I'm no Microsoft apologist by any means but come on, they rule the business world; they had to do something right to get there. Any company in the world would kill to have their products have 90%+ market share.
Microsoft got to where they are because Bill Gates was one of the first people, perhaps the first, to see that there was going to be a large and enduring market for personal computing software and he had the ability to make MS a force in that market. PCs were a disruptive technology that (effectively) killed mainframes and minicomputers and created many new uses for computers.
Even if MS do everything wrong they are still going to be a large and profitable company for many years to come. Their software is a de facto standard in too many places now for that to change in a hurry.
Their business is now in a mature phase. That means that while profits are huge growth has declined. They should be using that war chest to fund new tech. Ballmer seems to be quite smart but I don't know if he's a visionary. Perhaps he should stick to milking the cash cow and ask Gates back to recommend where MS should invest.
MS was headed for a crisis in the early 90s because their 16-bit consumer OS (Win 3.1/DOS) was a technological dead-end while their 32-bit next gen OS (Win NT) was not suitable for consumers due to excessive hardware requirements (namely a 4mb per process overhead for every 16-bit app, or a $150 premium for each 16-bit app running simultaneously). Instead, MS pursued an unusual hybrid approach (windows 95) that allowed a significant amount of the benefits of a 32-bit pre-emptive multi-tasking OS with more reasonable hardware requirements than OS/2 or NT. A solution that lasted another 6 years before finally being supplanted by their fully 32-bit Windows XP consumer OS. Similarly, MS recovered from the underwhelming Vista release with Windows 7. They turned around their shameful Live search efforts with Bing. They avoided disaster with the v1 XBOX, which was a reasonably popular system but a serious financial debacle, by halting production and putting out the XBOX 360, resulting in runaway popularity and financial success.
This ability to make such dramatic saving rolls against failure is a defining characteristic for MS. There are a few other tech companies that have shown some degree of this capability (Intel and Apple, for example) but it is far more characteristic of MS (and far more responsible for their success). In an industry with a rich history of fast rising superstars that later flare out in catastrophic failure (Sun, Excite, geocities, myspace, Digital Research, Netscape, DEC, countless more) MS's three decade history of turning potential catastrophes into successes is at the core of what makes the company tick. It may not be as glamorous as other companies who reach Olympian heights of excellence, trail-blaze new markets, or revolutionize old ones but it's been an enormously successful strategy for MS.
Perhaps MS has lost the mojo and the guts to make these sorts of major saving moves any more (from my time at MS I fear this may be becoming true). Perhaps this sort of strategy is no longer relevant in an era of even faster technological change. Only time will tell.
What does Microsoft need to do to get back it's Mojo? Split itself into multiple seperate companies that actually need to compete in the free market and that can no longer consider wasting Billions on faulty hardware, losing a format war and missing explosive market growth opportunities as "success".
The problem with making those rolls, maybe, is that MS is now disinclined to strike out in a new direction?
Protecting the fortress from the plunderers (Sun, Netscape, Novell, etc) has turned out to be so profitable that they've forgotten how to rape and pillage (Lotus, IBM, Digital Research, etc).