For the first time since 1982, the year that IBM launched its first personal computer, Microsoft's domination of the computing landscape is under pressure.
The recession and new technologies such as virtualsation, cloud and open source are hurting Microsoft's sales and margins.
But last week Microsoft fired the opening salvo of a price and technology war that aims to preserve its position against new competitors, notably search engine firm Google and online retailer Amazon, which are competing against Microsoft in the cloud.
Microsoft announced competitive pricing and service level agreements for Azure, its cloud-based hosted processing, data storage and network service.
It took the wraps of Office 2010, which includes a stripped down browser-based version of Office that will run for free from the cloud, heading-off competition from Google's low-cost cloud-based alternatives to Office.
And it revealed new licensing agreements that could save enterprise customers up to 40% of their licence fee. They will make it less attractive for enterprises to move to other open source and virtualised operating environments
Azure brings Microsoft into head-on competition with Google and Amazon for public hosted processing, data storage and networking in terms of price and product. Microsoft has the advantage of the widely-used .net application development platform. It will use this to encourage software developers to write software that will run in an Azure environment.
These are financially risky moves. It is not certain how successful Azure will be, and whether conservative IT departments will be prepared to move business-critical applications to the cloud. Commercial applications such as SAP and Oracle will need to be re-engineered before they can make the transition. But Microsoft has $25bn in cash and short-term investments to finance the war.
Analysts are interpreting Microsoft's move as a rushed response to its fragmenting hegemony. Many relish the prospect of increased competition. Some see an end to Microsoft's absolute control of the rate at which it releases new and better products.
Richard Holway, an independent analyst who has followed Microsoft since the 1970s, says without competition from Google, Microsoft would never have brought out Windows 7 so soon after Vista, and may never have introduced Office 2010.
David Roberts, executive director of the Corporate IT Forum , says the fight between Microsoft, Google, Amazon and other hosted service firms for the cloud computing market could be an "amazing spectacle".
"Name the three biggest players you would wish to see in a triangular thunderstorm of a boxing match. This is going to be a great fight," he says.
Holway believes Microsoft had no choice but to get into the cloud. "Everything will be cloud-based," he says. "We are going back to time-sharing."
Fabio Torlini, EMEA marketing director at RackSpace, one of the world's biggest hosting firms, agrees. "I don't think that Microsoft has a choice. The world is moving online and cloud is here to stay. I think Microsoft has seen what a big opportunity the market is and knows that it needs to take it seriously," he says.
Everyone wants a piece of Microsoft's financial fat. But it won't be easy. McKinsey analyst William Forrest says cloud computing is highly hyped and ill-defined. Many firms who go in for cloud computing now may not reap all the benefits they are promised, he says.
So far, cloud computing services are generally not cost-effective for larger enterprises, he says. The break-even point between cloud and on-premises processing, based on Amazon figures, is around $45 a month for an equivalent number of CPU cycles in a datacentre, he says. He estimates the total cost of ownership of cloud services needs to drop by 60% to match the per-CPU monthly costs of a typical datacentre.
This suggests revenue from software licences sold to large enterprises for on-premises processing will keep Microsoft afloat for a long while yet. Even Alistair Bagley, Microsoft UK's head of emerging business technologies, says companies are unlikely to convert their core enterprise systems to run on Azure in the short term.
But what about smaller firms and individuals?
"[With Azure] Microsoft is playing catch-up against two very, very modern thinkers where its huge embedded customer base may not be much of an advantage," says Roberts.
One of the attractions of cloud computing, especially for business start-ups, smaller firms and individuals is that they can get much of their data processing, storage and networking on a pay-as-you-go basis without the capital and running costs of their own datacentre. That cost differential may loosen existing bonds with Microsoft, but Bagley notes interoperability will be crucial in heterogeneous applications environments.
Holway believes that Microsoft's 90%-plus share of desktops will work to its advantage. He notes that 80% of netbooks are sold with paid-for Windows XP and Office rather than free Linux and OpenOffice.
"When you get to the cloud, you would like something familiar, and that means Office 2010, not Google Apps," he says.
As to how CIOs should respond to Azure, Holway reckons they should be guided by their users. "CIOs have always fought innovations like the PC and the mobile phone, usually on security grounds, but in the end they have had to accommodate them," he says. "End-users will dictate how fast they will have to move."