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Has Microsoft lost it?

There are some areas in which the Xbox excels, though. Xbox Live, its networked gaming and media service, has been a huge success – something that Sony has thus far failed to emulate. Come autumn, Live will play a key part in a major update to the Xbox, a new interface that essentially gives every Xbox owner a new console for free. The update will introduce Wii-style avatars and a new emphasis on video content in an attempt to reposition the console as a fully fl edged home entertainment system.

Nick Thomas suggests that Microsoft's move into Xbox video downloads has been a qualified success, particularly in the US – although the available catalogue is much smaller than Apple's iTunes. However, the lack of BBC's iPlayer, which is available on the Nintendo, is a big omission in the UK:

"Xbox's lack of a web browser – and according to some, a too-aggressive negotiating position regarding branding – means that the Xbox isn't able to offer its users access to the iPlayer." That said, "The partnership with Netflix in the US points to partnerships with retailers as a way to expand their offering... but again there are mixed messages coming from Xbox. Some execs seem unconvinced by the appeal of the console as a media device, preferring to focus only on games. Building on those content partnerships, whether it's games or videos, will be crucial to Microsoft moving forward – but for music, it's surely far too late for them to be a player."

Uh-oh or 2.0?

So has Microsoft lost it? A company with 93 per cent of the worldwide operating system market, rising revenues, a $60billion turnover and around $22.49billion in operating income is hardly struggling. However, the world in which Microsoft operates is changing dramatically, and Microsoft knows it.

In its latest report to investors, the "risk factors" section notes that "our competitors range in size from Fortune 100 companies to small, specialised single-product businesses and open-source community-based projects. Open-source software vendors are devoting considerable efforts to developing software that mimics the features and functionality of our products."

Microsoft is fighting back on multiple fronts. It's "developing versions of our products with basic functionality that are sold at lower prices than standard versions", but more importantly it's chucking enormous sums of money at things that may or may not work.

"We make significant investments in new products and services that may not be profitable. We may not achieve significant revenue from new product and service investments for a number of years, if at all. Moreover, new products and services may not be profitable, and even if they are profitable, [margins] may not be as high as the margins we have experienced historically."

To many observers, the way in which Microsoft's online division is haemorrhaging cash is a sign that Microsoft has missed the boat – but the 'let's throw money at this until it works' approach has worked in the past for Windows, Office, Internet Explorer and Xbox, none of which were immediately successful. Microsoft may not be the leader in search, cloud computing or mobile phones, but the combination of determination and deep pockets is a powerful one.

As Steve Ballmer told Microsoft staff in July: "Nobody is better than we are. Nobody works harder than we do. Nobody is more tenacious than we are. We're investing more broadly and more seriously than anybody else. Our opportunities to change the world have never been greater."

First published in PC Plus Issue 274

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