(Source: Business Week)Other than another profitable quarter, Microsoft (MSFT) has little to celebrate these days. The company is falling sadly behind, serving fewer ads, video clips, search results, or personal Web pages than rival Google (GOOG). Microsoft's $300 million ad campaign humanized Bill Gates but left consumers wondering, Where's the beef? The company can't even seem to buy up competitors [Yahoo! (YHOO), anyone?].

And the world is moving away from the kind of desktop-based software that makes up Microsoft's bread and butter, shifting toward a more distributed form of computing that exists in the so-called cloud, where the operating system [OS] disappears into a fog of user-friendly online applications and servers, scattered across the Internet.

In the midst of so much upheaval, what's an 800-pound gorilla to do?

Fortunately, large monopolies can reinvent themselves. IBM (IBM) did it. Twice. How else could the company that dominated the mechanical punch-card market have crossed the chasm to dominate electronic computers? And reinvention is precisely how the company known for mainframes -- those mammoth, centrally located machines supporting thousands of users -- pioneered the personal computer.

Start with Privacy Microsoft must draw on its experience, market share, and cash that's not tied up in buybacks to define the computer of the future. Here is my three-point plan:

Take the lead on privacy: What, trust Microsoft? But who else are you going to trust? Google, the company that scans your e-mail and every mapping request to determine which ads to send your way? Or what about Facebook, which has a hard time keeping pictures of your drunken escapades hidden from potential employers? Remember that it was President Richard Nixon, a Republican, who opened communist China, and it was Lyndon Johnson, a southern Democrat, who passed major civil rights legislation. So the idea isn't crazy.

What's more, protecting privacy is in Microsoft's interest. It's the perfect act of jujitsu against Google, which has much to gain from the ad targeting techniques that put privacy in jeopardy. Microsoft, on the other hand, has a secure desktop revenue stream, which means it can temporarily accept lower ad rates. By taking the high road and refusing to analyze the minutiae of personal Web surfing behavior, Microsoft could even reduce the value of Google's targeted ad placement, becoming the friend of the very customers who might otherwise find PCs anything but "PC."

Enhanced privacy controls on Internet Explorer 8 Beta are a first step. But these controls are hardly more than opaque and confusing Band-Aids. Microsoft should redesign its software to allow anonymous surfing by default.