From the Research 2.0 taxonomy perspective, we look at Microsoft as playing in all six software-industry markets. From an SEC reporting perspective, Microsoft lists four product-centric operating segments. But it is the “other ” business segment (see Figure 1) and the fifth segment, online services, in Microsoft’s (see Table 1) lineup that, in Research 2.0’s view, is the key to Microsoft’s continued performance at the level the investment community has come to expect. Online services relates to all of the product groups. Online services can act as a channel for all Microsoft product functionality. Online service is all about going “Live.”

Research 2.0 believes it is increasingly important for Microsoft to act more as a single company and for users to view Microsoft as offering a single strong value proposition based on six product businesses (or more, depending on acquisitions) merging into one services offering. This is true, however, only if you assume (as we do) that Microsoft’s still unspoken strategy is to become a services company. If that is not the case, if Microsoft prefers to be a strong software technology provider equivalent to Cisco in communications, Intel in chips or Adobe in document management, it could succeed. But it would not play the dominant role in the information technology (IT) market that it plays today.

We think the services approach is Microsoft’s strategy of the future because, hidden by the SEC segmentation but revealed by Research 2.0’s six-market taxonomy perspective, investors will see that Microsoft is already looking at Windows and Office as end games. It is looking at ways to change the IT user’s total experience to spur the next decade of Microsoft growth. In addition, we believe Microsoft will preempt the open source software (OSS) movement over the next decade—by joining it. The current price of $33 doesn’t fully reflect our expected long-term scenario for Microsoft. Our current fair value estimate is $41.