SENIOR MICROSOFT executives might not be saying it in public, but 2008 is shaping up to be a crunch year for the world's largest software company, writes John Collins.

Fuelled by new versions of its cash-cows, Windows and Office, as well as a raft of new business applications, Microsoft posted revenues of more than $50 billion (€32.54 billion) and profits before tax of a cool $14 billion for its 2007 financial year. While that's hardly the stuff of crisis, maintaining that performance is going to be increasingly difficult for Microsoft.

The Washington-based company dominated the PC era before the internet became ubiquitous. Microsoft famously took its eye off the ball in the Nineties as the web began to become popular. It arguably made the same mistake when sentiment towards the sector soured following the dotcom implosion at the start of this decade. That allowed a plucky start-up called Google to become the dominant internet search engine. Perhaps even more importantly, Google cracked what many before had failed to do - make money from web advertisements.

Microsoft's unsolicited $44.6 billion bid for Yahoo is turning into a mammoth struggle, and a key one, as it attempts to rein in Google's massive lead in online advertising. The total online advertising industry today is estimated to be worth over $40 billion and is expected to grow to nearly $80 billion over the next three years.

Google has an estimated 75 per cent market share worldwide for paid search - the ads which appear beside search results and the largest part of the current ad market.

"It's certainly a big opportunity for revenue and profitability for the future," said Microsoft's chief operating officer, Kevin Turner, on a visit to Dublin last week. "Clearly, they [ Google] have shown the way of the opportunity."

Microsoft's Windows operating system is run on about 92 per cent of the world's PCs, according to Net Applications, but in 2002 that was as high as 98 per cent - before the resurgence of the Macintosh and open-source challenger Linux going mainstream.

The much-delayed Windows Vista failed to live up to expectations and, although Microsoft has sold about 100 million copies since its late 2006 launch, business customers have yet to embrace it.

The imminent release of Service Pack 1 for Vista, usually the signal that a new product is stable and ready for business deployments, means analysts will be watching the sales figures closely.

"Clearly, most big commercial customers and governments will wait until Service Pack 1 to deploy," says Turner. "Companies like Total in France are starting to convert 80,000 desktops, Citi Group are going to convert over 100,000 desktops, so there's lots of big deployments that are starting to take hold."

Turner is a firm believer that people are what make a company successful, but Microsoft has challenges on this front. The company's iconic figurehead and founder, Bill Gates, will step back from an executive role at the company in July.

"He's still going to remain as chairman as he shifts to his philanthropic activities, which the company is very proud of," says Turner. "It puts the onus on leadership to step up, and I think great leaders do that when they have to. That will be required for all of us."

Gates stepped down as chief executive in 2000 to make way for college friend Steve Ballmer, who in 1980 was the first business manager Microsoft hired. More recently, Microsoft has hired in a number of new senior managers, most notably Turner, who joined from Wal-Mart in 2006, and Ray Ozzie, who came to Microsoft in 2005 when his Groove Networks was bought out.

While the proposed Yahoo deal would be Microsoft's biggest corporate transaction to date, questions remain over many of its recent investments.

Although it may have been small change to cash-rich Microsoft, last year's $240 million investment in Facebook for a 1.6 per cent stake is looking less and less like a good piece of business.

Microsoft's buy-in valued the social networking website at $15 billion, but since then research is showing that users are spending less time on such sites and visiting them less frequently.

Microsoft lobbied hard against Google's acquisition of DoubleClick, which received European regulatory approval this week. That $3.1 billion purchase rocketed Google into the market for display or banner ads on websites. Unsuccessful in wresting control of DoubleClick, Microsoft instead paid $6.1 billion for Aquantive last summer.

While all of these are bets on new lines of business, the software maker also has to get on with the humdrum task of selling software to run businesses and entertain consumers. This week Microsoft had the Irish launch of Windows Server 2008, SQL Server 2008 and Visual Studio 2008, an event which 2,500 techies pre-registered for.

"It's the biggest launch we will do this year," says Turner.

The products press a lot of hot buttons - Windows Server promises more efficient use of technology through virtualisation, the SQL Server database can now handle the heavy workloads of even the largest businesses, while Visual Studio makes life easier for developers.

The issue is that the two major trends in software - open source and software-as-a-service are not core areas for Microsoft. Microsoft fought open source long and hard over the last 10 years but effectively called a truce last month.

Senior executives announced "a set of broad-reaching changes" to its business and technology practices all around being more open.

"I think most customers are getting wise to the fact that Linux and open source is not free," says Turner. "I think open source is like any other competitor. Competition makes us better and we welcome spirited competition."

Microsoft is also a far more diverse company now than it was 10 years ago, stretching from high-end corporate infrastructure to the Xbox games console.

Not all of the new lines of business have proved profitable. The entertainment and devices division, which produces and markets Xbox, has yet to turn a profit, and many analysts believe the consoles are being sold below cost in an effort to seed the market for software sales. Turner, for one, does not consider it a challenge managing such a broad-based technology company.

"I think it makes us a unique company when you think that a billion people every day use our software," he says. "I haven't found it difficult to get my head around - you simply have to treat each customer audience as if it has unique needs and desires."

That one billion user figure alone underlines that Microsoft is not going away any time soon, even if the tech elite never tire of using the company as a whipping boy. Younger readers may not be aware, but once-dominant technology companies like Digital Equipment Corporation slid from their perches, although residents of Clonmel and Galway, in particular, where the company was once a significant employer, will need little reminding of that.

The next 12 months will tell a lot about whether Microsoft can ride the next wave of technology innovation.