The news last month that Microsoft  was issuing its first large-scale layoffs was a clear sign that the economic downturn is being felt even in Redmond, Wash. In a conference call with financial analysts Tuesday, CEO Steve Ballmer made it clear that the software giant doesn't expect things to improve anytime soon.
The global economy, Ballmer suggested, is going through an "economic reset," in which financial resources are removed from the system, the economy finds a new level, "and then productivity and sort of innovation can then again drive economic growth."
"I don't think," Ballmer said, "and certainly the earnings reports we see from everybody, I don't think anybody is able to cut costs fast enough in any industry to maintain the profits of yesteryear. So you've got to ask, what does the business reset look like that goes along with the economic reset?"
The Importance of R&D
Ballmer told analysts that as part of its effort to understand the current economic climate, Microsoft asked some of its employees to read various company annual reports from 1927 through 1938. The goal, he said, was to find out who had done a good job handling the Great Depression.
"RCA, god rest them in peace, RCA become our role model," Ballmer said. "They actually kept investing in R&D through the Depression period, and in the post-Depression they dominated TV technology because they were really the only guys who had invested."
During his presentation, Ballmer listed the company's various R&D initiatives. Among other things, he said, Microsoft is committing $7.6 billion in R&D funds to Office, the company's flagship productivity suite. However, Ballmer added, the next version of the program, Office 14, will not be available this year as expected, but will be "generally available" in 2010.
OS Market Share Challenges
Ballmer framed much of his strategy analysis on Microsoft's relative market share in various business segments. The company's dominant position in personal-computer operating systems, for instance, is both a blessing and a challenge: It provides enormous revenue to Microsoft, Ballmer said, but it is also vulnerable to the slowdown in hardware purchases. He also conceded that the company's OS market share has slipped slightly in the face of improvements in Linux, Mac OS X, and even pirated copies of Windows.
"I think, depending on how you look at it, Apple has probably increased its market share over the last year or so by a point or more," Ballmer conceded. "And a point of market share on a number that's about 300 million is interesting. It's an interesting amount of market share, while not necessarily being as dramatic as people would think."
Ballmer doesn't think the challengers to Windows will be limited to PCs and, clearly, Google looms large in his strategic thinking.
"I assume we're going to see Android-based, Linux-based laptops, in addition to phones," he said. "We'll see Google more as a competitor in the desktop operating-system business than we ever have before. The seams between what's a phone operating system and a PC operating system will change, and so we have ramped the investment in the client operating system."
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