Almost 10 years ago Bill Gates said in an interview that one day Microsoft would be replaced.

Gates’ prescience was accurate. The rise of Google is a threat to the future of Microsoft. Not just because of the rise of search as the key internet tool, but also because the web is becoming the platform for software development and delivery.

Microsoft’s failed $47bn (£23.8bn) bid for Yahoo shows how important search and web advertising is to the future of any software company.

On the business side other threats may yet undermine Microsoft’s dominance.
The rise of virtualisation and software as a service pose threats, though Microsoft says these are opportunities. And the adoption of open source operating systems and applications have all eaten into Microsoft’s business, especially in the public sector.

As Gates departs we examine where next for the world-beating company.

Operating Systems

Some believe the ubiquitous Windows operating system faces an uncertain future. In the medium term Windows Vista has been assailed on all sides as too slow and over-functional.

Support for Windows XP has been extended and it is only through relentless pressure that Microsoft has convinced large organisations to adopt its latest operating system.

Windows 7 is likely to be the next version of the Vista client and is expected in 2010, though reports have suggested that Microsoft may never opt for another blockbuster client operating system release.

Windows Server 2008 was released in February 2008 with the next version Windows Server R2 expected in 2010. On the virtualisation front the Windows Hypervisor, named Hyper V, is scheduled for delivery in September 2008.

Specialised Windows Server versions for storage file and print servers will continue shipping through resellers

Development tools

Microsoft’s professional application development platforms have been under threat recently from open source programming tools.

The firm owns the Visual range of developer tools and languages, including Visual Basic, Visual C++, Visual C# and the Visual Studio suite, as well as web development platforms such as ASP.Net, Internet Explorer and Silverlight. It also offers the .Net framework and database languages and tools based on SQL Server.
Microsoft says it has no problems selling development tools despite costly user licensing schemes and complex feature sets.

But in smaller software houses, education institutions, and those looking to build simple applications at low cost, it is struggling to compete with leaner open source development tools.

The supplier faces development platforms based on Java and PHP from groups such as Apache, Eclipse and Ruby on Rails, as well as database management platforms such as MySQL, now owned by Sun Microsystems.

Most are available either for free or at lower cost than licensed software, and are designed to run on open source operating systems such as Linux.
Perceived advantages include better community-based support and modification of the underlying source code.

Microsoft recently freely offered skimmed-down versions of its development tools to compete. “It’s important for people to look at the free support offered in the Microsoft Software Development Network library,” said Clive Howard, of development agency Howard Baines.

Server/desktop

The death of Microsoft’s cash cow PC applications such as Office has been predicted for many years. But even though open source alternatives are freely available Office continues to ship in vast numbers, with sales expected to hit $10bn by 2010.

Following last year’s Office upgrade no further releases have been announced, but another is expected in 2010.

In business applications, Microsoft is up against the likes of SAP, Oracle and Sage. The firm says its approach to customer relationship management (CRM) and enterprise resource planning packages is that of “composite applications” which it describes as “tying together functionality from different sources”.

In 2010 Microsoft’s highest-end integrated business productivity product, known as AX, is expected to receive an upgrade, which will be based around web services.
Dynamics CRM 4.0 is expected to get an upgrade no sooner than 2009.

“We are bringing business systems together with productivity and collaboration software and the online world,” said Microsoft chairman Bill Gates.

Cloud computing

Cloud computing services are central to Microsoft’s strategy as it diversifies its revenue models.

It already offers services online under the “Windows Live” banner. For consumers, there is email, photo sharing, and online storage services. All are still at the beta phase of testing, but the services will be free and funded by advertising. Final versions are expected next year.

Business versions of the Exchange e-mail, SharePoint document management, Office Communicator, and Dynamics CRM systems are available as hosted services on a subscription basis to companies with fewer than 5,000 workers, and will be available for all companies this year.

Search Server 2008 Express will be available as a free download this year.
Earlier this year chief executive Steve Ballmer indicated that the company was working on providing services such as virtualisation, security and datacentre management in the cloud; no dates have been set for rollout, although announcements are expected before the end of 2008.

The recent announcement from SAP that its ByDesign hosted business software package for small firms will be delayed by over a year will provide further incentive for Microsoft to accelerate its move to capture the market.

A key notable absence is the availability of Word or Excel online ­ a move Google has already made with its Google Apps software.

The internet

Microsoft’s attempts to boost its presence in the search engine market by buying Yahoo apparently ended this month, when its quarry announced a renewed advertising partnership with Google.

But while the corporation publicly states it has given up its pursuit, not everyone is convinced. “We don’t fully believe that the Yahoo deal is dead,” said David Mitchell Smith, Gartner Fellow. “There is still a chance for some kind of arrangement at some kind of price, but failing that there are plenty of other firms they could look at.”
An extension of Microsoft’s existing deal with Facebook is one possibility, while online rumours suggest a possible interest in eBay, said Smith.

Retail

At the start of June Microsoft opened online stores serving UK and Germany, the first in a wave of e-retail outlets. While the company maintains that it will still work with third-party vendors, the new sites allow Microsoft to directly sell software to consumer users.

The Xbox 360 console will also play a large role in Microsoft’s ongoing strategy. A new 60GB hard drive version of the machine is expected to be revealed in the US next month.

Mobile

Microsoft is aggressively pushing its Windows mobile software to smartphone makers. The company has tie-in deals with Samsung and Motorola and shipped 4.3 million units in the first quarter of 2008.

Analyst IDC estimates sales of Windows Mobile smartphones will be double that of the iPhone over the next four years. Microsoft has announced it will improve the music-playing software on its mobile devices to challenge in an area traditionally dominated by Apple.

Ambrose McNevin, Martin Courtney, Tom Young, Angelica Mari, and Neon Kelly contributed to this article.