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Microsoft’s Problems Mount

On the surface, if you’re a Microsoft stockholder, you’ll probably be reasonably pleased with their latest quarterly results, where higher revenue and profits were reported. All this despite the fact that they’re taking a $1 billion charge to cover the costs of fixing defective Xbox 360 consoles.

But it’s clear to me that the Redmond gorilla isn’t doing as well as they hoped. For one thing, they didn’t meet their goal of selling 12 million Xbox 360’s by the end of June. If you own one of these gadgets, you have to be concerned whether yours is going to fail next. No, this is not like some of the extended warranty programs Apple has had on note-books and other products. We’re talking here of dedicating roughly $100 in repair costs for each unit on a product that costs just a few hundred dollars. That’s one huge deal.

At the same time, the head of the Xbox division is taking a walk. Sure, it’s couched in the usual excuses that the executive, Peter Moore, is pursuing a more lucrative opportunity at Electronic Arts and wants to be closer to his family. But someone surely had to take a hit for the failures at Microsoft’s Interactive Entertainment Business division, and I can see where the buck has to stop somewhere.

Of course, you can’t expect a company, except in special circumstances, to admit that someone is being fired for being a screw-up. It just doesn’t happen very often.

Indeed, Microsoft has other issues that are threatening its dominance. Internet Explorer 7 debuted last fall as a “mandatory” upgrade to Windows XP users. It is the default, system-based browser for Windows Vista. Despite that, Mozilla’s Firefox continues to gain market share, especially in Europe. According to current estimates, in fact, Firefox is getting almost half the market in some countries.

Naturally, Microsoft will put the usual spin on the quality of its product and the value it offers to customers. But other than sites that require Internet Explorer to work properly, because of Microsoft’s proprietary components, just what value does Internet Explorer offer anyone? The ability to download malware without your permission?

I haven’t even added Apple’s Safari to the equation, because few are guessing just how well it’ll do on the Windows platform once the beta period is over. For now, it’s still a shaky release with enough bugs to put the kibosh on using it for regular browsing, and that’s not something only a Windows user is apt to say. I’ve tried the updated 3.0.2 version under Windows Vista  and I wasn’t overwhelmed. It’ll get there, but not yet.

Regardless, I am thinking that one solution to Microsoft’s problems may well be what TidBITS’ publisher Adam Engst suggested on this week’s episode of The Tech Night Owl LIVE, and that is that Microsoft might do well to spin off all but its core software business into separate companies. That would make it easier for them to jettison a division if its products didn’t succeed.

As it is, Microsoft rarely gives up anything. If something, such as the MSN online service, fails, they simply rename it to, say, Windows Live, develop a new marketing scheme, and continue to throw money at it.

Now, I can see the wisdom in nurturing a product in the hope that it will eventually become successful. Once the hardware defects are behind it, for example, the Xbox might become fairly profitable. It is, after all, a pretty good game console, according to most reviews.

The jury is still out on the potential for the Zune music player, however. Microsoft hasn’t said much about it lately, and one would think it would be time for a version 2.0 or some other variant to gain additional market share. At the same time, though, it would seem that whatever prospects the Zune might have are based on stealing sales from some of Microsoft’s PlaysForSure partners. I’m sure they aren’t pleased, but I can’t see that any of those companies would make a public break with Microsoft. They’ll either find new partners or put their best face forward and hope the Zune eventually goes away.

The same can’t be said for Dell, which has done a couple of things that cannot please Steve Ballmer and the rest of the crew at Microsoft. One was to once again offer a few models preloaded with Linux and the other was to allow customers to configure their new PCs with Windows XP rather than Windows Vista.

To be sure, aside from being bundled with most new PCs, it doesn’t seem that Vista has been the smashing success Microsoft hoped it would be.

This is not to say that Microsoft is a doomed company. It remains hugely profitable, but it also means they’ve got a lot of serious problems ahead that might some day change the financial picture considerably.