Mobile, Consumer Businesses Remain Troubled

Microsoft is entrenched in business and consumer consciousness as the company that owns the Windows OS and the Office productivity suite. But Apple has made serious inroads recently, capturing the imagination of both business and consumers with its iPad tablet device. Is Microsoft's efforts to protect its core markets hampering innovation? Some say yes.

The problem is partly perception, suggests Patrick Becker Jr. at Becker Capital Management, a value-oriented fund manager. "They don't get very much credit for what they do on the business side. For whatever reason, you do well with the consumer, and you get a higher multiple on your stock."

Digital Doubts

On the downside, Microsoft's entertainment and devices unit, which includes the hit Xbox game system and the less successful phone operation, is much less profitable. The online services business, including the Bing search engine and MSN internet portal, is a perennial loss-maker, leaking almost $6 billion out of the company in the last five years alone.

More broadly, there is concern that Microsoft has not prepared well enough for the shift toward mobile computing.

Some major holders have been selling. Fund firms Fidelity and T. Rowe Price cut their holdings by almost one-fourth in the second quarter, according to Thomson Reuters data.

"Tablets -- the iPad in particular -- and the smartphone market are major overhangs and discounted heavily in the stock," said Ken Allen, portfolio manager of T. Rowe Price's Science and Technology Fund, although he is still positive on the company's growth prospects. "There is huge investor fear around those two areas, especially with the iPad being successful so far."

It's too early to say whether Microsoft's new phone software -- its last ditch attempt to catch up with Apple and Google in the burgeoning smartphone market -- will be a success. The phones, with glossy touchscreens and 'live tiles' to quickly access e-mail, the internet and applications, go on sale in the United States in November.

There is a growing feeling that the $9 billion a year Microsoft is now spending on research and development -- totaling almost $69 billion over the last decade -- has not brought the breakthroughs it should.

"Comparing Microsoft to Apple over the past 10 years in terms of innovation, new products and completely new businesses, the differences are pretty obvious," said Don Dodge, a former 'startup evangelist' at Microsoft, who now works for Google. "What did Microsoft investors get in return for their investment of over $75 billion in R&D and acquisitions?"

That view is shared by another former high-ranking Microsoft executive, still active in the technology sector, who asked not to be identified. "There probably isn't another company in the world that has the same amount of raw talent and smart people," he said. "Then you look at the results over the last 10 years and they're not so impressive. How do you explain that gap?"