Channel Call

Inside Microsoft's Worst Hard Time

Based on its latest quarterly report, Redmond resembles other tech companies hit by the recession as it bleeds net income and lays off workers.

The last three months of 2008 were rough for Microsoft, and that's cause for some concern among Microsoft's partners.

First, the numbers. Compared to the same quarter in the previous year, Microsoft's net income fell by 11 percent -- though the company was still in the black by $4.17 billion on revenue that inched up by 2 percent to $16.63 billion.

There were two huge numbers in this quarter. Microsoft suffered a decline in client revenue of 8 percent, which the company attributed to PC market weakness and a continued shift to lower-cost netbooks.

The other was a layoff. Microsoft plans to cut 5,000 jobs in R&D, marketing, sales, finance, legal, HR and IT over 18 months. The company issued 1,400 pink slips the day of the earnings announcement. In all, the company expects the cuts to reduce its fiscal 2009 capital expenditures by $700 million. With some job growth in various sectors over the same period, Microsoft expects the net loss to be about 2,000 to 3,000 jobs.

Microsoft's problems didn't get a lot of attention because, let's face it, everybody's bleeding all over the place. Those job losses hit hard at Microsoft, and the marketing, sales and finance job losses will be felt by channel partners. But Redmond's losses don't compete with layoff headlines from Citigroup of 53,000 jobs, Circuit City Stores of 34,000 jobs and Caterpillar of 20,000 jobs. Similarly, a dip in profit isn't too shabby when you compare it against the billions of losses acknowledged by Wall Street banks and Detroit automakers.

The thing is Microsoft -- unlike other technology behemoths like HP and IBM -- never had a companywide layoff before. And even in the 2001 recession, the Windows client juggernaut kept piling up cash. The magic is fading, evidenced in a simple statement from Microsoft CEO Steve Ballmer about the company's earnings.

"While we are not immune to the effects of the economy, I am confident in the strength of our product portfolio and soundness of our approach," Ballmer said.

Not immune, as in, no longer immune. This is a much worse recession than 2001, no doubt. But Microsoft left itself badly out of position for economic hard times with the way it handled Windows Vista.

Fortunately for the company -- and for the partners who rely on Microsoft -- there may be time to recover the franchise product. Executives whose voices emerged as champions of customer experience in the e-mails that have come to light in the Windows Vista Capable class-action lawsuit are the ones who appear to be steering the Windows 7 effort.

There's also a lack of a clear theme among the forces that would replace Microsoft on the desktop. Apple is surging, but its higher price point should limit its appeal at a time when the market is also moving toward lower-margin netbooks. There may be time for Microsoft to get the magic back, and protect partners' investments in the company and its platforms. What do you think? Let me know at sbekker@rcpmag.com.

About the Author

Scott Bekker is editor in chief of Redmond Channel Partner magazine.