With word last week that Apple Inc (Nasdaq:AAPL) is now the world's largest technology company, it is certainly appropriate to ask the next logical question: "What happened to Microsoft (Nasdaq:MSFT)?". Even more relevant to investors, though, is the question of whether or not Microsoft can fix its issues and once again become not only the biggest tech company, but a creative, growing force in the business.

IN PICTURES: 20 Tools For Building Up Your Portfolio

What Went Wrong
Criticism usually starts at the top, and I am OK with that - if you want to sit in the big chair and make the big bucks, you take the blame as well as the credit. Steve Ballmer was named CEO of Microsoft in January of 2000, a time that just so happens to almost perfectly correlate with Microsoft's stock reaching an all-time high in December of 2000.

Some of Microsoft's issues have been external (costly litigation with the U.S. government and European regulators that drained away billions of dollars and a lot of management focus), but those are actually the smaller problems. On a more fundamental level, Microsoft badly miscalculated the dynamics of the search market and allowed Google (Nasdaq:GOOG) to dominate that industry. Likewise, Microsoft found itself outmaneuvered in other previous strongholds like browsers, where Mozilla caught the company sleeping.

Worst of all, though, has been the company's approach to both its core business and its biggest future opportunity. The launch of Vista was a complete mess, even worse considering the company has chosen to maintain a key focus on this low-growth legacy business. Meanwhile, the company's mobile strategy has gone almost totally off the rails and Microsoft is pretty much nowhere when it comes to the most dynamic segment of the consumer technology market. Along the way, the company has killed incubation projects that could have generated the creativity and the next break-out hits that the company so badly needs.

What Microsoft Can Do Now
The reality is that Microsoft has become something more like a services company - reliably kicking out updated versions of the operating system and core software packages like Office a few times each decade. That is much like what IBM (NYSE:IBM) was before its major transformation - a company living off of the profits of servicing yesterday's platforms.

Others have suggested that Microsoft break itself up, and I will join the chorus. A break-up could separate the low-growth legacy businesses from the high-growth emerging businesses and better align the company's resources and investor expectations. By creating two or more different businesses, with different cultures, agendas and growth profiles, the value of the individual pieces could ultimately surpass the value of the over-extended and stagnant monolith. Investors can look to examples like EMC (NYSE:EMC) and VMWare (NYSE:VMW), or Hewlett-Packard (NYSE:HPQ) and Agilent (NYSE:A) to see how spin-offs really can create value for all parties. (For more, see Parents And Spinoffs: When To Buy And When To Sell.)

Bottom Line
If you borrow a page from world history, you will notice that continent-spanning empires simply do not last. Many military leaders have built amazing empires in less than a lifetime, but nobody has been able to hold them. Simply put, maintaining an empire requires massive resources and organizational abilities, and to grow it further is a monumental challenge.

It may be the case that Microsoft is beyond help at this point. After all, IBM was the company that transitioned the world from the pre-computer way of doing business to mainframes. Microsoft transitioned the world from mainframes to PCs. Now it appears that other companies will pick up the legacy and transition the world to the post-PC era. But just as Microsoft's rise left little room for IBM to grow in its traditional businesses, so too is the rise of the post-PC leader likely to leave Microsoft as a legacy company. (For more, see The Successful Investment Journey.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  2. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  3. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  4. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  5. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  6. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  7. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
  8. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  9. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!