Economic downturn not taking the fight out of Microsoft

Ballmer's plan outlines adjustments, signals full-steam ahead

Microsoft last week outlined its intent to stand and fight against a difficult economy with a plan to go after competitors and seize market share in areas like netbooks, mobile devices/services, browsers, databases and even search/advertising.

Microsoft this week outlined its intent to stand and fight against a difficult economy with a plan to go after competitors and seize market share in areas like netbooks, mobile devices/services, browsers, databases and even search/advertising.

Microsoft CEO Steve Ballmer earlier this week walked financial analysts through the company's annual mid-fiscal year update on its strategic thinking, striking a bit of a conciliatory tone but making it clear he's organizing to fight.

"You don't beat it. You manage in this environment," Ballmer said. "We need to then really ask the question, what do we invest in, what's important, what's going to happen."

Chart showing Microsoft's strategies and challenges

What's going to happen, experts say, is that Microsoft, as always, is going to be on the offensive with its extensive line of products and business interests ranging from Windows to Xbox.

Ballmer speak

"This is Ballmer saying we think our strategy is working and we are not going to change it or the areas of investment," said Matt Rosoff, an analyst with independent research firm Directions on Microsoft. "They look at this as time to expand and take share from companies that are weaker fiscally. Microsoft has cash, they have incredible profit margins, they are doing pretty well."

In the first half of fiscal year 2009, Microsoft posted $31.7 billion of revenue, which was up 5% over the same time period last year, and $11.9 billion in operating income. The company reported in December that it had nearly $20 billion in cash.

"If you look at the numbers, just the raw numbers, it was actually a very good first half," said CFO Chris Liddell, who appeared this week with Ballmer at the financial analysts meeting in New York City.

Ballmer said Microsoft will seek to grow its share in various markets that it has been in for years including mobile and databases and attack new markets like netbooks and entry-level servers.

Some of the company's effort will be to protect market share, as is the case with the upcoming Internet Explorer 8, some will be to gain market share, as in its ongoing battle to steal database customers from Oracle, and some will be a massive uphill battle like search and advertising where Google dominates.

Ballmer announced that Windows 7 would be available on netbooks and said Microsoft is working on a low-cost, low-functionality entry level server called Foundation Edition.

And he said Office 14, slated to ship next year, client access licenses and a new high-end version of SQL Server would be foundations to sell into corporations.

The opposite of gloom

Despite Ballmer's gloomy assessment of current overall economic conditions his words exposed his poker face.

"I tell our people, I don't know why you get grim, even in a down economy we could take share, maybe especially in a down economy it's time to take share," he said.

In addition to growing share and revenue, Ballmer talked about reducing operating costs and being smart with investments. He said Microsoft's "little corporate strategy group" researched annual reports of various companies from 1927 through about 1938 and found that those that invested during down cycles prospered when better times returned.

Microsoft has a research and development budget of $9.5 billion for this year. And it plans to spend $14 billion in sales and marketing.

"That is so Microsoft for them to go that deep with analysis and plan their strategy not around gut feelings but around what has been successful for other companies and to do it so methodically," said Al Gillen, an analyst with IDC.

Gillen said Microsoft certainly understands the down side, but "they also see opportunity, Microsoft sees weakness in competitors, Microsoft sees opportunity to invest when others will pull back. They have the cash to do it. They can invest significantly over the next two years even if the market is soft. So I think we can expect that Microsoft will try to come out of this stronger and not weaker."

The tell tale sign of any Microsoft success will come over the next 12 to 18 months and beyond.

Ballmer outlined where the opportunities would be by focusing on Microsoft's "seven big businesses," and he provided strategies to grow share and build revenue through what he called "revenue realization," which, he said, isn't about pricing but about selling more things to the same customers, such as replacing pirated copies of Windows with licensed versions. But he also said Microsoft would try to move corporate users to newer and more powerful versions of Microsoft software.

Seven signs

The seven businesses where Microsoft will focus are Windows, Windows Mobile, desktop productivity especially Office, server, enterprise software especially SQL Server, search/advertising and entertainment/TV.

Some of Microsoft's strategies center around adding a netbook version of Windows 7, a 2010 release for Office 14, the low-cost, low-functionality Foundation Edition server slated to appear in the next year or so, a high-end version of SQL Server called DataCenter and a version that runs on the cloud OS Windows Azure.

Microsoft plans to make enterprise customers an important part of its strategy, and Ballmer said Microsoft would look at up-selling existing customers on such things as client access licensing, and on products such as a new high-end SQL Server version slated for delivery in the next 12 months.

Microsoft's other plans include attacks on the low-end of the PC and server where it has not typically played. Netbooks are an emerging market that Microsoft has been targeting. A Windows 7-based netbook will help ramp up that effort. (View a slideshow of what we love and hate about Windows 7.)

And the Foundation Server hopefully will appeal to users in small or emerging markets where Linux has been satisfying needs.

On the mobile side, Microsoft will try to take advantage of users switching from feature phones to smartphones with a low-cost alternative in that market.

"I do think the guys in the best position are the guys with phones at low price points," Ballmer said.

Microsoft plans to focus on corporate buyers as it preps to roll out Office 14 next year.

Ballmer said enterprise buyers bring the greatest Office revenue "because we attach more value. We help the user log-in, we help IT manage the desktop, we help with collaboration, we run e-mail."

And Ballmer ticked off new technologies that Microsoft will sell into the enterprise including security management, identity management, authentication, next generation portal, collaboration and conferencing.

In the area of enterprise software, Ballmer said Oracle would be on its radar. The company, he said, has higher revenue share in the database market, but that Microsoft leads in unit share, and given the economy, "I think the time to take share from Oracle, who recently raised prices, has never been better."

In search/advertising, Ballmer said Microsoft would not give up against Google and he even said he would again explore a partnership with Yahoo, which he firmly said would not include an acquisition, in order to catch Google.

"This is a huge opportunity, if you give up you cannot get back in the game," he said.

And game might be the operative word, because clearly Microsoft believes it still has game no matter how far behind Google it is or how deep the economy may sink.

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