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Lights out for Microsoft 2.0?

How the economy will focus minds

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Analysis Microsoft's conversion to Web 2.0 concepts like online, ad-funded services and software-as-a-service in the last few years have made it the oldest startup in town.

Chief executive Steve Ballmer has evangelized search and advertising as his company's manifest destiny and, from chief software architect Ray Ozzie on down, has brought on individuals and companies to help make that transition.

We now have Windows Live, Office Live, Live Search, MSN Video, an ads-serving platform, and online business applications. Microsoft has even tried to grease the pump by paying people to use its online search services.

Such is the commitment to drive traffic to its own versions of Google search, YouTube, and Digg, Microsoft has done what most other startups couldn't: spend billions of dollars and almost double it's workforce in just three years. Microsoft now has nearly 100,000 employees.

Despite its size, though, Microsoft is poised to experience the same pains of junior startups, if the money that fed Web 2.0 optimism has - as it seems - dried up. If and when that happens, and if Microsoft's business managers behave like most do during a downturn, that'll hurt Microsoft's three-year-old Web 2.0 strategy.

Don't bank on the bank

The economy, as you're well aware by now, is in trouble. Banks are not lending money, and some big names have gone out of business.

That's going to cause problems for companies of any size who rely on cash flow to keep their heads above water. Caught between suppliers and employees that need paying and customers who pay the bills, operations can get very tight.

Microsoft is already concerned about the implications of bankruptcy on its customers' ability to pay its software bills. It was telling that Microsoft is closely watching developments in the Washington Mutual bankruptcy case. Microsoft won't say why it's watching the WaMu case, or whether it's watching other bankruptcies, but odds are WaMu is a customer and owes Microsoft money.

This is just one case, but it's symbolic. What if other customers also start struggling to pay the bills when their cash flow begins to dry up?

Then there's the usually lucrative fourth-quarter Holiday shopping season, when consumers gorge on new PCs and Xboxes along with turkey during Thanksgiving and Christmas. Consumer confidence is already at record lows, meaning they aren't spending. The omens portend this will not be a happy Holiday Season for retailers, including those Microsoft relies on to ship PCs and Xboxes.

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