The 8 Things That Scare Microsoft

Steve Ballmer thoughtfulMicrosoft CEO Steve Ballmer has a lot on his mind.

Photo: AP

Microsoft is in the midst of a major overhaul.It’s building its own tablets, risking its relationships with device makers. Its plan to hurt Google with Bing hasn’t worked. It’s still struggling to get people to love its phones.

Its most recent quarterly report plainly spelled out its biggest threats.

Microsoft has a lot of opportunities, and it’s talked plenty about those. But here’s what the software giant should worry about—straight from its own mouth.

1. It's not just about software. It's about the cloud!

Microsoft really wants you to know that it's a player as software goes online--'in the cloud,' in industryspeak.

It names six cloud platforms: Office 365, Xbox LIVE, Dynamics CRM Online (a competitor), Bing, Skype, Azure (which competes with Amazon Web Services), plus some other minor services (like Microsoft Intune).

But it worries that its cloud products might not be as popular as its PC software products:

'While we believe our expertise, investments in infrastructure, and the breadth of our cloud-based services provide us with a strong foundation to compete, it is uncertain whether our strategies will attract the users or generate the revenue required to be successful.'

Upside: Microsoft is making a lot of smart investments in its cloud. It opened Azure to Linux. It is letting Skype run as its own unit, maintaining support of Android and iOS and so on.

2. The two companies Microsoft fears most: Apple and Google.

Windows is still at the centre of Microsoft and Windows now has more competition than ever:

'The Windows operating system faces competition from various commercial software products and from alternative platforms and devices, mainly from Apple and Google.'

Upside: Microsoft's enterprise customers are in no hurry to ditch Windows PCs for Macs or iPads or Android tablets. A large portion are only now upgrading to Windows 7. Microsoft has some time to get Windows 8 fine-tuned before it risks losing these critical customers.

3. In the enterprise Microsoft has a LOT of competition.

Microsoft spent years trying to build high-end software for data centres.

Microsoft named Hewlett-Packard as a competitor twice. It named IBM 10 times. It named Oracle 9 times. All three make integrated hardware and software. Oracle and IBM also offer a lot of business software that competes with Microsoft.

But Microsoft is also wary of CA Technologies, VMware, Adobe, Cisco, and SAP as competitors with its business software products. Even Intel got a mention, for competing with Microsoft's embedded systems products. Microsoft also named Linux at least a half a dozen times and Red Hat once.

Upside: As long as enterprises still want Windows devices, they will keep buying Windows Server and software that runs on it and manages it, which is its biggest, healthiest business right now. And Microsoft is the lower-cost option in some areas like databases.

4. Microsoft sees Apple and Google as threats to Xbox.

Microsoft warns, 'In addition to Nintendo and Sony, our businesses compete with both Apple and Google in offering content products and services to the consumer.'

Neither Apple nor Google make gaming consoles, but they both make devices that let you stream entertainment to your TV. Xbox is Microsoft's video-game console--which is also the company's best bet on the online-entertainment business.

Upside: Xbox Kinect made Microsoft cool again. An Xbox console that does it all is an affordable option compared to buying a whole bunch of entertainment set-top boxes.

5. IBM is a love/hate relationship.

Despite naming IBM as a competitor 10 times over, Microsoft is relying on IBM as a single-source supplier for chips for some of its hardware products like Xbox 360 and Kinect.

It's buying all of its RAM from one supplier, too--Taiwan Semiconductor Manufacturing Company. It will do the same for its Surface tablets. 'Sole source suppliers also will produce key components of our Surface devices.'

Upside: By giving all of its business to single-source suppliers, Microsoft gives itself a lot of leverage with them, even though it risks inventory supply if these vendors experience problems.

6. The popularity of non-Windows smartphones and tablets could lure away developers.

Microsoft knows that all of its big plans rests on cool software. It needs lots of developers to write apps for Windows 8 and Windows Phone 8, which they won't do unless they think lots of people will buy those devices.

'Users may increasingly turn to these devices to perform functions that would have been performed by personal computers in the past. Even if many users view these devices as complementary to a personal computer, the prevalence of these devices may make it more difficult to attract applications developers to our platforms.'

Upside: Microsoft has plenty of cash and in-house developers. It already owns wildly popular software like Microsoft Office and Halo. It can grease the wheels all on its own.

7. All this new stuff could succeed but will still erode margins.

Microsoft warns, 'New products and services may not be profitable, and even if they are profitable, operating margins for new products and businesses may not be as high as the margins we have experienced historically.'

Upside: Microsoft has one of the biggest R&D labs in the world. In its fiscal 2012, 2011, and 2010, it spent $9.8 billion, $9.0 billion, and $8.7 billion, respectively. Microsoft has enough cash to alter its businesses AND try and find the next big thing.

8. Everyone might hate Windows 8.

Windows 8 is such a big change that people may opt to leave Windows altogether.

Microsoft warns, 'In fall 2012, we are launching Windows 8, a major new release of our PC operating system that seeks to deliver a unique user experience through well-integrated software, hardware, and services. Success depends on a number of factors including the extent to which customers embrace its new user interface and functionality, successfully coordinating with our OEM partners in releasing a variety of hardware devices that take advantage of its features, and attracting developers at scale to ensure a competitive array of quality applications.'

Upside: The only true alternative to Windows 8 is a Mac. But most Windows 7 apps will run on Windows 8. That will probably be good enough to keep millions of Windows users happy and willing to grow through a Windows 8 learning curve.

Microsoft isn't the only company in transition ...

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