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Last Updated: Friday, 16 June 2006, 12:54 GMT 13:54 UK
Q&A: What now for Microsoft?
More than three decades ago, Bill Gates co-founded a software start-up called Micro-soft.

Bill Gates and Steve Ballmer
Bill Gates steps back, but Steve Ballmer stays chief executive

Today, the Windows operating system created by Microsoft (the hyphen disappeared long ago) runs more than nine out of every ten personal computers in the world.

And few business PCs would be complete without the firm's Office package of so-called "productivity" software.

But Microsoft is very much a company created in Mr Gates's image. So what will life be like AB - or After Bill?


What does the change at the top mean for Microsoft?

In one sense, the headlines about Bill Gates leaving day-to-day management aside ignore an important detail.

Mr Gates gave up his job as chief executive officer - the company's boss, so to speak - six years ago, in favour of his old friend and colleague Steve Ballmer.

Mr Ballmer, the head of the company, is going nowhere, and in any case, Mr Gates is intending to stay on as chairman for as long as the board will allow.

That said, Mr Ballmer may be the company's head - but as chief software architect, Mr Gates has remained its heart.

The company's aggressive, take-no-prisoners style - its urge to dominate every market it enters, and what critics would see as its refusal to co-operate unless forced to do so - is a reflection of Mr Gates's (and Mr Ballmer's) approach to the software business.

There isn't any time in our history when there haven't been questions about Microsoft
Bill Gates

His successor as software supremo, Ray Ozzie, comes from a very different background: that of building collaborative, bottom-up systems.

The big question, then, is whether that difference in attitude may affect the company's broader behaviour - or whether Microsoft is to remain a reflection of its founder.

What about Microsoft's performance in financial terms?

Investors will probably be hoping that the changes at the top will be good news.

The company was once legendary for making its shareholders - many of whom were also its employees - exceptionally rich.

Ray Ozzie
Could the rise of Ray Ozzie mean a new personality for Microsoft?

But for the past couple of years its shares has been becalmed, while new rivals such as Google - and even old enemy Apple - have seen their stock prices soar.

Similarly, it might seem churlish for a company whose sales look set to top $50bn (27bn) this year and whose profits come in at about $1bn every month to be criticised for poor performance.

But investors and analysts worry that the company is still dependent on two key cash cows: its core Windows and Office products.

Each generates a gross profit margin of as much as 80%, called by some critics a "Windows Tax", which keeps the company's cash reserves - currently standing at some $35bn - topped up.

That sits awkwardly with the current trend away from applications sitting on the computer itself and towards services - often mimicking those applications, be they email, word processing or even hardcore office functions such as customer relationship management - sitting on the internet.

As that happens, the incentive to stick with Windows and Office, and the expensive business of upgrading and paying for licences on a regular basis, recedes.

Mr Ozzie already has an explicit brief to move Microsoft in this direction with an initiative known as Windows Live. Investors will be hoping his efforts are accelerated.

What about the company's legal troubles?

They haven't gone away.

Microsoft was famously found by the US courts to have breached anti-trust rules during its battle with Netscape for control of the web browser market.

The penalty was watered down, both by an appeal court judge and by the Justice Department - the plaintiff in the case - following the 2000 election victory of President George W Bush.

Since then, it has paid out billions to settle a raft of other cases, not to mention several intellectual property claims.

But in Europe its court battle over its fight to dominate the server and audio-video software markets continues.

The European Commission (EC) has voiced increasing irritation with the firm's legal tactics, and threatens to fine it 2m euros a day - backdated for more than a year - unless it behaves better.

Microsoft insists that it is the EC which is being unreasonable.

Without a truly radical shift in company policy, the case will continue.

Still, Microsoft's competitors must be breathing a sigh of relief.

Not necessarily.

Under Bill Gates, Windows has always been the company's crown jewels.

Google homepage
Google's rising share price has contrasted with Microsoft's

Everything it did had to boost Windows - and that is often seen as one of the reasons why many of its attempts to expand out of the office and into the living room have been less than successful.

Windows Media Centre PCs, for example, have failed to gain much traction. Windows-based mobile phones, despite strong niche popularity, have yet to constrain the power of the likes of Motorola and Nokia.

Its online service, MSN, is an also-ran when compared to Yahoo or AOL, while Apple's dominance in the MP3 player and online music sales market needs little explanation.

And the Xbox comprehensively lost the mindshare battle in the games market to Sony's Playstation 2 - as well as losing billions along the way.

With Bill Gates stepping back, the company may find it easier to adopt a more flexible posture to other markets - which could mean a sharper, less dogmatic and thus more successful strategy.

The new-generation Xbox 360, for instance, is designed as a media centre in its own right, without the need for a Windows PC - and is in the market a year ahead of Sony's PS3.

And a greater readiness to look for "win-win" solutions in its core market too - rather than the zero-sum approach which has long been its hallmark - may give it opportunities too.

How about its users?

Microsoft's most important user base is corporations: particularly the large ones who buy Windows, Office and server licences by the thousand.

For them, the biggest issue is whether Microsoft can move more quickly to keep its products secure, reliable - and affordable.

Vista, the next version of Windows, is now years behind schedule and has lost several of its most attractive features along the way.

Microsoft's licensing practices have sometimes felt as if the company was exploiting its near-monopoly on business PCs.

Its corporate customers will be happy if Microsoft can manage the transition to offering services without imposing punitive tariffs for using its software on demand, rather than as discrete products - and if Vista lives up to the hype.

As for consumers, most will simply be happy if the company's heightened focus on security continues - and, again, if Vista fulfils its promises.


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