News

Microsoft's CFO Talks Strategy at Goldman Sachs Event

• By Kurt Mackie
• February 26, 2009

Chris Liddell, Microsoft's senior vice president and chief financial officer, painted a grim picture of the global economy, and he said it's bad for everyone -- not just Microsoft.

"It's just an incredibly tough trading environment -- certainly the worst that pretty much any of us have seen in our lifetimes," Liddell said.

Microsoft has been digging back into the historical record, looking at past economic contractions triggered by credit issues, he explained. Under such conditions, the gross domestic product (GDP) generally contracts by 10 percent on average, he said.

"It varies from three to four percent 'mild' to the 'Great Depression,' which was 30 percent, but on average it's about 10 percent," he said.

"It's not unreasonable to think on the scale of what we're talking about that we could see GDP contraction on a global basis at that level of magnitude," he added. "Certainly, five percent is what we're seeing in Japan, where you're already seeing a run rate of more than 10 percent."

Microsoft's task is how to react to such an economic environment, Liddell said. The company has been used to seeing its spending expand by 10 percent each year. Now, however, Microsoft will concentrate more on prioritizing its projects and keeping its costs flat.

Companies will have to differentiate themselves by focusing on market share, revenue per unit of market share, cost containment, prioritization of projects and cash management, he explained. On the latter front, Microsoft is doing well cash-wise with its AAA rating.

Liddell described Microsoft's enterprise product line (with products such as SQL Server, Hyper-V and SharePoint) as its main strength. The Windows Azure cloud computing line of business will be slower to develop, he said.

In response to a question, Liddell said that Windows 7, Microsoft's newest operating system, will help Microsoft's business to some degree. However, he added that macroeconomic environment conditions, which currently aren't good, always dominate in terms of PC sales.

Liddell spent a lot time fielding questions about netbooks, a smaller low-cost and low-tech alternative to laptops. He acknowledged that netbooks have cannibalized PC sales figures, saying they'd have been much lower without netbooks sales included. Microsoft is still trying to figure out the upsell on machines that may cost below $300.

"Windows 7 will work on netbooks, so we'll have a basic SKU but we'll also have the ability for people to trade up and get a better SKU, which would give a price more similar to what we normally get from a consumer," Liddell said. Netbooks, he explained, are as much of an opportunity as a challenge.

In competition with free operating systems, such as Google's Android, Microsoft's position is that "people are willing to pay an extra $20 or $30 to have a good experience," Liddell said.

Microsoft is sticking with its efforts in online advertising, which represents a $50 to $60 billion revenue opportunity in the next few years. Having technical search expertise is important in this market and Microsoft currently has "the strongest team we've ever had" with the addition of former Yahoo search technologist Dr. Qi Lu, Liddell said. He added that Microsoft expects online advertising to be a relatively positive trend over the next five to 10 years.

Scale might help Microsoft with its online advertising business, but combining efforts with Yahoo won't be a panacea, Liddell explained, because "[Yahoo] doesn't have the magic solution either."

The host of the Goldman Sachs event wanted to know why Microsoft had not cut back more on its personnel count.

"We could have done what is relatively easy, like it is in your business, and put people out on the street and change the structure overnight," Liddell snapped.

However, Microsoft takes the view that it is keeping people who will create value over the next five to 10 years. The company prefers to invest for the long term, Liddell added. He suggested that creating a cultural change in the spending environment at Microsoft would be a more effective cost-cutting approach than eliminating personnel.

"You can't live in a continuous uncertainty environment," he added.

Lastly, Liddell explained how Microsoft plans to monetize its operating system for mobile devices. He said that Microsoft will still charge for its OS, but the key to the mobile market is achieving scale. Microsoft will not be able to get revenue per handset. Instead, Microsoft is currently looking at alternative monetization scenarios, such as gaining revenue from mobile search.