Innovation in Monopolistic market

Microsoft is (almost) operating in monopolistic Corporate/business users market for its Windows operating system. Conventional theory would say that in a monopolistic market the incumbent are better-off not innovating as there are no new entrant who pursues innovation as an entry strategy (lets forget Linux for now as it have very limited presence in Business user/corporate market). Why so?

1. Diverting the precious resources (capital, people, etc.) in innovation endeavor, when instead they can be reduced to increase their margins.
2. Innovation resulting in new product version may lead to cannibalizing their existing products
3. The new version may lead to losing their captive customers due to the cost involved in upgrading/learning/supporting the new version

It seems that is not true for Microsoft, which has been a non-disruptive innovator. Being a monopolist, Microsoft has successfully managed to move their installed base to the latest version of the OS every time, though the product can be frustratingly buggy :-)...How do they do it? By withdrawing support, patches (mean to fix bugs) to the product base and frightening good souls out there of pernicious virus and Trojans that can exploit the loop holes leave aside the fact they never mention that they had more bugs that can harm you then those viruses/Trojans.

However, we don’t seem to see the same pattern when it comes to tangible products (esp. hardware). Here it seems the innovation has mostly been disruptive. Do you recall what ever happened to the 5.25 inch disks? Reading innovators dilemma gives us countless organizations that have failed by releasing new versions of their archaic products. This was due to new innovations that had not only introduced better features but at lesser cost. This has resulted in monopolists always loosing out due to disruptive innovation by new entrant.

I was reading the "Loyal servant" prototypical game in game theory and realized the above pattern was unique where theory didn’t exactly apply. It prompted me to think on these lines and raised few questions:

1. Is there any disruptive innovation in the software product market?
2. How do we spot them if they are already available? (Remember more convenience/features & lower cost for tangible products)
3. What are the right things that these corporations have to do to bring faster adoption of the innovative product (same time faster obsolescence of their existing product)?