But don't count the company out just yet -- it had some solid breakthroughs in 2012. There were also several misfires. Here's a look back at Microsoft's biggest hits and misses of the past year.
Microsoft's 4 Big Hits
1. Windows 8
Microsoft has taken a lot of heat for Windows 8, and early sales are likely below expectations. Critics complain that the OS, with its Live Tiles interface, is too difficult to learn. But Redmond should be given credit for its bold move to introduce a truly innovative platform that separates Windows 8 devices from the iPad and me-too Android tablets.
Granted, Windows 8 could use some tweaking to make it more user friendly, and sales and distribution have been anything but smooth. But the software itself is rich, technically impressive (how about those seven-second boot times?), and secure. It should eventually make Microsoft a player in tablets while keeping its PC franchise intact.
2. Yammer Acquisition
Microsoft in June bought out business social networking and collaboration specialist Yammer for $1.2 billion. On its own it would have been a smart deal, as biz collaboration is one of enterprise software's hottest categories. But the deal makes even more sense given the synergies Microsoft can achieve by adding Yammer to its existing collaboration technologies.
Among the products that will benefit from getting bits and pieces of Yammer added in are Dynamics CRM, Skype, Sharepoint and Office 365.
3. Xbox SmartGlass
For the past couple of years, Microsoft has dribbled out a host of new products that appeared to have little connection to each other. Windows Phone, Windows 8, Live, Bing, Kinect, Azure and so on. Enter Xbox SmartGlass, a game-changing technology that ties it all together and promises to make Microsoft relevant again in the consumer market.
SmartGlass is a collection of apps and embedded technologies that form an ecosystem, one in which digital content can migrate from one platform to the next, be it a phone, tablet, desktop or home theater. In a demo at E3 earlier this year, SmartGlass pulled together the capabilities of Xbox 360, Kinect and Windows 8 tablets to show how it can take gaming to the next level. With Madden NFL 13 running on one screen, a user drew up plays on a Win8 tablet, which the game then executed on an HDTV. Pretty cool stuff.
4. Hardware Entry
With the introduction of the Surface tablet this year, Microsoft stole a page from Apple's playbook to become a vendor of integrated systems. It was a smart move. Software margins are declining and hardware is a commodity, but by bundling Microsoft can continue to ensure decent profits.
From a technical standpoint, CEO Steve Ballmer said it best at the company's shareholder meeting last month: "What we've said to ourselves now is that there is no boundary between hardware and software that we will let build up as a kind of innovation barrier." Up next? Watch for a Microsoft-branded smartphone.
1. Windows 8
Windows 8 is a hit, but it's also a miss? Yep, because right now, Windows 8 is all about potential. But that will be lost if Microsoft doesn't clean up a few things. For starters, the company needs to unify the user experience across Windows 8's dual (and dueling) Metro and desktop interfaces. For example, Internet Explorer 10 in Metro relies on a host of commands and touch gestures that don't function in the desktop version. That's just going to breed user frustration and confusion.
Microsoft also needs to give users the option to bypass Metro and boot to the more familiar Windows Explorer desktop if they like. No need to strong-arm users into Metro if that's not what they prefer.
2. Surface RT
Similarly, Microsoft's decision to get into hardware should be a hit long term, but its execution in the short term has been poor. By all accounts, Surface is not selling well -- and with good reason. With a starting price of $499, it's $200 more expensive than Amazon's Kindle Fire HD and priced on par with the new iPad.
[ Will Microsoft introduce more hardware products beyond Surface? CEO Steve Ballmer suggests it's likely. ]
Microsoft needs to bite the bullet on price to establish Surface in the market. $399 would have been a good starting price, and we may yet see that. Microsoft also erred by withholding Surface Pro until after the holidays. Buyers who want a fully functioning Windows 8 tablet in time for Christmas can opt for one from Dell, Acer or a number of other OEMs. That's good for the PC makers, but it doesn't help the Surface franchise.
3. Windows Phone 8
Like Windows 8, Windows Phone 8 is technically impressive. It supports quad-core processors, and features scaled down and more customizable Live Tiles. But unlike Windows 8, it doesn't have a 400-million user installed base of previous-generation software on which to ride. It's out there on its own.
As a result, Windows Phone, including Windows Phone 7 and Windows Phone 8, holds a market share less than 3.2%, according to ComScore. Unless those numbers pick up soon, the Windows Phone experiment will have to be considered a flop.
4. Bing Taste Test
In September, Microsoft stood up a website through which users could take a blind test to rank search results from Bing and Google. Microsoft claimed that users, who didn't know which results were from which search engine, preferred Bing almost 60%. InformationWeek invited readers to take the test and report back to us. The numbers weren't even close to Microsoft's claim. InformationWeek readers preferred Google's results by a ratio of almost 2 to 1. Sorry Bing.
What do you think were Microsoft's biggest hits and misses of 2012? Let me know in the comments section below.