Microsoft is getting its ducks in a row — in the nick of time

Poor Microsoft. After sitting on top of the world for more than a decade, it has seen its business chipped away on all sides: Web-based email, cloud-based software, tablets, phones, databases, and even developer tools.

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But those who are quick to talk about the end of Microsoft are jumping the gun.

Microsoft posted a record $18 billion in revenues for its most recent quarter, and it would have shown healthy profits as well if it hadn’t written off $6.2 billion due to its useless acquisition of aQuantive a few years ago. Think about that: It took a $6 billion mistake to make this company post its first loss in two decades as a publicly-traded company.

Also, Microsoft has $63 billion in cash and short-term investments. It still holds a dominant position in many markets, including the not-insignificant duo of PC operating systems and office software.

It’s true that Microsoft doesn’t have the cool factor of competitors like Google and Apple. It’s got a phenomenal R&D organization, but the most successful thing to emerge from that organization recently seems to be the Surface — the old, table-sized Surface — which hasn’t exactly taken the world by storm. And its stock price has gone essentially nowhere in 10 years, which means anyone who joined the company in the past decade hoping to become a millionaire is still waiting for their big payday. That has to make it difficult to recruit top-notch talent, especially in a market where computer science graduates can command six-figure salaries and rich stock option grants right out of college.

However, there are clear signs that Microsoft understands the gravity of its strategic situation and is moving to turn its ship around.

ZDNet columnist Ed Bott sifted the tea leaves in Microsoft’s most recent quarterly 10-K filing and found signs that the company is moving towards a more aggressive, vertically-integrated structure. Surface — the new, iPad-sized Surface — may be more than just a shot across the bows of Microsoft’s manufacturing partners; it may be the first step in the company’s plan to build and sell a complete stack of hardware, software, and services.

“The strategic importance of a vibrant ecosystem increases as we launch the Windows 8 operating system, Surface devices, and associated cloud-based services,” the 10-K states. It goes on to refer to additional software and cloud-based services, as well as “other hardware devices we design and market.” Its OEM partners are not mentioned anywhere in this section, Bott notes.

In other words, Microsoft is taking hardware seriously at last. Where it used to stand out for a few niche products (mice) and one outright hit (Xbox 360), the company is now eyeing hardware plays across an unspecified range of markets. The Surface is just the beginning.

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This, of course, is not just because Microsoft wants to become a hardware company and start enjoying the lucrative returns and fat margins of a modern electronics company. (Hint: I’m being sarcastic.) Rather, the company sees that there’s power in a vertically-integrated stack of hardware, software, and services, as Apple has amply demonstrated. When you control the entire market, you are in a much more powerful position than when you are merely a supplier. That’s why Microsoft’s starting to tie everything together with a common, Metro-styled design, with ample integrations between its software and cloud services, with a host of Bing-powered data services for humans and for application developers. Rebranding Hotmail as Outlook.com is just the latest step in a long march in this direction.

The tech industry is at a point that favors vertical integration right now, which is why Microsoft is not the only company embracing this strategy. Google is adding hardware maker Motorola to its portfolio, augmenting its operating system, cloud services, and marketplace. Amazon is building a wider and wider range of its own hardware too, soon to include a phone.

Now, Microsoft has some serious challenges ahead of it. The Surface is a pretty good tablet, but it hasn’t won the hearts of Apple lovers the way, say, Google’s Nexus 7 has done. Windows Phone is a promising operating system but is still coming from far behind iOS and Android.

The transition to Windows 8 will be shocking and disturbing to many Windows users, and there’s a risk that Microsoft will lose people to alternatives like OS X or, who knows, maybe even Google Chrome OS. There’s no doubt that the Windows 8 rollout will be critical to the future of Microsoft, as VentureBeat’s Matt Marshall recently wrote.

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The company is aware of these issues and has listed a litany of risks Microsoft faces in the coming year. It’s not going into this blind. But these are big issues.

And then there’s still that talent challenge. When I talked with VoodooPC founder Rahul Sood recently about his new job running Microsoft’s Bing Fund, he raved about what a great place to work it was. But I’m not sure Microsoft is getting that message across to the next generation of programmers and engineers.

It’ll need to fix that perception problem if it’s going to succeed in what may turn out to be one of the most ambitious pivots in tech history.