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Despite Record Earnings, Microsoft is Shooting Itself in the Foot!

All right, ladies and gentlemen, here’s the good stuff, at least if you’re a Microsoft employee or stockholder: For its fiscal third quarter, ending March 31st, earnings rose to $4.93 billion, or 50 cents a share, compared to $2.98 billion, or 29 cents per share last year. Total sales increased by 32 percent to $14.4 billion.

Indeed, Microsoft earned a whole lot of cash, most likely because of the arrival of Windows Vista and Office 2007, which gave them something new to sell.

So you’d think the company is in wonderful shape, and indeed their stock price jumped $1.05, to $30.15 per share, in after-hours trading. Clearly Wall Street likes the numbers, although not quite as enthusiastically as Apple’s.

On the other hand, when you look past Windows and Office, things aren’t quite so rosy. Take the Xbox 360 game and the Zune music player, which, together, showed a 21 percent decrease in sales to $929 million. As a seasonal decline, maybe that’s not a whole lot. But the problem is that these products have yet to become profit centers. This is particularly true with the Xbox, which has cost Microsoft billions of dollars since it was released.

Of course, with its huge hoard of money, Microsoft can afford to subsidize these products for years and not seriously suffer from the ongoing investments. Certainly, you have to admire their optimism, that they believe in these ventures and hope that some day, maybe not this year or the next, the Xbox will be a cash cow and the Zune will make a serious dent into the iPod’s market share.

You can certainly understand that Microsoft realizes it can’t sustain itself until the end of time on Windows and Office, plus related products, and that they need to diversify. However, are they doing all they can to move beyond their core businesses?

Well, the Xbox has surely gotten good reviews, and millions of gamers love them. The worst you can say, perhaps, is that Microsoft is taking the same tact as a printer maker. They sell the basic hardware for the lowest price possible, and depend on the sale of the things you need to use the product to make profits.

With the Zune player, you have to wonder, though, just what Microsoft is thinking by selling the player at a loss. If you can believe what Apple says in its financial reports — and there’s certainly no reason not to — Apple makes a ton of money from the sale of every single iPod. They never lose a dime from anything they sell!

So, other than being competitive, or mostly competitive, why would Microsoft take a loss on every single Zune it sells? Where are the profits coming from? Well, I suppose there’s the music, right? They’re taking the same approach as with the Xbox, hoping to make up the difference at the Zune Marketplace.

That business plan, however, is questionable. The nasty truth is that the profits from iTunes are relatively small in the scheme of things. Surely they’re not enough to subsidize the sale of iPods, and, fortunately for Apple, it’s not necessary.

So why can’t Microsoft, a much larger company than Apple, keep its expenses down so that it doesn’t take a loss on every Zune it sells? Well, there are those economies of scale, of course. Apple moves far more product. In addition, Microsoft has taken the bullet-point approach in creating products, which is to add features the competition doesn’t have. In this case, a built-in FM radio and Wi-Fi.

These two subsystems clearly add to production costs, and it’s hardly certain that they have impacted sales all that much? I mean is Apple wrong not to have an FM tuner in the iPod? After all, they’re available from third parties as add-ons if you need them.

Wi-Fi? Well, I suppose there might be a benefit in being able to send and receive content, but the feature is so crippled on the Zune, you have to wonder why it is even offered at all? In case you haven’t been following this — and why would you? — it’s because the tracks you squirt to a fellow Zune player, assuming one can be found, are overlaid with a time bomb. Three plays or three days, whichever comes first, and they’re useless.

So, yes, Microsoft is doing well enough to keep its people happy. But on a long-term basis, there are troubling signs. They’ve yet to learn, for example, that you can’t create hot new products that people lust after with committees and marketing departments. Something has to change. The question is whether Microsoft’s emerging new leadership understands that, or whether they will continue on the long road to eventual irrelevance. Not this year, or the next, but five or ten years from now, things just won’t be the same.