Analysts weren't surprised to see Microsoft report a 35 percent jump in quarterly profit this month. That's because its software sales have been bolstered by Windows 7, which has soared like an eagle compared with sales of Vista last year.
Microsoft's success over much of the past decade has been closely tied to corporate sales of Windows, Office and server software. But, amid rising competition from Google and other companies, the software giant is gradually offering more Web-based "cloud" computing services while boosting its visibility in the gaming and smart phone markets with some new hardware and software.
And it's also doing some mixing and schmoozing with technology trendsetters: teenagers, college students and Gen Y-ers.
Surrounded by college and graduate students who came to Washington, D.C., this week to compete in the U.S. finals of the Imagine Cup -- a competition focused on creating innovative software and games with a social mission -- Craig Mundie, Microsoft's chief research and strategy officer, offered a glimpse into Microsoft's future this week.
Mundie said the technology industry is looking at a major change in the next three to five years: the arrival of microprocessors with the potential to make everything from laptops to smart phones 50 to 100 times more powerful.
Personal Interfaces
Mundie said these souped-up devices could deliver a "natural user interface where, in fact, machines have vision, they have hearing, they have speech recognition and synthesis and they have, of course, the ability to recognize touch."
Computers will become more like a partner: "It will be like having a great personal assistant," Mundie said. "The longer it works with you, the more it understands, the more context it has -- and therefore the more it can anticipate and help us solve problems that perhaps we might have not developed an answer for ourselves."
Mundie said computers of the future may actually present themselves as avatars to facilitate communication -- especially as cell phones and smart phones become more commonplace among some of the poorest populations on Earth.
Despite the overture to students, appealing to those between 15 and 30 in the consumer marketplace won't be easy for Microsoft.
"Microsoft, in many ways, for people of that age -- that's their father's technology company," says Carl Howe, a consumer research director for Yankee Group.
Microsoft may not enjoy the same coolness factor that Google or Apple might have, but it has created a substantial following with products like the Xbox.
Innovation In Gaming; Bye-Bye, Courier
Mundie said the company will release its much anticipated depth-camera peripheral for the popular gaming console later this year. The camera will sense bodily gestures and react accordingly.
So if you're playing a driving game, you would simulate steering with your hands and accelerating with your foot without actually having to use a controller.
Despite its success with the Xbox, Morningstar equity analyst Toan Tran says, "Microsoft, for the most part, doesn't quite get the consumer."
Still, analysts say the company is hoping to regain its footing in the smart phone market with the introduction of Windows Phone 7.
With Apple's much-hyped iPad debut, speculation had been mounting about whether Microsoft would release a two-screen tablet device, code-named Courier. The company had kept mum about the project. But on Thursday, Frank Shaw, a Microsoft spokesman said in a blog post that plans for the device have been shelved, noting that "its technologies will be evaluated for use in future Microsoft offerings."
A Cloud Dilemma
How much will Microsoft embrace cloud computing?
"The growth of Web-based applications and cloud computing are definitely huge threats to Microsoft's business," Tran says.
The company already faces competition from Google, which charges an annual fee of $50 per user for companies to use e-mail, calendar and document management systems that are part of Google Apps. Google also offers a free consumer version.
Microsoft already offers Web-based services for Windows, Office and the Xbox, and Mundie says the release of Office 2010 will also include additional cloud services. Microsoft sees cloud services as something that would "work in conjunction" with existing software sold to clients, he says.
Tran says the company's biggest asset is its "ecosystem of third-party developers" who helped create Windows' dominance by building applications for Microsoft's desktop system. But if the brightest programmers -- including those who gathered for the Imagine Cup -- decide they'd rather build applications for the Web, the iPad or iPhone, then Microsoft could suffer a brain drain.
"Windows is still a huge force, but how much innovation have you seen in desktop applications?" Tran says. "All of the innovation has happened on the Web in terms of Web-based applications."
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