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Ballmer Cites Microsoft's Plans in Weak Economy

Microsoft provided a strategic update at a financial analyst meeting in New York, describing prospects for the company's second half of the fiscal year, which ends in June.

• By Kurt Mackie
• 02/24/2009

Chris Liddell, Microsoft's senior vice president and chief financial officer, cited deteriorating PC sales, a deteriorating situation on the server side and a gloomy outlook for Microsoft's online search business as ad sales come under pressure.

Microsoft's CEO Steve Ballmer described the economy as being in reset mode, but his overall assessment was rather bleak.

"We've got the view that the economy is going to be relatively weak for a relatively long time," Ballmer said, who described Microsoft's strategy for the rest of the year in broad strokes.

Microsoft is concentrating on its seven big business segments, including Windows and Windows Mobile, desktop productivity, servers, enterprise software, online search and advertising, entertainment and TV and "the other" category. From an operating expense standpoint, Microsoft has $27.5 billion to spend, which breaks down to $9.5 billion going to research, $14 billion for sales and marketing and $4 billion for G&A (general and administration).

Most (28 percent) of Microsoft's capital expenditures are going to desktop productivity software, followed by Windows (16 percent) and enterprise software (10 percent). Ballmer said that Microsoft's desktop productivity software is "very profitable" for the company with most sales coming from the enterprise. Desktop productivity sales are being affected by PC sales, Ballmer noted.

He acknowledged competition with OpenOffice.org, a free office productivity suite, and said Microsoft faces "challenges in the education market." He also said that Office 14, Microsoft's office suite of applications currently under development, will not be available this year.

Microsoft's search and advertising segment was described by Ballmer as "very unprofitable." He left the door open to a deal with Yahoo, suggesting that Yahoo's new CEO, Carol Bartz, might want to chat about pooling Microsoft and Yahoo resources against their chief competitor, Google. Ballmer openly bragged about hiring 10 of Yahoo's key search technologists, including Dr. Qi Lu, who now serves as Microsoft's Online Services Group president.

Microsoft's online business segment typically loses money, and Ballmer noted that some people have suggested that Microsoft should just abandon the search advertising business.

"I don't want to be known as the Jerry Yang of the market," Ballmer said, referring to the former Yahoo CEO who met shareholder ire, especially after he declined a Microsoft acquisition bid.

Ballmer acknowledged two challenges from Linux operating systems, one of which being the spread of Google's Android on mobile devices. However, the biggest challenge for Microsoft is in the Web server market, where "Linux still dominates the Web," he said. Ballmer also acknowledged a one point market share gain by Apple's OS.

Oracle was also on Ballmer's radar screen. He suggested Microsoft had an opportunity to take market share from Oracle but also noted that Oracle's enterprise licensing model is making it "hard for us to get in."

Microsoft is also heavily targeting the netbooks market, with Ballmer saying that "Windows has a more than 90 percent attach rate on netbooks." By contrast, regular PC sales have been flat. Microsoft is still trying to figure out an upsell market on netbooks. In response to a question, Ballmer threw out the idea of having a business edition of Windows 7 on netbooks as one possible approach.

Finally, on the cloud computing front and Windows Azure, Ballmer suggested that the company "ought to have significant progress by the end of this year at PDC [Microsoft's Professional Developers Conference]."