Microsoft's '08 Mistakes: The Software Giant's Big Errors

As the year winds down, financial analysts are predicting that Microsoft will pre-announce negative earnings for the first time since 2000 because of a flat PC market. But all things considered, 2008 was a pretty good year for the software giant.

Windows is still used on 90% of computers and Internet Explorer on 70%. Despite growing Web-based competition, Microsoft Office saw 20% growth in Q1 of fiscal 2009 and the company's server and tools division grew by 23% in Q1 2009.

On top of that, research from NPD Group this week shows that November retail sales for Macs fell 1% year over year while Windows PC sales grew 7%.

Under new cloud-minded chief software architect Ray Ozzie, Microsoft has been adapting to a changing Web 2.0 world. Cloud computing operating system Windows Azure, Windows Live, Live Mesh and Office Web Apps are a few examples of Microsoft's focused attempts to stay innovative.

But even though its finances are stable and its eyes are on the future, Microsoft executed poorly in some major areas in 2008.

Here are three Microsoft stumbles from the past year that will put more pressure on the company to survive and thrive in 2009.

Poor Marketing of Windows Vista

The real tragedy of Windows Vista, especially after service pack 1, is that it's not as bad as its reputation. But Microsoft did not do enough in 2008 to let people know that. It got caught in the crosshairs of bad Vista perceptions and unrelenting anti-Vista marketing from Apple.

But bad perceptions don't appear out of nowhere. Compatibility and performance issues plagued Vista from the start. It was a vastly different OS from Windows XP and there were major changes to security features and the graphics system that created usability problems. These changes may have been necessary, but adapting to them led to chaos.

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Michael Cherry, an analyst at Directions on Microsoft, says that Windows Vista isn't as bad as Microsoft has convinced us it is. By remaining silent on Vista, he says, Microsoft did more harm than good.

"The biggest misstep was not using Vista SP1 [released in February] as an opportunity to show customers that Vista is a stable and reliable system, especially now that most device manufacturers have updated their drivers," he says.

Cherry said Microsoft missed an opportunity to "illustrate why the security changes in Vista are so important, to promote security features like UAC and BitLocker, and to help people purchase machines that can best utilize Vista SP1."

Microsoft's self-consciousness about Vista in 2008 was glaring, and it led to timid or non-existent marketing.

Letting the Apple Momentum Build

For most of 2008, Apple relentlessly lampooned Microsoft in its ubiquitous "I'm a Mac, I'm a PC" TV commercials. The ads were often funny and effective in pointing out Vista's flaws in ways that everyday people could understand.

America waited for a response from Microsoft ... and waited ... and waited.