Ballmer Still Plans to Throw Money Around

Microsoft's CEO says he hopes to gain market share during the recession -- and he's willing to spend money to do so.

When Microsoft Corp. reported an 11% year-to-year drop in its second-quarter profits on Jan. 22, it also announced a series of cost-cutting moves that included a plan to eliminate up to 5,000 jobs over the next 18 months.

And at a meeting with financial analysts in New York last Tuesday, CEO Steve Ballmer had some downbeat words about the economy and the software vendor's business outlook.

Ballmer said he expects Microsoft's revenue growth to be lower than usual in the second half of its fiscal year and possibly beyond. He added that he thinks economic conditions will be "relatively weak for a relatively long period of time."

But in spite of all that, Ballmer also said that Microsoft plans to continue investing money in an effort to increase its market share in key parts of the technology market, such as browsers, enterprise software, and online search and advertising.

"We're going to compete for share," he said. "That's economy-independent, and the theme I'm sending to all of our people is 'Share, share, share, share, share."

Ballmer noted that he's taking cues from how companies handled previous economic crises, most notably the Great Depression of the late 1920s and '30s. He even had members of Microsoft's corporate strategy group read the annual reports of various companies from that era to see how they coped with the economic hard times.

As a result of the history lesson, Microsoft is following the example of one company in particular: RCA, which kept investing in research and development and then dominated the TV industry after the Depression, according to Ballmer.

By year's end, Ballmer said, Microsoft plans to release its Windows Azure cloud computing platform to compete with services such as Inc.'s Elastic Compute Cloud.

Internet Explorer 8 and Windows 7 are also on the way, and Office 14 is expected next year. Moreover, Microsoft announced Windows Mobile 6.5 two weeks ago, and it hopes that the upgrade will put phones based on that operating system in the same class as the iPhone and BlackBerry Storm; Ballmer said Windows Mobile 7 will follow in 2010.

Forrester Research Inc. analyst Andrew Bartels said that even though Microsoft's revenue growth has slowed, the company has "lots and lots of money." Bartels added that he thinks the IT market is poised for a return to "strong growth" next year, with the recession currently masking demand for technologies such as cloud computing services, virtualization and unified communications. For Microsoft, he said, spending some of its cash hoard to better position itself for an economic rebound has low risk "and tons of upside."

But Matt Rosoff, an analyst at Directions on Microsoft in Kirkland, Wash., said Microsoft's biggest problem isn't an inability to invest money -- it's the company's failure to successfully execute in new technology markets. In particular, he cited search and advertising -- businesses that Microsoft has thrown hundreds of millions of dollars at with little to show for its investment.

Ballmer, who recently described Microsoft as a David compared with Google Inc.'s search Goliath, acknowledged the criticisms voiced by Rosoff and others.

"Some of you will ask, 'Why do you stay in search and advertising?' " Ballmer said. But he reiterated Microsoft's stance that the search market is "extremely important competitively" for the software vendor, despite Google's dominance.

On the same day as the analyst meeting, Microsoft's research unit held its annual TechFest event at company headquarters to show off future technologies. Among those on display was an experimental search site called Viveri, which Microsoft expects to launch this summer to streamline the process of testing new search capabilities.

Viveri will be open to the public, and Robert Rounthwaite, a software architect at Microsoft, said the company hopes that technology enthusiasts will try out the functionality available there. That won't gain Microsoft much share by itself -- but it might be a small step in the right direction.

Montalbano writes for the IDG News Service. Nancy Gohring of the IDG News Service contributed to this story.

Copyright © 2009 IDG Communications, Inc.

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