Ballmer thinks Microsoft can learn from Apple. "They are good at providing an experience that is narrow but complete, while our commitment to choice often comes with some compromises to the end-to-end experience," he told staff. "We're changing the way we work with hardware vendors to ensure that we can provide complete experiences with absolutely no compromises."

It's a rather cryptic comment, but it makes sense when you compare the out-of-the-box experience of an Apple computer with that of a Vista PC. Apple's control over hardware means that there are no device driver issues or incompatibilities – the famed 'it just works' approach – and the Mac desktop isn't stuffed with trial programs and ISP icons, often termed 'crapware'. Essentially, Microsoft wants PCs to be more Mac-like.

During Microsoft's Financial Analysts Meeting in July, Bill Veghte from the Windows group explained: "We worked with [OEMs] to do what we call the Windows Vista Velocity Program... a very extensive set of tests to measure everything from reliability to security to compatibility, boot time and so on. We ran over 280 systems through that process and you're starting to see the results of that in the market today."

Ballmer elaborated: "You can take the same laptop, oftentimes, and pre-configure it one way – and you get almost instantaneous boot and fantastic battery life. If you pre-configure it with software in another way you get long boots and much less battery life. That kind of education, discussion, dialogue, we find our OEMs appreciate. It doesn't mean they always follow our advice... but some of our OEMs, I know, are going to step up and do a lot more to complete the end-to-end experience of software, hardware and so on. And that will be a great thing."

Microsoft is planning the same approach with smartphones. While Windows Mobile fell short of its target of 20 million licenses sold in a year, it still increased its global market share from 11 per cent to 13 per cent – but the iPhone is clearly gunning for enterprise customers, with version 2.0 of the phone's software delivering Exchange support and group policies to make it a much more business-friendly device.

Apple's manufacturing partner Foxconn is reportedly manufacturing 800,000 units per week, and analysts predict sales of around 15 million iPhones in 2008 and 40 million in 2009 – a drop in the ocean compared to Nokia's 400-plus million units per year, but double what Windows Mobile is currently doing.

To fight back, Microsoft has it's new operating system Windows Mobile 7 – but that won't ship until at least 2009. In the meantime, the firm is addressing one of the key things that iPhones do better than Windows Mobile devices: web browsing. The next version of Windows Mobile's Internet Explorer will deliver full-screen browsing, Flash, Silverlight support and H.264 video compatibility. It should appear on handsets by late 2008.

Out of Office

Office is famously Microsoft's cash cow, but that cow's being chased around the field by open-source Office-a-likes and fast, flexible and free online office services. Microsoft's solution isn't to make Office free, but to change the way that it's sold to price-conscious customers.

US consumers can now subscribe to Equipt, a £35 per year service that delivers the OneCare security package, Live Mail, Messenger and Writer, Office Live Workspace – a web-based service for online file storage and sharing – and the full Office Home & Student Edition. Long-time Microsoft watcher Rob Enderle calls it "a transitional product".

As he explains: "One of the problems of moving to a new concept like cloud computing is that you have to move your code base and the market has to be ready for the move at the same time. This means that an entrenched firm has to create a transitional product with elements in both the old and the new in order to create time for the translation of the code base and to allow the installed base – in this case consumers – to make the switch to a new product." Enderle believes that Equipt is that product.