Microsoft Will Play The Eunuch No Longer

From 1987 to 2002, Microsoft was THE American company. As its growth accelerated, it was able to get huge percentage gains in revenue, even off already large numbers. Revenue in 1997 was over $11.4 million. By 2001 that figure was $22.3 million. The company crushed competitors like Corel in word processing. It buried Lotus Notes. Netscape saw its majority share in the browser market disappear in a few short years. Media player companies like RealNetworks were savaged as MSFT incorporated its own media player into the Windows OS.

And then the music died. New initiatives like the MSN portal and ISP could not catch Yahoo! (YHOO) and AOL (TWX). Patent suits hit the company as smaller competitors went after Microsoft’s large cash position. The US government and European Union charged Microsoft with antitrust violations.

The Big Man was castrated. From 2002 on, the stock never broke $32, and it fell to to $23 in 2003 and again in 2006.

But, the mad scientists in the basements of Microsoft’s campus in Redmond worked on. They built the Xbox. began work on the new Vista OS and even hatched the new Zune multimedia player. To counter moves by Google (GOOG) and others to deliver server-based software, they created their own competing products, dubbed Microsoft "Live".

And, the faithful seem to have been rewarded. Microsoft’s shares have risen from under $22 in June to $30, and with the company’s Q4 earnings viewed as positive, the stock is bound to go higher.

Microsoft’s Q4 results topped estimates for both revenue and EPS. A few short years ago, the markets believed that the Xbox could never compete with Sony’s (SNE) mighty Playstation.  But sales of Microsoft’s game platform and server software drove results higher. Deferred revenue for the Vista and Office 2007 products hit $1.64 billion. MSFT pointed out that if the revenue had hit Q4, the top line would have grown 20% over the same quarter last year.

With Vista’s consumer launch still ahead of the company, it would seem very likely that the balance of calendar year will be extremely good to Microsoft and that its days chained in a cage by lack of product innovation and antitrust issues are behind it.

Companies like Sony and Google once again have reason to fear MSFT’s technical prowess and balance sheet. With cash flow from Vista, Office 2007, and server software products, the company can make the market ugly for competitors again.

Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.