An iPod from Microsoft?

Evidently Microsoft (MSFT) is developing a digital music device and download service to compete with the iPod and iTunes from Apple (AAPL). Headlines like these show that Microsoft is feeling the heat and believes it must reinvent itself. I would agree completely with that assessment, but I also disagree with their apparent strategy.

Merely copying successful products that have already attracted scores of competition is not going to reinvigorate growth at Microsoft. They need to play offense, and by that I mean, develop new technologies and products. They should aim to be first to market, and force others to play defense by copying them.

Adding another video game system to the market is not very innovative. Adding another mp3 player to the market is not innovative. Ditto for a music download service. The companies that are taking aim at them today aren’t doing so by copying. They are doing so by innovating. Google changed the online advertising market, has the best product out there, and now dominates.

Google’s beta of a new, free, online spreadsheet program isn’t merely an imitation of Excel. You can see where Google is going with this. Low end computers nowadays can cost as little as $300 with a monitor included. However, if you want to put a copy of Microsoft Office on your new home machine in order to do work on weekends, the software package could easily double your system’s cost to $600.

Large corporations have big pockets, so they will likely continue to equip all new systems with the full version of Office. Consumers though, hate paying hundreds of dollars for software that is oftentimes essential to do anything productive on their computer. Microsoft may have a monopoly on desktop software, but their dominance has nowhere to go but down the drain as other companies innovate. An online spreadsheet program complete with free storage space on Google’s own servers could ultimately dent Microsoft’s Office business, though it will take time.

Selling video game consoles and imitation iPods might make up for some of the business Microsoft will undoubtedly lose to companies such as Google, but the margins will be so much lower that it will never completely make up for it. Right now Microsoft gets nearly all of their operating income from Windows and Office. Those businesses are under attack, but do you really think the way to reinvent the largest software company on the planet is to go after the iPod?