In-Depth

2009: Good Riddance

It is customary to end a year by reflecting on successes and positive moments. There are precious few of those for many Microsoft partners in the IT channel to grab onto as this year draws to a close. By nearly all measures, 2009 was one of the worst business years on record since the Great Depression. Rather than looking back for bright spots, this is a year to turn back and say, "Good riddance to 2009."

The Economy -- How Bad Was It?
The overall environment was simply brutal. The National Bureau of Economic Research made it official just before 2009 started, in December 2008, that the economy had hit its peak a year earlier in December 2007 and had been in recession since then. In the months leading up to that announcement, the entire economy appeared on the verge of collapse. The wild several-hundred-point swings of the Dow Jones Industrial Average pointed to a paralyzing possibility that the economy as we all knew it could completely fail.

The economy was at its scariest in the fourth quarter of 2008 and the first quarter of 2009, bringing new orders and even scheduled-but-unstarted projects to a grinding halt at the beginning of the year. According to the Bureau of Economic Research, real Gross Domestic Product (GDP) for the fourth quarter of 2008 decreased 6.3 percent and real GDP for the first quarter of 2009 dropped by 5.7 percent.

By the second quarter, things had stabilized quite a lot and in the third quarter had begun to turn around, from a GDP perspective, at least. Real GDP fell by a much smaller 0.7 percent in the second quarter. The advance estimate for the third quarter of 2009, released Oct. 29, showed GDP growth of 3.5 percent. Analysts attributed much of that growth to the government "cash for clunkers" program and special tax breaks for first-time homebuyers.

Ahead of the GDP numbers, the Dow worked its way back from first quarter lows to cross the 10,000 threshold it originally passed in 1999 and hovered there as the fourth quarter got underway. And investors, like everyone else, tried to figure out whether the recovery was real.

"We went from double-digit server growth and double-digit PC growth ... to double-digit negative growth on servers and PCs. There was nothing we could do."

Allison Watson, Corporate Vice President, Worldwide Partner Group, Microsoft

Troubling data continues to come in on the employment side. Even as the Dow passed 10,000 and the GDP data looked promising, unemployment continued to increase. Unemployment reached 10.2 percent in October, the highest rate in 26 years and approaching the early 1980s peak of 10.8 percent. The Labor Department's broader measure of unemployed and underemployed is 17.5 percent, the highest rate recorded. Although that broader measure dates only to 1994, The New York Times worked with Labor Department economists to estimate the rate back to 1970. The previous high would have been in December 1982, when it would have hit 17.1 percent. The New York Times estimates the figure would have been around 30 percent in the Great Depression. In all, nearly 16 million people are unemployed in the United States and more than 7 million jobs have been lost since 2007.

'Worst Year Ever' for IT Spending
There was a glimmer of positive IT news in the GDP figures from the Bureau of Economic Research for Q3. The Bureau noted that equipment and software increased 1.1 percent in Q3, compared to a decrease of 4.9 percent in Q2.

It's an industry that could use any piece of good news. The headline of an October press release issued during the Gartner Symposium/ITxpo in Orlando flatly called 2009 the "Worst Year Ever." That isn't hyperbole given that IT didn't exist during the Great Depression.

How bad was it? According to the first line of the release, carrying the theme from the headline, Gartner Inc. noted, "The IT industry is exiting its worst year ever, as worldwide IT spending is on pace to decline 5.2 percent ... Worldwide enterprise IT spending will struggle more with IT spending dropping 6.9 percent" [emphasis added].

As awful as a 5.2 percent drop is, this is a slightly better forecast than Gartner gave earlier in the year, and Gartner's forecasts have been a barometer for IT market sentiment. In July, drawing on data from the dismal first quarter, Gartner projected a 6 percent drop in IT spending for all of 2009. As the financial crisis hit in late 2008, Gartner was calling for 2.3 percent growth in IT spending for 2009. Over the summer of 2008, Gartner had called for a relatively rosy 5.9 percent growth rate in IT spending for 2009. With the October numbers, for the first time in the forecast cycle, a Gartner forecast is trending toward improvement rather than further toward an abyss. Perhaps when the analyst firm processes the Q3 data, the IT spending forecast will improve some more?

At the same time, Gartner analysts looked at segments of IT spending. Hardware was one of the hardest-hit areas, with a 16.5 percent decline in spending for 2009. The forecast for software spending for all of 2009 was a decline of 2.1 percent.

Microsoft: First Full-Year Revenue Drop Since IPO
Want a really good gauge of how bad 2009 has been? Microsoft saw its full-year revenues (its fiscal year ends in June) drop for the first time since going public in 1986. Even during the technology-led recession earlier this decade, Microsoft kept going like the Energizer Bunny, cranking out record revenues and earnings while other tech giants stumbled. This time, Microsoft's full-year revenues dropped 3 percent to $58.44 billion. Net income for the full year dropped 18 percent to $14.57 billion. Full-year sales of Windows dropped for the first time.

In another unhappy first, Microsoft announced the first broad layoffs in its history in January as the shape of the recession became clear. At the time, Microsoft announced a 5,000-person cut in a labor force of about 94,000 employees. Then in November, the company confirmed a further cut of about 800 employees even as a wave of product launches from Windows 7 to Exchange Server 2010 was under way, indicating that the belt-tightening and pain are not yet over.

The results for Microsoft's first quarter of 2010, which ended Sept. 30, were similarly discouraging, although Wall Street rewarded the company's stock for beating expectations. The company reported that revenues declined by 14 percent compared to the year-ago quarter and earnings per share fell by 17 percent.

While Microsoft makes a solid bellwether, especially for the performance of its own partners, other tech vendors and channel players are faring as poorly or worse. In the most recent round of earnings, generally covering the period when the Bureau of Economic Research was finding the economy as measured by GDP growing at 3.5 percent, tech vendors were seeing revenues go down, not up. Some were able to improve earnings by cutting costs, others weren't in a position to manage that. In their most recent quarters:

  • IBM Corp.'s revenues fell 7 percent while earnings rose 18 percent.
  • Symantec Corp.'s earnings fell 3 percent and earnings improved 20 percent.
  • SAP AG's revenues fell by 9 percent while earnings went up 6 percent.
  • EMC Corp.'s revenues fell 5 percent and earnings fell by 26 percent.

Among major distributors:

  • Tech Data Corp. saw revenues fall 16 percent but managed to improve earnings by 67 percent.
  • Ingram Micro Inc. saw revenues fall 11 percent and earnings fall by 7 percent.
  • Synnex Corp.'s revenues fell nearly 2 percent and earnings improved by 1.5 percent.

Dell Inc. and Hewlett-Packard Co. both released quarterly results after the deadline for this issue, but both struggled during the previous quarter, when overall GDP was officially nearly flat. Dell had a revenue drop of 22 percent and an earnings drop of 23 percent, and HP had a revenue drop of 2 percent accompanied by an earnings falloff of 16 percent.

The difficulties, of course, extended into the channel. In addition to being a major IT vendor, the IBM Global Services unit is itself arguably the largest systems integration firm in the world. IBM's earnings release from Oct. 15 highlighted the continuing struggles that unit, and by extension, the solution provider channel, is having this year. Total Global Services revenues were down 7 percent compared to the year-ago quarter. Signings in Consulting and Systems Integration and in Integrated Technology Services decreased 16 percent in value. Total outsourcing signings were up 1 percent. In a sign that things could be picking up a bit, the company reported, "IBM signed three [services contracts] in the first two days of October with a total value of nearly $1 billion." The company had signed 13 contracts greater than $100 million for the quarter.

Microsoft Consulting Services, while considerably smaller than IBM Global Services, is also struggling, according to Microsoft's latest quarterly financial filing. There was a "decline in demand for consulting services." The amount wasn't specified, but the decline was cited to explain a decrease in cost of revenue of $69 million in the Server and Tools business unit.

Many of Microsoft's most committed partners have built their businesses on the Microsoft Dynamics line of business applications. The numbers are tough there as well. Microsoft Dynamics revenues declined 6 percent in the first quarter, compared to the year-ago period. This is especially interesting because it's the first time Microsoft has talked about Dynamics revenues. In the past, Microsoft used the vague phrasing "Dynamics customer billings," which were difficult to define. Last year, such billings were up 10 percent in the July through September quarter, down 7 percent in the October through December quarter, down 8 percent for the January through March quarter, and off 7 percent for the full fiscal year that ended in July. But it's hard to say, given the change in reporting from billings to revenues, whether the 6 percent revenue drop points to a sequential improvement over whatever the fourth quarter drop in billings represent, or not.

The segment of the channel Microsoft relies upon most heavily for revenues is OEMs such as Dell, HP and Lenovo, which in turn are heavily dependent on global PC demand. Microsoft estimated in its latest financial filing that worldwide PC shipments from all sources for the July 1 to Sept. 30 period were somewhere between flat and 2 percent growth. OEM revenues dropped $207 million, or 6 percent. Part of the reason for the dip in OEM revenues (which account for about 80 percent of Windows Division revenue) is an 8 percentage point decline in the OEM premium mix to 63 percent. According to the report, that's "primarily driven by growth of licenses related to sales of netbook PCs, a decline in premium editions sold to business customers, and changes in geographic mix."

Hiding 'a Lot of Mediocrity'
Allison Watson, corporate vice president of the Microsoft Worldwide Partner Group and Microsoft's highest-ranking channel executive, provided some insight into how Microsoft is thinking about and reacting to the events of the last two years during an October speech in Cannes, France, at an Executive Partner Summit for the Europe, Middle East and Africa region.

Echoing a message delivered by Chief Operating Officer Kevin Turner at the Worldwide Partner Conference in July, Watson implied that Microsoft was as blindsided by the severe economic downturn as anyone else.

"In this time period last year, we went from double-digit server growth and double-digit PC growth, which sort of means there's plenty of sockets out there that people need to put software on and need services around, and it turned around overnight to double-digit negative growth on servers and PCs," Watson said. "Did we have any choice in that matter at that point? Is there anything we could do? There was nothing we could do."

Even as the decline in demand, revenues and employees was as much of a shock inside Microsoft as it was outside, it gave the company an opportunity to clean house a bit. "It was a real wake-up call for Microsoft," Watson said. "I don't know about your businesses, but the concept that growth and success and, in Microsoft's case, 34 years of double-digit growth without ever really hiccoughing, except for a little bit in year 2000, hid a lot of mediocrity."

The results of that effort have been apparent outside the company. In addition to thousands of employees losing their positions, a number of products, such as Microsoft Money and the Microsoft Response Point, went into development limbo.

According to Watson, Microsoft's processes before turning new ideas into business units and programs are becoming more rigorous. "[This] is the concept of not putting in things during good times when you have to take them out and you wouldn't put them in during bad times. Microsoft had to look back at the things that we were doing because they had once seemed like a good idea or we had a good conversation about them. From now on we'll look harder and say, even if times were good or bad, does it make sense to put them in?" Turner, the COO and former Wal-Mart executive, is exerting an influence on Microsoft's discipline in that area, Watson suggested.

Inside the software giant, the attitude on the economy is that sales, marketing and internal costs are going to continue to require hard work. "We don't know when the economy is coming out of the downturn, we don't know the macroeconomic view of the world, and we're continuing to take a conservative view," Watson said.

Without any rosiness, the Microsoft attitude is that there's opportunity out there, but it's mostly in saving money for customers and in taking market share from competitors.

"IT budgets are flat to down but none of our customers would say that we've actually achieved all of our IT capability, nor would they think that their priorities have gone down. We're in the new normal or we're in an economic reset, and yet at the same time what are we being asked to do? Well, we've got new efficiency," Watson said.

Reinforcing the Gartner projection that 2009 sales would be worse for the enterprise than the rest of the IT market, Watson called on partners for assistance with big customers. "[The enterprise business is] the area [where] we probably need the most help as we close out the next two quarters and the full fiscal year. Our small- and mid-market business is starting to turn around, and our OEM business with Windows 7 is really starting to take off. But we really need that help in the corporate accounts and enterprise business to establish share regrowth with our customers."

Things Will Be Better in 2012
Watson is a few rungs down the corporate ladder from Steve Ballmer, and her message of a more subtle opportunity mirrors Ballmer's message this year of an economic "reset." Ballmer contends that without all the financial leverage of the mid-2000s, economic activity -- when it comes back -- will come back at a more muted level.

Gartner struck a similar chord in its October projections.

"While the IT industry will return to growth in 2010, the market will not recover to 2008 revenue levels before 2012," Peter Sondergaard, Gartner's global head of research, said in a statement. "2010 is about balancing the focus on cost, risk and growth. For more than 50 percent of CIOs the IT budget will be zero percent or less in growth terms. It will only slowly improve in 2011."

For 2010, Gartner forecasts 3.3 percent growth for a global total of IT spending of $3.3 trillion. By segment, Gartner calls for spending in the already battered hardware market to remain flat, in the software market to swing to 4.8 percent growth and in IT services to grow 4.5 percent.

A lot will ride on what shape the recession-recovery takes. Economists have been throwing around an alphabet soup of possible scenarios. The devoutly to be hoped for V-shaped recession would be one where the third quarter results are followed by even more rapid growth in the fourth quarter and throughout 2010. Others point to the 10.2 percent unemployment and expectations that unemployment will rise through the first half of 2010 in expecting a different letter -- a U-shape, where the economy bounces around the bottom for awhile before slowly growing. The argument goes that, in an economy that's 70 percent dependent on consumer spending, it's hard to see how current levels of joblessness can sustain a recovery. A worse fear is that once the federal stimulus wears off and if commercial real estate and asset bubbles pop, we could be in for a double-dip, or W-shaped recession. Worse still is the possibility of an L-shaped recession similar to what produced the so-called "lost decade" in Japan.

How to deal with this somewhat chaotic outlook? We'll dig into that next month in the 2010 installment of the Redmond Channel Partner magazine Marching Orders piece. That article will tap channel luminaries for their advice on selling, marketing, tidying up the business, reaching out to potential partners, navigating the resources of the Microsoft Partner Network and seizing new opportunities. For now, take what pleasure you can in saying "good riddance" to 2009. And let's hope we're not saying "good riddance" to 2010 a year from now.