"The Windows operating system faces competition from alternative platforms and new devices that may reduce consumer demand for traditional personal computers," the report warns, noting the possibility that software as a service and mobile devices could decrease the relevance of traditional PC operating systems. "Competitors such as Mozilla offer software that competes with the Internet Explorer Web browsing capabilities of Windows products. User and usage volumes on mobile devices are increasing around the world relative to the PC."
Firefox has been a success story against Internet Explorer, continually increasing its share against Microsoft's market browser for the last few years. The repeat -- and newly prominent -- appearance on the list of threats to Windows shows that Microsoft is aware of its own important balancing act as the company strives to maintain its relevance and dominance in the services era.
Microsoft has been spending billions on huge new data centers around the world, as recently as last month announcing a new one in Iowa. It's making major investments in search and advertising, has expanded consumer services, and has begun rolling out business services and will likely announce plans later this fall to compete with companies like Amazon.com in utility computing services.
"The ability to combine the power of desktop and server software with the reach of the Internet represents an opportunity across every one of our businesses," the company said. "As we continue to build out our services platform, we will bring a broad range of new products and service offerings to market that target the needs of large enterprises, small and medium-sized businesses, and consumers."
Still, Microsoft makes it clear in its report that much of the increase in revenue the company has seen in the last two years has continued to come from Windows. Preinstalled Windows copies account for more than 80% of Microsoft's client division's revenues, and more PCs sold around the world means more Windows copies sold as well. Microsoft characterized Windows Vista adoption in the last year as "widespread."
Whether that means Microsoft's operating systems are continuing to be well accepted is another matter entirely. Microsoft has begun embarking on a new marketing strategy for Vista 18 months after it was released, trying to convince people that they should buy it despite early criticism. It also recently lashed out at Forrester Research for what it said were "schizophrenic" reports on Vista's adoption rate.
In other competitive notes, Microsoft leaves Citrix off a long list of competitors to its server and tools business, which includes both Windows Server and Microsoft's Visual Studio development tools. Citrix increasingly competes with the group's virtualization products and isn't listed despite VMware's presence. Microsoft and Citrix have had a long partnership around Citrix Presentation Server, which is now known as XenApp.
Microsoft continues to up the ante in research and development, spending $8.2 billion in fiscal 2008. That's a 14% increase over the previous year's $7.1 billion investment, which itself represented 14% more than 2006. Still, all that spending doesn't represent all of Microsoft's investment in new technology, as the company spent $8.8 billion in 21 acquisitions last year, including $5.9 billion on advertising giant aQuantive and $1.3 billion on enterprise search company Fast Search & Transfer.