A Retreat From What Microsoft (MSFT) Holds Most Dear

For more than a decade Microsoft’s OS has not only been the company’s cash cow, it has been the saber the company has used to cut into strategic markets. The OS was Microsoft’s way into the browser market, the internet portal, and the media player business. It used the sword on Netscape, AOL, and RealNetworks (RNWK).

As time passed, the world’s largest software company paid a price. It was chased by the Justice Department, state attorneys general, and overseas bodies including the European Union. It paid hundreds of millions of dollars in fines and damages. But, it has already damaged competitors, and, so, perhaps the price of the penalties was cheap, simply a toll on the road to dominance.

Microsoft (MSFT) has just cut a deal with Justice and some of the states based on a complaint by Google (GOOG) that Redmond had set up the new Vista OS to make it more difficult for outside firms to run their desktop search on top of the new MSFT software.

The fact that it was Google which brought the complaint, and Google who is the big winner in the Microsoft retreat is telling. The search company has become powerful enough so that MSFT cannot bully it as it might have smaller firms with smaller resources. Google has now shown it can get the upper hand, and Microsoft has to deal with the fact that its years-old strategy for entering new markets may be irreparably broken.

The king of software has, in many ways, lost its teeth.

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