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Lights out for Microsoft 2.0?

How the economy will focus minds

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That brings us to online services, Microsoft's supposed future. In May 2006, Microsoft promised to spend $2bn more than everyone had expected in online services for the coming fiscal year - to catch Google on search and in ads and to turn the MSN properties into a major destination for online traffic.

Since 2006, Microsoft's head count as grown 28 per cent to 91,000 as it has hired individuals and bought companies like online ads house aQuantive - Microsoft's biggest acquisition at nearly $6bn, an 85 per cent premium on the company's actual value. Go back to 2005 when Microsoft bought Ray Ozzie on board with his Groove Networks start-up, and Microsoft's head count has grown a staggering 49 per cent. There have been increases across R&D, sales, marketing, and support.

Despite, or because, of this investment Microsoft's online business has made the opposite of a profit. Last fiscal year, it lost $1.2bn despite a 32 per cent increase in revenue. That's little surprise when the company is increasing its costs with growing numbers of staff while splashing out on online cash-back programs for little obvious return on investment.

As the economy slows and there's a huge question mark over income, you should expect Microsoft to begin re-assessing where it invests.

If Microsoft's managers do what's in the blood of all good managers, they will start to hunker down for a period of economic uncertainty and cut the unproven stuff. In other words: focus on the core business while freezing or scaling back the ventures that have yet to payback.

In the case of Microsoft, the core business is Windows client and server and tools. These have seen growing costs, too, but are still the company's engines: the Windows client business saw revenue increase 13 per cent to $16.8bn revenue, while server and tools expanded 18 per cent to $13.1bn during Microsoft's fiscal 2008. Importantly, Microsoft is beginning to build new products in these core areas - Windows 7 on the client, a new Windows server, Visual Studio 2010, and SQL Server 2010. If these are the core business, they will naturally demand the lion's share of funding.

Online services will be in the firing line because they are not core, they're losing money, and - probably like most other Web 2.0 ventures - it is unclear how they will make money. Microsoft has talked of some payback in 2010, but that might as well be 3010 when the money that had enabled such start-up activities has tried up.

Staff shuffle

Should the economy continue heading south, you should expect to see Microsoft freeze or rein in its online expansion. First Microsoft will - if it hasn't already - stop taking on new people. There are already reports Microsoft has instituted a hiring freeze from too many different people for this not to be the case, even though Microsoft has denied there's a freeze.

Then it'll shuffle people around. Expect people to move from the online business areas to the cash generators - client, server, and Office.

If that still doesn't work, expect Microsoft to slim down, by removing people who came in with acquisitions such as aQuantive. Contrary to what it likes to think, Microsoft is not an online ads company. It's a software business.

Microsoft's online strategy requires a leap of faith and time to bloom. In a down economy, when the money's drying up, it's fiscal planning based on hard realities that help you survive. If and when Microsoft begins to cut spending and staff, expect investment online to drop, the rhetoric about destiny to get canned, and some properties to be put on hold or go dark. ®

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