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Market share key to Microsoft's Wi-Fi exit

The software giant's decision to dump its wireless networking gear business came amid sliding market share and profit margins, analysts say.

Microsoft's decision to stop selling wireless routing gear was more about sliding market share and profit margins than accomplishing its purported Wi-Fi mission, analysts said Tuesday.

Between December and March, Microsoft's share of the Wi-Fi hardware market dropped from 9 percent to 6.6 percent, according to market analysts NPD Group. At the same time, fierce competition had relentlessly cut into margins for sellers of wireless routing gear, making the market less attractive for the software giant.

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"The margins in the wireless home networking business just don't fit Microsoft's business profile," IDC analyst Jonathan Gaw said.

Microsoft this week portrayed its decision to exit the wireless home networking gear market as a case of mission accomplished. A Microsoft spokeswoman said Tuesday that the company entered the market two years ago to "raise the bar" on ease of use, security and overall performance. "We believe we've met these goals," she said.

But analysts said business rationale may have played an equally, if not more important, role in the decision.

Microsoft quickly established itself as a Wi-Fi gear contender when it entered the market in September 2002, at one point holding second place behind leader Linksys. But the company soon fell into a see-saw battle for runner-up with a number of rivals, and ultimately failed to break away from other second tier players.

Among other things, Microsoft was hurt by fielding a limited number of Wi-Fi products, rather than the full set sold by competitors, said Stephen Baker, NDP's director of industry analysis. "Usually, Wi-Fi is sold 'whole,' both cards for PCs and access points," he said. "They didn't have the full complement of products."

Microsoft's departure could help Cisco Systems-owned Linksys, which currently collects about half the revenue in the United States from sales of wireless networking products. Cisco, which purchased Linksys last March, on Tuesday reported results for its third fiscal quarter, which ended May 1. Cisco executives said that Linksys sales over the last three months accounted for $174 million, a 5 percent increase from the previous three months.

Linksys could face new problems as well, however, as the last premium Wi-Fi gear maker left standing.

Wireless home networking products from Microsoft and Linksys have been priced in the past as much as $10 above competing products thanks to their strong brands. But now that Microsoft has left the market, Linksys may be forced to cut prices, some analysts suggested.

"We'll see if Linksys can maintain that price differential," Gaw said.

A Linksys representative was not immediately available for comment.