCs doesn't mean they won't need to make new technology investments. By buying into Microsoft's cloud strategy, enterprises can get access to hosted versions of Exchange, SharePoint and even Office using existing hardware. Hosted services are a sales opportunity if PC upgrade cycles retract.

Similarly, Microsoft doesn't need to sell bazillions of Windows tablets to leverage its cloud. The company can tactically offer cloud services/apps for Android and iOS tablets. It's a sensible way to help businesses to maximize their investment in existing Microsoft software and/or hosted services. Ideally, Microsoft should control more of the applications stack, but "not ideal" doesn't mean the Titanic sinking.

Yes, 2011 looks challenging for Microsoft, but it's also chock full of opportunities. Microsoft marketing has never been better. Hosted services are poised to open up existing customer upgrades impossible a year ago. Microsoft's brand is stronger than it has been in years. Technology deals with Facebook are hugely important (and they're topic for another post). I should remind that doomsayers have predicted Microsoft's demise for years. Eleven months ago, I declared that "Microsoft Office is obsolete, or soon will be." But projects like Office 365 and Office Web Apps access within Facebook revitalize Office's future.

Microsoft isn't sunk yet. The largest icebergs aren't competitors or management malease but negative perceptions fostered by people by Friar. Do you agree?

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