Ballmer sees recession as investment opportunity for Microsoft

CEO says software vendor will continue spending in an effort to increase market share

Microsoft Corp. CEO Steve Ballmer told financial analysts today that the software vendor plans to continue investing money in an effort to increase its market share in key parts of the tech market, despite the ongoing economic recession.

Downturns such as the current one can be a good opportunity to invest strategically in preparation for the economy's eventual turnaround, Ballmer said during a "strategic update meeting" in New York, where he also said that Microsoft plans to release its Windows Azure cloud-computing platform by year's end.

However, Ballmer reiterated earlier comments that he doesn't expect the economy to improve quickly and said that Microsoft is prepared, if necessary, to hunker down and spend carefully until business conditions do get better. Microsoft made an initial move to cut costs last month, when it announced plans to lay off up to 5,000 workers over the next 18 months.

Ballmer said he's taking cues from how companies handled previous economic crises, most notably the Great Depression of the late 1920s and 1930s. "I've had guys go through annual reports of a bunch of companies from 1927 to 1938 to see what were those guys saying," he noted.

Microsoft is following the example of one company in particular: RCA, which kept investing in research and development during the Depression, and afterward dominated its industry, according to Ballmer. Microsoft likewise will try to make gains in some areas where it can improve its market-share position while the economy is down, he said.

"We'll compete for share -- that's one thing that's economy-independent," he said, adding that he is repeating a mantra of "share" to his staff to remind them of its importance.

Another thing Ballmer took away from his historical research, however, is that the business climate will continue to be difficult for the foreseeable future. The companies he has studied "all have a story associated with them, and none of them is a quick recovery," he said.

Keeping that in mind, Ballmer said, Microsoft expects its revenue growth to be lower than usual for the rest of the current fiscal year, which ends June 30, and possibly beyond.

Microsoft didn't disclose any financial guidance for the remainder of the year when it announced its second-quarter financial results and its layoff plans in January. It was the same today, with neither Ballmer nor Microsoft Chief Financial Officer Chris Liddell, who also spoke to the analysts, giving a specific business forecast. No further layoffs were mentioned, although Ballmer and Liddell both emphasized that they will continue to examine how the company could reduce costs even as it continues to make strategic investments.

One area where Microsoft will invest in hopes of improving its market-share position is the search and advertising business, which continues to be a thorn in the company's side, since Google Inc. shows no sign of giving up its market dominance in that arena.

Ballmer acknowledged criticism of Microsoft's search and advertising business, which continues to flag despite significant investment already from the company over the past several years. Microsoft's market share -- which hovers at about 3% to 4%, according to analysts -- has barely budged in that time, leading even Ballmer to describe Microsoft as a David compared to Google's Goliath.

"Some of you will ask, 'Why do you stay in search and advertising?'" Ballmer said today, before reiterating Microsoft's stance that that market remains a "good opportunity" for revenue and is "extremely important competitively" for the software vendor, despite Google's dominance.

Ballmer also restated his opinion that Microsoft and Yahoo Inc. should engineer some kind of strategic partnership to compete with Google, but he "short-circuited" the possibility of a full acquisition. He said he will approach new Yahoo CEO Carol Bartz, who took over from Jerry Yang last month, when she has settled more comfortably into her position. Yang resigned after rejecting a Microsoft acquisition bid and seeing a proposed search advertising deal with Google fall apart.

Despite Microsoft's continued interest in search and advertising, though, Ballmer said he will exercise caution while making new investments because of a recognition that it's not a market where the software vendor is "going to swing from 3% or 4% global share to 25% in a year."

"We know we have to be responsible in the money that we've invested," he continued, adding that he doesn't want to be known as the "Jerry Yang" -- that is, "the guy that invested forever" -- of the search-advertising market.

Microsoft also is increasing investments slightly in its Windows client operating system operations, though not in Windows Mobile, according to Ballmer. During a question-and-answer period, one analyst said that was puzzling, since he thought the market for software that supports mobile devices would be a strategic area of investment because of its growth potential.

But Ballmer said he sees the client and mobile operating systems businesses drawing closer together. Investment in the Windows client eventually will spill over into Windows Mobile, he added. "At the end of the day, the technology base will be largely shared over time, whereas historically, it was not shared," Ballmer said.

In fact, he predicted that the kernels in the two operating systems will one day share the same technology, although he didn't disclose a time frame for that level of integration.

Copyright © 2009 IDG Communications, Inc.

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