2012 Review: Microsoft

In some ways, 2012 has been quite a historic year for Microsoft (MSFT -1.84%). In other ways, this year may also prove to be an important inflection point for the software giant as it embarks upon a treacherous path of transition.

When acquisitions attack!
In July, Microsoft posted its first quarterly loss in its history as a public company when it reported fiscal fourth quarter earnings. We're talking about $492 million, or $0.06 per share, in red ink that Mr. Softy posted as it closed out its fiscal 2012. That loss was purely due to the $6.2 billion goodwill impairment that Microsoft had warned investors of relating back to its 2007 acquisition of aQuantive.

Five years ago, the company bought aQuantive with the hopes of jump-starting its online advertising business and challenging Google (GOOGL 0.35%), but that purchase hasn't helped Microsoft's online service division as much as it had hoped. Google had just bought DoubleClick for $3.1 billion just a couple months prior.

Since then, Microsoft has grown its search market share -- but so has Google. Big G has improved its already dominant position even further over the years and now serves up nearly 70% of all Internet queries.

Source: comScore.

Microsoft went public in 1986 and has delivered over a quarter century of black ink to investors, then broke that streak in a botched attempt to compete with Google on its home turf. Sadly, the online services division is still unprofitable, generating $364 million in operating losses last quarter.

Forget everything you know about Windows
In October, Microsoft launched what's arguably the most important upgrade to its flagship Windows operating system in decades. Windows 8 is a complete reimagining of the core interface that's been in place since Windows 95 and its familiar Start menu. In its place is the Start screen and tile interface from Windows Phone.

As fate would have it, Windows head Steven Sinofsky would abruptly resign from the company just weeks after Windows 8 was launched globally. He was seen as a key figure in leading Windows 8's development and was a 20-year veteran of the company, so his departure was no small matter. There were reportedly political tensions at the top, as Sinofsky was eyeing Steven Ballmer's CEO role. Instead Sinofsky was replaced by two of his lieutenants, Julie Larson-Green and Tami Reller.

The new operating system is an ambitious attempt to change computing paradigms of how the majority of PC users interact with their computers. Windows 8 tries to do it all by incorporating a touch-optimized interface as well as a somewhat familiar desktop one. That's a stark contrast to longtime rival Apple's (AAPL -0.57%) strategy, where the Mac maker has chosen to separate its traditional OS X desktop platform from its iOS mobile platform.

Windows 8 is a huge risk to Microsoft, but one that needed to be taken. The PC market is struggling and being eaten alive by rising smartphone and tablet adoption, driven in part by the iPhone and iPad. If consumers welcome the operating system, the PC market could see a reinvigorated upgrade cycle that will benefit the entire PC value chain. If it alienates users with its unfamiliar ways, they may switch to rival platforms like OS X, among others.

With its launch less than two months ago, it's still too early to call it a success or failure. One thing is a fact, though: years from now when investors look back, they'll remember 2012 as a pivotal year for Windows -- for better or for worse.

The new Microsoft, starting in 2012
Despite the fact that Microsoft's platform approach differs from Apple's, the company has clearly taken to admiring the accomplishments of its rival from Cupertino. That form of flattery may not be new, but Microsoft is now pursuing hardware and software integration on a scale that it's never attempted before with its Surface tablet.

Microsoft has dabbled in hardware here and there over the decades, but never like this. The Surface is a clear shot at the iPad, competing directly on price and offering impressive hardware (too bad the software is underwhelming). In doing so, Microsoft has become a rival to its longtime hardware OEMs in a risky move that threatens to harm its most important partners.

Ballmer has made it clear that Microsoft's future lies in devices and services. Those are two areas respectively exemplified by Apple and Google, and also operating segments that contribute little to revenue and have historically held back the bottom line relative to Microsoft's core software divisions.

This is just another reason why investors will mark 2012 as a year of monumental transition for the software giant.