I would say that last week was a pretty typical one for Microsoft (Nasdaq: MSFT) and its shareholders. On Thursday, famed investor Whitney Tilson pointed out at a hedge fund conference that the stock was cheap, giving the stock an intra-day boost. Where have we heard that before? It feels like I read that somewhere every day. We even recently featured Microsoft as a dividend play for a lifetime on our homepage, in which Jim Royal gave one of the best bullish arguments I have seen to date.

To be fair, I don't disagree that the stock is cheap, but it has been cheap for years now, and that hasn't seemed to matter. Tilson sees the same cash generating machine that everyone else does, and he has a $35 price target on the stock over the next six to 18 months. Clearly, his wide time frame isn't as confident as his words.

While the bullish calls and proclamations of a cheap stock have been constant, so have the failures to innovate and keep up with the growing competition. This was on display last Wednesday as it was announced that Google (Nasdaq: GOOG) had beaten out Microsoft to provide internal messaging apps and email to the 17,000-employee General Services Administration. The GSA awarded the contract for $6.7 million to Google partner Unisys Corp (NYSE: UIS), who will take care of the software mitigation. Google's software applications will be replacing IBM's (NYSE: IBM) Lotus Notes and some Domino software, so clearly the upgrade was needed.

Small contract, big rewards
Don't get me wrong, the contract is small potatoes for both companies, but it is a microcosm of Microsoft's struggle to keep up, especially with the large cloud-computing proliferation. To be honest, I don't want to beat on Microsoft; I even wrote that it looked like the company may finally be headed in the right direction last month. However, the response to the contract loss by one company executive on a blog shows that Microsoft may still yet to be going anywhere fast.

Microsoft's Senior Director of Online Services Tom Rizzo wrote, "There's no doubt that businesses are talking to Google, and hearing their pitch, but despite all the talk, Google can't avoid the fact that often times they cannot meet basic requirements... Regardless of how organizations are thinking about the cloud, Microsoft provides a choice for their productivity needs; on premises, in the cloud or as a hosted solution. Google does not offer any such choice."

I think Rizzo does a great job of highlighting the main point, but not in the way he wanted to. Google doesn't offer the same number of options as Microsoft, and it is still far behind Microsoft in the enterprise space. However, this GSA contract triumph by the "cloud" company shows just how much the enterprise space is changing, and this is a massive threat to Microsoft's multi-"option" business solution. And let's be honest: The federal government isn't the most innovative and revolutionary workplace.

Can Microsoft adapt?
If you only saw Microsoft's advertisements and heard the message from executives about the company, you would guess that it was primarily a cloud company. Speaking on the subject earlier this year CEO Steve Ballmer declared, "For the cloud, we're all in." The problem is Microsoft is not all in -- it can't be. Rizzo is correct when he says that Microsoft offers many more options, but that's because it has to. The huge office suite business is still ruled by Microsoft, and most office desktops still have Microsoft software pre-installed. Microsoft built its dominant enterprise market share through early innovation, but the product has changed little and now employees and businesses are demanding more.

Businesses want easy-to-use software that is applicable on any device and allows open collaboration across business groups and offices, without having to work around long and laborious upgrade cycles and new patch installations across all devices. Unfortunately, this is not yet Microsoft's forte, and other real cloud companies like Google, VMware (NYSE: VMW), and Akamai Technologies (Nasdaq: AKAM) are capitalizing on this growing consumer and business demand for innovation and the continuing trend of increased online data and virtualization that come with these innovations.

Security is often a concern cited by businesses that are unsure of converting to more open cloud platforms. However, even some of the extremely security rigid financial institutions are even allowing employees to tinker with Apple products and applications.

Microsoft is still far ahead of Google and other competitors in the enterprise space. However, the gap is beginning to narrow as businesses demand more flexibility and ease of use in with regards to its software and applications. This means that the consumer and enterprise business are going to continue to become more intertwined as well. Unfortunately for Microsoft understanding the consumer and making products they want to use is still not one of its strengths.

Andrew Bond owns no shares in the companies listed. Apple and Netflix are Motley Fool Stock Advisor picks. Google and Microsoft are Motley Fool Inside Value picks. Motley Fool Options has recommended a diagonal call position on Microsoft. Google is a Motley Fool Rule Breakers pick. The Fool owns shares of Apple, Google, and Microsoft. You can follow Andrew on Twitter @Bond0 or on his RSS feed. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.