Has Microsoft lost it?

In July, Steve Ballmer told analysts that search was a key part of Microsoft's future. "There's a $1trillion market being transformed. That is such a huge opportunity. We have to seize it." While Ballmer admitted that so far, Microsoft's spending in search hasn't resulted in huge returns, he noted that the spending was "tiny relative to our business" and offered a good ratio of risk versus return.

Search is taking money from its other businesses, but Ballmer is convinced that it's where Microsoft needs to be. "Search is ripe for innovation," Ballmer says, and his internal memo to Microsoft staff explains what he meant. "We'll introduce new approaches that move beyond a white page with 10 blue links to provide customers with a customised view of their world," he wrote. "This is a long-term battle for our company—and it's one we'll continue to fight with persistence and tenacity."

Microsoft search guru Satya Nadella told analysts that "we think we're as good as Google" when it comes to relevance, and that Microsoft intends to make search better still by understanding user intent, offering cashback via Live Search, putting Live Search on popular sites such as Facebook, increasing the size of Live Search's index and improving relevance still further.

Another key area is marketing. As Ballmer put it: "Google doesn't have to. We do." Veteran Microsoft observer Joe Wilcox of Microsoft Watch agrees. "Google's dominance isn't assured," he writes. "Microsoft needs to keep pushing the technological boundaries and more aggressively market, market, market Windows Live Search. Microsoft, don't just sell advertising – buy it."

Microsoft, says Ballmer, will "re-invent the user model and business model. It's harder for the market leader to do this." However, as Silicon Alley Insider notes, "The market leader can sit back, watch others innovate and steal the good ideas. Microsoft used to be great at this... what do you think Google will do if it sees something it likes? Copy it. Immediately. Before users change [their] habits."

That's entertainment

Microsoft's entertainment portfolio looks decidedly mixed. The Xbox 360 has done very well, but the Zune music player is an also-ran and Microsoft's attempts to rival iTunes have been less than impressive.

Windows Mediapowered download shops have barely dented iTunes, which is now the US's biggest music retailer. Realising that selling songs that don't work on iPods means missing out on most of the market, retailers are increasingly dumping Windows Media to sell unprotected MP3s instead. Windows Media still has a role to play in digital music, but only in music subscription services.

Nick Thomas is the European Media Analyst for Jupiter Research. "Apple's success with the iPod has been to build an ecosystem around software, content partnerships and hardware, making its profits from the hardware," he says. "Microsoft doesn't have the content experience to build a compelling aggregated rival to iTunes and doesn't have the experience of hardware manufacturing (Xbox aside) on a scale to compete with the iPod."

As Thomas notes, the Xbox 360 has done rather better – partly because it beat the PlayStation 3 to market and partly because Microsoft created a very credible console for serious gamers. However, PS3 sales are catching up fast and Nintendo's Wii already outsells both consoles. "Sony's PS3 and the Nintendo Wii are competing on different fronts.

The PS3's Blu-ray compatibility gives it additional appeal to potential buyers who enjoy both games and movies, and will benefi t from the marketing push for Blu-ray titles in the all-important Christmas season." Microsoft tried to do the same with the Xbox, but backed the wrong horse: the now-defunct HD-DVD.

"Nintendo has taken the console market into whole new areas beyond core users," Thomas says. "Families and female users who would not have considered either an Xbox or a PS3 have bought a Wii to play Wii Fit, among other titles. Microsoft has been publicly dismissive of the Wii, seeing it as just a stepping stone en route to a 'proper' console like the Xbox, but given the relative sales of the two machines, that comes across as arrogance or sour grapes – or both. They say the Xbox is being positioned as a more family-friendly console, but their major games titles are generally more hardcore shoot-em-ups than mainstream family-friendly titles."