Microsoft's announcement last week that it plans to open its own chain of retail stores "to create a better PC and Microsoft retail purchase experience" might be viewed as just the company's next move in its continuing marketing competition with Apple, but it might also be understood as more than that. It could be a sign that the company has realised it's in trouble.

The last few years haven't been especially good ones for Microsoft, despite all the many billions in revenues it has extracted from businesses and consumers worldwide since it released its last successful PC operating system, Windows XP.

In 2001, Having emerged seemingly unscathed from the US antitrust lawsuit, in which it was handed an undeserved pass due to the fortuitous election of an extremely corporate-friendly US administration, Microsoft appeared to be firmly established as the dominant player in the PC software market when it launched Windows XP. In hindsight, however, 2001 was perhaps the year of the company's high-water mark, as the subsequent events including its own actions over the intervening years might seem to suggest. 

It can be argued that Microsoft is now in serious trouble on several fronts, mostly due to the consequences of its own bad practices throughout its history as well as some errors it has committed in recent years. These major problems facing the company include:

• EU Commission regulation
• Failed diversification efforts
• Windows Vista debacle
• Failed Yahoo acquisition
• Increasing competition
• Consumer backlash

EU Commission regulation
In Europe, the EU Commission observed the ineffectual resolution of the United States v. Microsoft antitrust case with some interest, and evidently decided to hold Microsoft to a higher standard than the US. Having responded to industry complaints about Microsoft's anticompetitive abuses of its Windows monopoly dating back to the 1990s, by late 2008 the EU Commission had levied more than $2.686 billion in fines against the US company.

The EU Commission also required that Microsoft offer versions of Windows XP in Europe without Windows Media Player and fully document and licence its server programming interfaces to the open source Samba project and other competing vendors in order to enable open competition and interoperability.

The EU Commission is also investigating the questionable tactics and processes that led to ISO adoption of Microsoft's OOXML document formats 'standard'. Based upon just the limited information that leaked out to the press regarding the actions of Microsoft and others that resulted in forcing OOXML through the ISO/IEC fast-track standards setting process, an independent, thoroughgoing investigation by the EU Commission might well end up invalidating the company's massive, proprietary, largely unintelligible and as yet unimplemented OOXML document formats Trojan Horse 'standard'.

In addition, last month the EU Commission announced another investigation of Microsoft, this time into the company's bundling of its Internet Explorer web browser in Windows. An EU Commission requirement ordering Microsoft to unbundle Internet Explorer from its Windows operating systems is expected in due time.

Forcing Microsoft to unbundle Internet Explorer from Windows will hammer the final nail into the coffin of its former dreams to take over the entire Internet with its proprietary extensions that break the standard Internet protocols and website coding standards.

These regulatory and oversight initiatives on the part of the EU Commission with respect to Microsoft indicate that, in Europe at least, the governmental stance that corporations must operate for the net benefit of society still prevails. That limits Microsoft's power in the computing and Internet markets, and such enforcement of fair competition rules will work to prevent Microsoft from extracting abusive monopoly profits from businesses and consumers in the future.

Failed diversification efforts
Riding high from its US antitrust wrist-slap at the start of the new millenium, Microsoft attempted to diversify into game consoles with the Xbox, into PDAs and cellphones with Windows CE, into music players with Zune, into pen computing with the Tablet PC, into the Internet space with MSN, Hotmail and Search, into television with MSNBC, and so on.

With the qualified exception of the Xbox, all of these diversification efforts have failed to achieve the commercial success of Microsoft's near-monopoly Windows operating system along with its back-office server software and related Office productivity software suite leveraged by that client PC base.

These several failures in the marketplace of its diversification initiatives suggest that Microsoft, in markets where it lacks the advantages of its Windows software monopoly, has been unable to compete successfully. More about Microsoft and competition below.

Windows Vista debacle
Windows XP was barely out the door when Microsoft announced it had started up design work on XP's successor, initially codenamed Longhorn, which the company projected to deliver within about three years. To help fund that development effort, Microsoft started selling an expensive subscription "software assurance" program to its largest enterprise customers, offering "free" upgrades to a loaded Enterprise Edition of the next version of Windows and its other software products, along with staff training, employee discounts, extended maintenance support and other benefits.

Those three years turned into four, five, nearly six years before Microsoft finally unveiled Windows Vista to its corporate customers in late 2006 and to the public in January 2007.

Certainly companies that had signed up for the software assurance program in 2001 and continued paying for it all those years felt that Microsoft had taken advantage of them by failing to release the successor to Windows XP for so long. Sure, they had received a couple of Service Packs for XP and a stream of bug patches for security flaws, but then so had everyone else, free of charge. That led to a souring of corporate attitudes towards Microsoft that it began to see with its late release of the deeply flawed Windows Vista.

Most of Microsoft's enterprise customers have rejected Vista. The company may claim to have sold about 100-150 million copies of Vista, but most of the Vista licences bought by Microsoft's corporate customers have been downgraded to install Windows XP instead.

Market penetration of Windows Vista in corporate accounts still languishes below 10 per cent, more than two years after its initial release. It's perhaps fair to think that most of the people actually using Windows Vista are private consumers, and it might even be the case that the overwhelming majority of those consumers who have acquired Vista got it preloaded on newly purchased PCs.

Failed Yahoo acquisition
Microsoft was rebuffed early last year when it offered to acquire Yahoo for more than $44 billion in cash. At the time, then Yahoo CEO Jerry Yang represented that he and the Yahoo board of directors wanted Microsoft to offer more for the company, but it was widely understood that they simply didn't want to sell out to Microsoft, for fear that it would destroy the Yahoo brand and operations that they had spent more than a decade building up into one of the premier and most respected portals on the Internet. Although some major shareholders were furious at Yang for refusing to sell out at the high price Microsoft was offering, he and his allies on the board managed to prevail even in the face of a threatened proxy battle, and Microsoft, apparently unwilling to risk an expensive and potentially unsuccessful hostile takeover bid, eventually withdrew its offer in May.

Yang decided to step down last November, but not before he saved the company from Microsoft, and his departure was orderly rather than the result of a boardroom revolt.

By making its play for Yahoo, Microsoft revealed that it regards its own web search and advertising operations as weak and unlikely to gain significant market share away from Google without an infusion of more talented professional employees and major additions to its existing customer base.

Coming as it did after it had become obvious that Windows Vista was such a failure, this failed attempt to acquire Yahoo left Microsoft looking almost like it couldn't do anything right - not to mention that Yahoo's unwillingness to be acquired by Microsoft reflected a definitely unflattering light on the larger company.

Increasing competition
All business people dream of having a monopoly, which would let them offer products of whatever quality they pleased and demand very high prices from captive consumers who would have no alternative sources of supply. Microsoft had the misfortune of stumbling into a monopoly at its founding, when IBM granted it the exclusive franchise on MS-DOS, which was the operating system IBM distributed with its original IBM PC system in 1981.

The rest is history, as they say, but the immediate result was that Microsoft grew up in the hothouse atmosphere of its MS-DOS monopoly, and thus it abhorred any competition from its very beginning. Microsoft's strong aversion to having to compete only continued after it released its first version of Windows in 1985. As Eric S. Raymond memorably put it, Microsoft's Windows operating system was: "A 32 bit extension and graphical shell for a 16 bit patch to an 8 bit operating system originally coded for a 4 bit microprossessor, written by a 2 bit company that can't stand 1 bit of competition."

Microsoft's near-monopoly in the PC marketplace was largely based upon its oppressive operating system preload agreements with the large PC manufacturers, agreements that required them to pay Microsoft for Windows licences on all of the machines they shipped, whether or not they actually preloaded Windows on all of the systems.

Microsoft was forced to abandon some of its more egregrious practices with respect to preload agreements in 1994, and - as software alternatives based on Linux have become available - a few of the large PC manufacturers are offering those to buyers. However, one result of such agreements and other anticompetitive practices was that the company avoided or stifled effective competition from other operating systems and applications for most of its early history.

A couple of applications programs did compete with Microsoft early on - the Lotus123 spreadsheet and Wordperfect word processing applications come to mind. But Microsoft deployed its control of the operating system interfaces and document formats, along with a variety of other tricks, to effectively drive those other applications into decline if not entirely off the market when it released and later upgraded Windows and its soon dominant Office suite of applications.

Thus, by not having had to face any serious competition in its earliest years, Microsoft did not learn how to compete fairly on the intrinsic merits of its software products. As the company grew larger, Microsoft's corporate culture grew up lacking clear focus on developing truly excellent products that delivered good value, because its customers had to buy whatever it decided was "good enough" to release.

Microsoft found that "good enough" meant it could release software that worked most of the time but not reliably, let its customers find its software defects for it (after they had already bought the products), and release revised versions of the same products every couple of years to keep customers sending it money on a treadmill of upgrades. Because it had a near monopoly, Microsoft itself as well as a lot of its employees became wealthy. But it didn't learn how to compete, even though it did finally manage to cobble together some mostly stable and halfway decent software products by 2001, after only 20 years.

It got away with that for so long because - even after a couple of competitors appeared - the combination of manufacturer preload agreements and other anticompetitive actions, network effects, and strategic errors by its competitors shielded it from competition. As a result, Microsoft has only recently started learning how to compete on a level playing field, and it is finding that difficult.

Microsoft is finding it hard to learn how to compete fairly because by now it's a fairly big company with a well established corporate culture - a culture of stealing the good ideas, bundling functions into its operating systems to strangle smaller competitors, screwing its customers and even its 'partners', subverting industry standards to lock customers in and potential rivals out - which is finally struggling to change its ways. And it's not clear yet that Microsoft will succeed in going straight.

But the company's history of successfully preventing competition has had consequences, not least of which have been the company's high-handed treatment of its customers and its rather spectacular marketing, design and execution errors that became all too painfully evident in the debacle of Windows Vista.

Microsoft's failure to deliver a capable, snappy and attractive successor for Windows XP in Windows Vista opened a window of opportunity, so to speak, for competing operating systems. And as luck would have it, Apple's Mac OS X and new versions of major Linux brands were ready to take advantage of the situation.

Unlike it was ten years back, or even as recently as five years ago, it's no longer such an overwhelmingly Windows-centric world out there. Walk into any Starbucks coffee shop anywhere, especially in a University district, and you're just as likely to see someone using a Macbook as a Windows laptop. More people, especially professionals whose work requires computing skills, are comfortable using multiple computers running different operating systems.

Increasingly these days, paralegals, engineers and architects, as well as management consultants and marketing people, might be found to have different operating systems running on two or even three different machines. One might be a Windows machine, if their work requires it, but it's just as likely that they might have a desktop running some flavour of Linux and an Apple Macbook running OS X, or maybe a desktop and a netbook, both running Linux.

Last month web metrics firm Netapp released some statistics it gathered based on 160 million visitors to its hosted domains. It said that Windows' market share is now below 90 per cent at 88.26 per cent, while Apple Mac OS X market share has reached nearly 10 per cent at 9.93 per cent, with the rest accounted for by Linux. The Linux figure might be lower than its actual market share on individual computer users' systems, but that's what Netapp reported.

This is all healthy and good, just as the Windows software monoculture that existed ten years ago was not only stultifying but also a pervasive security concern and unhealthy for both business and consumer computer users as well as the information technology industry as a whole.

However, it has got to have Microsoft worried, and rightly so. And that's healthy for the industry, too.

Consumer backlash
Corporate customers, and not a few consumers, might be understandably resentful that Microsoft delivered in its Windows Vista an operating system that had so many serious flaws and required the purchase of new PC hardware having more memory and newer video graphics parts to run acceptably well.

It's quite telling that recent migrations to Windows Vista by corporate accounts didn't pick up after Microsoft released its Service Pack 1 to fix most of the initial release's device incompatibilities and performance issues. And having been burned by trying Vista, many potential buyers might adopt a wait and see attitude about Windows 7, whenever Microsoft finally releases that.

Microsoft damaged its Windows brand by releasing Vista, and now it's going to have to earn back the trust of most of its large enterprise customers as well as many ordinary consumers. If Windows 7 and its related software products aren't really good, Microsoft could face the prospect of customers abandoning it to migrate away to other operating system, server and applications software alternatives.

Conclusion
By announcing that it's going to be opening its own retail stores to resell its brand of personal computing, Microsoft is admitting that it realises it has an image problem.

That Microsoft has an image problem has been apparent to a lot of people for a long time, but the company's penalties imposed by the EU Commission, its failures to gain traction with most of its diversification efforts, its stumbles with its Windows Vista catastrophe and its rejection by Yahoo, as well as the relatively recent appearance of some serious operating systems and applications software competition, all culminating with the looming possibility of a real corporate and consumer customer backlash in the near future, must have it worried indeed.

That Apple's gaining market share can't be very comforting right now to those occupying Microsoft's executive suite, nor can the growth of Linux awareness and acceptance in the general consumer population. Welcome to the real world, folks.

Microsoft might have to finally learn how to compete fairly, without the great advantage of its formerly overwhelming industry dominance that had been due to its practically unassailable Windows operating system monopoly. It seems to be trying to get Windows 7 right, after having failed so utterly with Windows Vista, and it is going to have to get Internet Explorer 8 right too, in order to have a good chance of regaining consumer trust and approval in the computing marketplace.

But maybe I'm wrong, perhaps for Microsoft this really is merely about doing something to counter those wickedly effective Apple ads. X