Microsoft needs more customers like Phil Bienert. The manager of customer-relationship management and E-business for Volvo Cars of North America, Bienert advertises on Microsoft's MSN Web site, uses Microsoft server software to let car shoppers E-mail Volvo dealers, and licenses Microsoft's Windows CE software for the navigation system in the dashboards of some Volvo cars. He's even bought the latest version of Microsoft's Content Management Server to keep the information consistent across Volvo's international Web sites.

	Volvo is searching for end-to-end connectivity, Bienert says.

Over time, Bienert envisions using Microsoft Passport and other .Net software to make sure customers need to sign on only once to a sponsored page on MSN and Volvo's corporate Web site. And he wants to expand Volvo's marketing to include interactive TV ads that are delivered through Microsoft platforms. "We're building relationships with Microsoft at the data, software, and media levels," he says. "We're trying to get to that ultimate Holy Grail of end-to-end connectivity for our customers." Microsoft's products aren't all integrated today. Still, he says, "We're right at the cusp of all this stuff taking off, and Microsoft has a hand in just about everything."

Microsoft is trying to introduce successful products in emerging consumer markets and tie them to its market-leading PC software and fast-growing back-end servers. If it succeeds, the company could give automakers, cable-TV operators, consumer-electronics manufacturers, and other consumer businesses low-cost, integrated tools for rolling out new services. And it could provide Act II for the world's largest software company, going beyond its staple Windows and Office franchises, keeping it as relevant--and controversial--in an era of pervasive computing as it was for PCs.

Microsoft plans to invest $5.2 billion in research and development this year, much of it in emerging markets for software that powers video-game consoles, automobile navigation and entertainment systems, handheld computers and cellular phones, and set-top boxes for digital TV. Earlier this month, the vendor said it had signed up 350,000 subscribers to its Xbox Live online gaming service, a harbinger of ways the company can deliver computing power that's not harnessed to a PC.

"For Microsoft to continue to grow beyond the desktop PC, it has to be doing this kind of stuff," says Jonathan Geurkink, an analyst at Ragen MacKenzie, a subsidiary of Wells Fargo Investments LLP. To compete with companies such as Sony Corp., "Microsoft needs to get a share of time in the living room," he says.

Microsoft is generating strong revenue and profits at a time when other tech vendors are listing. Revenue for Microsoft's second quarter ended Dec. 31 rose 10% to $8.5 billion, and net income increased 12% to $2.6 billion. Most profits come from Microsoft's mature businesses, though, such as Windows and Office. And revenue from its desktop operating system is stagnant. In January, Microsoft declared its first dividend, a sign it's changing from a hyper-growth company to a more mature one that doesn't need to hoard all its cash for future investments and acquisitions.

Microsoft's emergent businesses--MSN, its Home and Entertainment unit, Business Solutions software for small companies, and CE/Mobility software for wireless devices--generated $3.2 billion in revenue for the six months ended Dec. 31, a growth rate of 48% and about 19% of its total revenue. But those businesses lost more than $1 billion over that period. That's not counting $905 million in losses unattributed to any business division.

So the company is taking steps to ensure future growth. As part of a reorganization of its Windows-client business this month, Microsoft pulled 900 employees from its Windows development and business-productivity divisions to work in a new Windows Extended Platforms Division, which will prototype PCs of the future and manage initiatives such as the Tablet PC and Smart Personal Objects Technology, a combination of lightweight operating system, specialized chipset, and FM network that can deliver information about traffic, weather, and sports to a $150 watch. This fall, wristwatch manufacturers Fossil Inc. and Suunto plan to deliver the first Spot products.

Taking a chance on emerging technology could be a way to stay relevant, says Brewer, Fossil's VP of technology.

Taking a chance on the emerging technology could be a way to stay relevant, says Donald Brewer, VP of technology at Fossil. In addition to Microsoft-powered Spot watches, Fossil plans to sell a watch this spring featuring software from Palm Inc. "Either we go the way of the buggy whip, or we're a major player," Brewer says.

Microsoft's sheer breadth of products lets the company seal deals that other technology companies can't. To pump up the revenue it receives from cell phones loaded with its software, for instance, Microsoft is developing hooks to its server products. Microsoft Exchange Server 2003, due midyear, and Mobile Information Server, which provides cell-phone access to corporate E-mail, use Microsoft's active synch protocol to update the devices. If businesses want E-mail on the go, they have to buy Microsoft servers, too. "We look at these devices as potential Exchange clients down the road," says Ed Suwanjindar, a Microsoft product manager.

But David Nagel, CEO of PalmSource, the Palm subsidiary that develops its software, says Palm OS devices are better for business than Microsoft-powered PDAs, since they talk more readily to a variety of back-end software. "General industry trends are toward open server interfaces. Microsoft provides closed ones," he says.