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Microsoft examines threats posed by Google, Apple

Formalizing some of the issues Microsoft touched on during its analyst meeting earlier this month, the report also reveals how much it spent to acquire Sidekick maker Danger.

Microsoft filed its quarterly report with the U.S. Securities and Exchange Commission on Thursday, and in addition to financial revelations about its recent acquisitions, the tech titan also gave a more formal glimpse at how it views and plans to deal with the growing threat posed by Google and Apple, as well as longtime nemesis open source. Microsoft CEO Steve Ballmer touched on many of these issues last week at the start of the company's financial analysts meeting.

In a section titled "Challenges to our business model may reduce our revenues and operating margins," Microsoft reiterated that its bottom line may suffer if it has to drop the prices of its products to compete with Linux.

Proponents of open-source software continue efforts to convince governments worldwide to mandate the use of open-source software in their purchase and deployment of software products. Although we believe our products provide customers with significant advantages in security, productivity, and total cost of ownership, the open-source software model continues to pose a significant challenge to our business model. To the extent open-source software gains increasing market acceptance, sales of our products may decline, we may have to reduce the prices we charge for our products, and revenue and operating margins may decline.

In the same section, Microsoft also pointed to the business model challenge posed by its main search rival which has far more scale. The report seems to express admiration for the business model and says the company is throwing "significant resources" at attempting to emulate it.

Another development is the software-as-a-service business model, under which companies provide applications, data, and related services over the Internet. Providers use primarily advertising or subscription-based revenue models. Recent advances in computing and communications technologies have made this model viable and enabled the rapid growth of some of our competitors. We are devoting significant resources toward developing our own competing software plus services strategies. It is uncertain whether these strategies will be successful.

Another section addresses the threat posed by Apple, while conceding that competing with the model may prove expensive.

An important element of our business model has been to create platform-based ecosystems on which many participants can build diverse solutions. A competing vertically-integrated model, in which a single firm controls both the software and hardware elements of a product, has been successful with certain consumer products such as personal computers, mobile phones and digital music players. We also offer vertically-integrated hardware and software products; however, efforts to compete with the vertically integrated model may increase our cost of sales and reduce operating margins.

Also in its report, Microsoft confirmed that it spent $500 million for its acquisition earlier this year of Sidekick maker Danger.

The company also made its larger $1.3 billion purchase of Norway's Fast Search and Transfer and closed its $5.9 billion Aquantive purchase. Other deals made during the year added another $1.1 billion, Microsoft said.

Other interesting Microsoft facts from the report:

Microsoft now occupies 2 million square feet of real estate that it owns and 8 million square feet of leased space.

It ended the year with $23.66 billion in cash and short-term investments, up slightly from the $23.41 billion it had as of June 30, 2007.

That's what I got from a quick read. Let me know if I missed anything.