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Microsoft lacks wow at CES. Do investors care?

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CIOL Bureau
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SEATTLE, US: Microsoft Corp's dazzling display at a Las Vegas tech extravaganza last week shows that it has not given up on the idea of joining Apple Inc as a leader in home consumer electronics.

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But some investors would prefer the world's largest software maker to save its cash and stick to doing what it does best: pursuing steady but unglamorous growth in software platforms for corporations and individuals.

The company thrust itself to the forefront of last week's Consumer Electronics Show in Las Vegas with a giant multimedia display that rivalled the likes of Samsung Electronics in the latest attempt to convince the world that it stands at the cutting edge of personal technology.

But once again, most attention turned instead to the latest gadgets from Apple and Google Inc, which weren't even exhibitors at the world's largest tech show.

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It's a familiar story for Microsoft, which has struggled to translate its dominance in the business and home personal computer software market into leadership of hot new consumer sectors, or to capture the buzz that some rivals generate.

But for investors, does it even matter, given the success of their core business software?

"Yes, you should pay attention, but it's not where the value is being created for Microsoft," said Todd Lowenstein, a portfolio manager at Los Angeles-based HighMark Capital Management, which holds Microsoft shares.

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"It is not clear whether the consumer side will ever get the returns the enterprise side has."

Aside from users of Windows operating systems, Microsoft's consumer business is modest. Its entertainment and devices unit posted a profit of $169 million last fiscal year, a fraction of the almost $11 billion profit from its Windows franchise.

The Xbox gaming system, which has sold 39 million units worldwide since its launch in 2001, is Microsoft's indisputable hit in the consumer sector. But it has not quite become the beachhead into living rooms it was intended to be.

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Rabbit Trails

Meanwhile, Windows mobile phone software is losing ground to a new array of smartphones and its Zune digital music player has not put a scratch on Apple's iPod. Bing, its search engine, is also struggling to take share from market leader Google. The company's online services unit lost $2.2 billion last year.

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Some investors complain that Microsoft is wasting its time and money on markets it can't dominate quickly.

"Microsoft has never invented anything," said Bill Smead, chief executive of Seattle-based Smead Capital Management, which holds 340,000 Microsoft shares. "Why are they spending a great deal of management time and effort trying to invent a major product category?"

Microsoft should act more like a mature company such as Johnson & Johnson, which makes shrewd purchases and manages them well, said Smead, rather than chasing what he calls "rabbit trails" that lead to nothing.

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"I don't expect them to be Apple, I don't want them to be Apple," he said. "They need to be really good at being 50, an elder statesman."

But that view underestimates the strength of Microsoft's long-term game plan, other investors say.

"It has potential upside and not a lot of downside," said Ken Allen, Baltimore-based portfolio manager of T. Rowe Price's Science and Technology Fund, which holds Microsoft shares.

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"They bring a lot of resources to bear and have a lot of assets. It's classic Microsoft mode -- try to chip away and get better and better and eventually be in a great position."

Microsoft's top management certainly shows no signs of backing off. Chief Executive Steve Ballmer kicked off CES with a keynote speech casting Microsoft right at the center of it.

"From the largest screen in the living room to the smallest screen in our pocket ..., we are delivering the experiences people want," Ballmer said, showing off a range of machines from big, touch-screen PCs to hand-held "slate" devices, all running Windows software.

He demonstrated new ways of watching television on the PC or even a phone with its Mediaroom software, which powers online TV services such as AT&T Inc's U-verse.

Xbox in particular is set for a strong year, he said, as Microsoft launches the controller-free Project Natal gaming system and a new installment of best-selling game Halo.

Investors don't all share that optimism, especially in phones.

"Microsoft makes good products but they have not been able to deliver the elegance of design or user experience that Apple does," said Toan Tran, an analyst at Morningstar.

"Aside from buying someone like (BlackBerry maker) Research in Motion there's pretty much nothing they can do to be successful in this market."

Others are content to watch Microsoft try its luck, as long as it doesn't divert too much cash from the main business.

"They don't seem to have connected with the consumer in other areas outside of the PC," said HighMark's Lowenstein.

"But technology moves so fast, you just don't know where things are going to go, so you have to plant many seeds and see what sprouts," he said. "As an investor, as long as they keep deploying capital at very high returns, I'm OK with them making some side bets in the consumer space."

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