The biggest threat to Microsoft is Microsoft

I was reading this article on Microsoft having it's revenue eroded because of low cost hardware. The author made some interesting points, but I think there is a bigger issue that Microsoft is facing. While the market is pushing toward lower cost hardware, this trend has been going on for years and isn't the big problem. The elephant in the room resides in your pocket, lets mom know you're safe and comes with nifty ringtones.

Modern PC's are used for a great many tasks and they do them quite well. So well in fact that the only technological advances that we've seen in this area have been incremental. Quicken 2008 looks like 2009 and 2010. We've plateaued, at least for now. Current innovations are in real-time, portable, personal media and communications. PC's aren't the platform and never will be.

Smartphones are the new technological touchstone. They are dynamic, constantly following us on our kinetic lives, connecting us with our loved ones and documenting our adventures. And now they are the interface for the human experience. Witness the smarthone's effect on the Iranian revolution. Apple saw this to some extent and threw fuel on the fire with the iPhone. RIM(Blackberry) is playing catch-up but appears to be hobbled by their devotion to corporate America. Android is a small but growing contender. Microsoft, however, completely blew it. It has had a foothold in smartphones since the Palm days, but couldn't close.

The reason? Microsoft's financial foundation is built upon legacy revenue streams. It is this market that it's afraid to disrupt. And all new technology is fundamentally disruptive. Smartphones could eat into the PC's market if they became too powerful. Why buy Outlook when your email and calendar are in you hand? And who will buy a $300 package for a smartphone they probably got for free? It's not a platform for Microsoft's sales model.

Thus they made the conservative choice and failed to innovate. This is a very serious problem for them as it appears that the consumer market is moving away from the platforms that Windows is geared towards. Windows 7 is a move in the right direction, but the competitors are nipping at its heels. The reality is that Microsoft is being outflanked in nearly all areas, with the possible exception of the Xbox.

What will the future hold? Microsoft has touted that Windows is installed on over 75% of all new netbooks. However, this is considerably less than the 90% dominance that it enjoys on the PC market. If this trend holds, then we will see further market erosion. Firefox has already established itself on 30% of PC's and according to some sources will soon approach 50%. Clearly, Microsoft is losing consumer mindshare. The safe money appears to be on the open source software movement from which Linux, Android, your beloved Tivo and to some degree Apple Mac OS X are built upon.