Microsoft ruled desktop computers but now can barely get people to visit its website without paying them. Tim O’Reilly effectively sums up Microsoft’s problem:

Microsoft was once motivated by its own Big Hairy Audacious Goal: “a computer on every desk and in every home.” They achieved that goal, and ever since, they’ve drifted. Now their only goal seems to be to stay on top of the heap. They need to stop focusing on eating other people’s lunch and start thinking deeply about what kind of goals might stretch the company once again.

This past month has show Microsoft’s tunnel vision when it comes to the web. The company failed to acquire Yahoo (which was probably a good thing for both companies). Then, Microsoft offered cash back to users of its product search, feebly thinking this would steal customers away from Google. Microsoft ignored the fact that its product search is inferior to Google and didn’t offer enough money to make the step down worth it.

More subtly, Microsoft announced it was ending its book scanning project, leaving the endeavor to Google. Alex Chitu explains:

In other words, the book search engine didn’t make enough money and Microsoft decided it’s better to focus on areas that are more profitable. Instead of improving their search engine with valuable content from books and offering better search results, Microsoft chose to make decisions based on the short-term profits.

But that’s not all. Microsoft also decided to remove several games from its Xbox Live store because people couldn’t find the games they wanted. Apparently, Microsoft’s never been to Amazon.com or it would realize the benefits of the Long Tail and maybe fixed its user interface instead of depriving itself of additional revenue.

This is a lot of mistakes for one company to make. None of these seem like poor ideas over the short term, but they show Microsoft can’t look past its next earning’s report. Google, in comparison, lets its ad service support a research factory of innovation where products are unleashed with the idea for monetizing a distant thought for the future. Google News, Docs, Apps, Notepad, and Reader all have no advertising.

O’Reilly suggests Microsoft needs to define its long term goal, something that doesn’t put it in direct competition with Google, even outsourcing search. I don’t agree Microsoft should give up on search, mostly because I don’t want Google to have a monopoly on search (competition good, remember). But it’s true Google’s already doing well with the “Organize all the world’s information” goal.

Microsoft needs something new, that doesn’t rely on the walled gardens that made it the powerhouse it is. The next stage in computing won’t allow Microsoft to live off overpriced software like Windows and Office; not when free, open-source and online alternatives offer compelling alternatives. Buying Yahoo or Facebook isn’t a strategy unto itself, but needs to be part of a long term goal that recognizes both short term and long term benefits. Microsoft itself needs to change, and that change will happen over the long term.