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"Underdog" Microsoft Dominates Earnings: Are Apple and Google Now the Bad Guys?

Today, Microsoft posted record quarterly revenues of $16.2 billion, a 25% rise year-over-year. Net income leaped 51% from last year, and though it wasn't all positive (its online division lost $560 million), it smashed analyst estimates for sales and earnings. That will surprise a lot of people who thought Microsoft was on the way out — and it may even be a pleasant surprise for its founder.

"In '98, '99...we knew that our honeymoon period was kind of over," Bill Gates said in a 2008 interview. "Sometime between '95 and '98 we went from being the company that, if we had purple rugs, everybody thought that was how businesses succeeded, and they'd go out and buy purple rugs — to an 'eh, who's next?' kind of a thing."

It's true that Microsoft hasn't been a trend-setting company for a long time. The honeymoon ended over a decade ago. They've been replaced on that score by more innovative companies like Apple, more popular services like Facebook, and more scooter-friendly campuses like Google. CNN Money this week said Microsoft's consumer brand was "dying." A recent Pew Center report showed that news coverage for Microsoft has become almost non-existent. And Apple has passed them in market cap.

But all this bad news is actually good for Microsoft. It gets to fly under the radar. Overlooked by a world that prefers to follow shinier products (or announcements of shinier products, or announcements of announcements of shinier products), Microsoft has managed a successful Windows 7 launch. Revenue from Office 2010 rose 15% from last year. Sales of Xbox 360 have rocketed 38%, outselling every other competitor this quarter. They've launched Windows Phone 7 and introduced Internet Explorer 9. Halo: Reach grossed a record $200 million on launch day. Not to mention Bing, which has kept Google on its toes, partnering with Yahoo (and passing it in market share), and teaming with Facebook for social search.

Sure, not every launch has gone off without a hitch and not every product is profitable. But the company is innovating. It may even have earned the right to shed its bad guy image. In many areas, it can rightly claim to be the scrappy newcomer. In mobile, they're a distant last place, nipping at the heels of Apple and Google. In gaming, they're beating up on incumbents Nintendo and Sony. And in search, they are the "underdog," as Mark Zuckerberg recently said.

"They're incentivized to go out and innovate," said the Facebook chief of Microsoft, before criticizing an unnamed Internet giant (Google) for complacency. "When you’re an incumbent in an area ... there is tension between innovating and trying new things versus what you already have."

Microsoft is no longer the giant atop the ladder, looking down to defend others from reaching its peak. (Arguably, between Antennagate and Google Maps' privacy issues, Apple and Google have assumed Microsoft's place as the industry's bad guys.) Instead, Microsoft has taken on a new perspective, from a different position: They're looking up now, and trying to figure out where to climb to next.