Microsoft in 2012: two screens and a question mark

Tonight at 6:30 PM Pacific Time, Microsoft CEO Steve Ballmer will bound onto the stage at the Venetian Hotel in Las Vegas and deliver the company’s final CES keynote with his trademark enthusiasm.

He will, no doubt, expound on the theme that the company has been pushing for nearly three years: three screens and a cloud. But he will also have many questions to answer, especially about that third screen.

From both a consumer and a business perspective, Microsoft has managed to keep its focus during a three-year sprint that began in 2009 with the release of Windows 7. Two of those three screens are on track:

• Windows 7 has shipped a half-billion copies, fueling a PC business whose growth is slowing but is still immensely profitable. Apple makes tremendous profits from its Mac division, but Microsoft still controls roughly 90% of the PC market worldwide and is still the standard for business computing.
• Likewise, the Xbox 360, once derided as a money-losing folly, has become a billion-dollar business with a bright future thanks to the Kinect. A new Metro-style dashboard and ambitious partnerships with media companies might help expand the Xbox from its traditional core of gamers and turn it into a media hub for the living room.

But that third screen—the one that’s small enough to fit in a pocket or purse? That’s the troublesome one for Microsoft.

Windows Phone continues to get great reviews, but after more than a year on the market its market share is still anemic. Apple and Android devices own the smartphone segment today, leaving Windows Phone with a formidable hill to climb.

Meanwhile, the iPad dominates the tablet segment, with a dozen or so fair-to-middling Android-based tablets fighting over the crumbs. Microsoft won’t have a credible tablet competitor until later this year, when Windows 8 ships. And details about ARM-based Windows tablets are still sketchy, to put it kindly.

So, Ballmer has to tell a credible story tonight about how Windows Phone will gain market share in 2012 (hint: do not include the word “Nokia” in your keynote drinking game unless you are prepared for a serious hangover tomorrow). And it’s also time to fill in some of the holes about how and when Microsoft and its partners are going to deliver Windows 8 tablets.

But even the best-case scenario has Microsoft still in a distant third place next year at this time. Where does that leave the cloud? Microsoft has been steadily improving its SkyDrive and Windows Live services for consumers, rolling out some interesting new features recently and promising much better integration with Windows 8. On the business side, Office 365 is holding its own with Google Apps, and Windows Azure continues to grow, slowly.

But those cloud strategies assumes a world where customers remain loyal to Microsoft on all three of  those screens.

With a few exceptions—OneNote and Lync for iPhone and iPad, Bing and Hotmail clients for iOS and Android, a new SkyDrive client for iPhone—Microsoft has been slow to deliver solutions for those other platforms. The biggest missing piece of all? The absence of any of the big Office apps, with or without cloud support, on non-Microsoft mobile devices.

So the real question becomes: can Microsoft build any momentum—or stop falling behind—in a world where it doesn’t control all three of those screens?

Mary Jo Foley and I will be live-blogging the keynote tonight from a distance. You can bet we’ll be listening for answers to those big questions.

Related posts: 

• Microsoft: Hey, we're supporting Apple's iOS, too
• Cloud wars: Microsoft SkyDrive now native on Apple's iPad and iPhone
• Xbox 360 mashes up games, live TV, social media, and more in a major update
• Does Microsoft really need a chief software architect?
• Microsoft CEO Ballmer’s last stand: Liveblog from CES