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Microsoft (MSFT) once had a near monopoly on web browsers with Explorer, so it comes almost as a shock to find that the web browser most used to access my site, Bruceongames, is Firefox 3 and that even the undermarketed Chrome has made a significant impact. When it comes to search Google (GOOG) always had the majority of the market but MSN now seems to have slipped away to nearly nothing.

You can forgive the above because Microsoft, famously, misunderstood the internet so came to it late. Operating systems are different though, Microsoft has owned this sector since MSDOS. But even here there are massive cracks appearing. By far the fastest growing section of the PC industry is Netbooks. And the Linux derived Ubuntu has become a great success. Microsoft has fought back by bringing XP from the grave. But it is imposing stupid maximum system specifications that attempt to defy Moore’s law.

And of course its worst operating system problem is Vista. This has been the biggest train wreck in the history of Microsoft and it is rushing out Windows 7 to try and mitigate the disaster.

You might think that Microsoft owns the market for standard applications with the Office suite of programs that have swept all in front of them to become global standards. Even here, though, Microsoft is in big trouble from Google Docs which is free for most users and which massively reduces the IT costs for the many corporates that are now using it. Basically, Microsoft didn’t see the cloud coming.

So Microsoft is having problems in many of the most important areas that made the company great. But the reality was always that this was inevitable, you cannot hang on to monopolies for ever, especially in the fastest changing area of technology that the world has ever seen. And Microsoft must always have known this. Its monoplies will continue to fade away in the face of this change and new competition from aggressive competitors.

So it is against this background that the Xbox/Zune/Live project makes so much sense. The gaming industry is still at its very beginning. The future growth potential is very many times the current size of the market. So it will grow to be a far bigger market than the IT markets that Microsoft has monopolized for so long. In other words, Microsoft could become a bigger company because it will be in a bigger marketplace, as long as it has a significant market share.

So Microsoft is playing a long strategy in gaming (and it is growing to be a lot more than gaming). The company is building market position over successive generations of platforms, both hardware and software. And it is using its massive financial and intellectual resources to win.

Applying this strategy Microsoft must have been amazed that its main competitor, Sony (SNE), decided to make so many strategic and tactical mistakes and to basically throw away its market dominance. It must also be very pleased that Nintendo (OTCPK:NTDOY) chose to remain in the “toy” end of the market and so did not build the infrastructure necessary to compete in the long term.

Microsoft is in the middle of one of the biggest shifts that any major corporation has ever made. From an IT company that did a bit of gaming to a consumer media company that does a bit of IT.

Disclosure: None

Source: Microsoft's Shift in Focus