Microsoft: Tablet PC May Be The Next Xbox

Microsoft (NASDAQ: MSFT) has been pretty good at protecting a lead. Its Windows 7 franchise has kept it well ahead of any other PC operating system and produced record sales after the disappointing launch of its predecessor Vista. The Windows division of the company still has 70% margins. Challenges from Google Inc (NASDAQ: GOOG) and enterprise software firms have not done much to hurt Redmond’s lead in business and server  products.

Where Microsoft has failed is in internet search, a business were it has not been able to come from behind to catch Google. Microsoft’s joint venture with Yahoo! (NASDAQ: YHOO) may help, but many experts are skeptical.

The market is also skeptical that Microsoft can have much success in the tablet computer business, which Apple (NASDAQ: AAPL) already dominates with its iPad. None of the large PC companies has been able to mount a challenge to Jobs & Co.

Microsoft pushed the proposition during its analyst day on July 29 that it will make up ground in tablets and that Apple’s lead is not insurmountable. Doubters probably made up nearly 100% of those in attendance.

But Microsoft does have one model of success for the tablet market and that is its Xbox franchise. When the Xbox was released in 2001, Sony ruled the video game console market with its PS2. Nintendo owned most of the portable console market due to the success of its DS product. It cost Microsoft seven years of loses to catch and then pass Sony. Redmond has a reasonable chance of catching the market leading Nintendo Wii, an aging platform

The lesson that Microsoft has taught the market is that it is willing to spend billions of dollars to gain share in a business that its considers strategic to its future. It is willing to spend the money despite skepticism. Microsoft is also willing to put its still formidable technology resources to work to make itself a place in a business in which the market leader appears to have a large lead. Apple may have a head start, but that is not guarantee Jobs can keep it.

Douglas A. McIntyre