7 Ways To Save Microsoft In 2011

2010 started with a bang for Microsoft. The company was riding the momentum from its Windows 7 launch the previous October, CEO Steve Ballmer commanded the stage at the Consumer Electronics Show to tout Microsoft's tablet plans, and its introduction of the KIN social networking phones promised to restore the company's place in the mobile market and capture a new generation of users.

Cue the whimper. After 12 months, Windows 7 is selling well, but the real buzz in operating systems has been stolen by Google, which this year will introduce a series of potentially game-changing netbooks powered by its Chrome OS. Windows-based tablets are almost nowhere to be seen, and the KIN died an early death amid abysmal sales. With those challenges in mind, here are seven strategies Microsoft must pursue this year to restore its cred.

Phones, phones, phones. Ballmer must pull out the stops and establish his company as a legitimate contender in smartphones. Microsoft launched Windows Phone 7 with a big marketing campaign in October, but early sales numbers indicate it has more work to do. About 1.5 million Windows Phone 7 handsets, from vendors like HTC, Dell, and Samsung, shipped in the operating system's first six weeks on the market, according to Microsoft. Not bad, but it's not enough to cause Steve Jobs to lose sleep.

Apple's iPhone sold 3 million units in just three weeks during its debut period. Ballmer must use all of Microsoft's remaining clout with retailers, channel partners, and OEMs to push Windows Phone 7 devices to the forefront. Otherwise, the company could become an also-ran in a category that Gartner predicts will represent the dominant computing platform by 2013, when there will be 600 million units deployed worldwide.

Produce a genuine tablet OS. Similarly, Microsoft is very late to hardware's other key growth market: tablets. Apple still rules with the iPad and will introduce an even slicker version in the coming months. Google, meanwhile, is fast becoming a player with Android-based devices from Samsung, Dell, and others.

Microsoft has been AWOL, and it didn't help when HP ditched plans for a Windows 7-based slate in favor of tablets that run its own Palm WebOS software. That should have been Microsoft's first clue that it needs to produce a true tablet OS instead of trying to shoehorn Windows 7 into a new form factor. PC operating systems are too slow and bulky for the tablet market, which demands instant-on and flawless touch screen capabilities. Microsoft's best bet: Develop a version of Windows Phone 7 geared for tablet needs.

Make Windows cheaper, or free. One way for Microsoft to fend off encroachments by Google and Apple into the desktop is to radically change the way it prices Windows. The company currently charges up to $319 for a boxed version of Windows 7 and licenses it to PC makers for anywhere between $50 and $100 per unit for preinstalled versions.

It's a good business – Microsoft generated about $12.9 billion in Windows OEM sales alone in calendar 2009. But it won't last.

Google is now looking to use its success in the cloud and in mobile to assail Microsoft's core desktop market, and it's offering Chrome OS virtually for free to OEMs. That means computer makers can charge a lot less for a Chrome-based machine than one that runs Windows, and pass the savings on to customers. Google recognizes that the real money to be made going forward is in online services like search, advertising, geolocation, and social networking, and that in the cloud age the OS is nothing more than a gateway to those services.

Consumers and businesses are already catching on and want less client and more cloud. Microsoft needs to respond by drastically lowering the price it charges end users and OEMs for Windows licenses.