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Ballmer resets recession, preps for 100,000 troops

Microsoft's right-hand/left-hand moment

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The economy is not in recession - it's just experiencing a "resetting" of spending. And Microsoft won't retrench after years of huge expansion; it'll just apply the brakes until things get better.

At least, that's what Microsoft chief executive Steve Ballmer said while announcing 5,000 planned layoffs and second-quarter earning that saw Microsoft undershoot expectations by almost $1bn.

Ballmer's uncharacteristic appearance in a second-quarter call was clearly designed to reassure analysts wobbly about Microsoft and the investment bets Ballmer's made in the wake of a tough quarter. Those layoffs were the first in Microsoft's 30-odd-year history.

According to Microsoft's CEO, there's a resetting in the economy to a "lower level of business and consumer spending".

That's been dictated by consumers who can't get credit to refinance their homes, let alone buy a second or third PC, and businesses chopping IT to control capital expenses.

"Neither the consumer or the business side of the technology industry is immune to these economic conditions," Ballmer said, calling this a "once in a lifetime set of economic conditions".

It would appear that Microsoft had deployed its CEO optimism measures.

"There's no stopping our industry or Microsoft. The pause the economy has imposed on our industry will be just that... it will be a pause, it will see renewed strong growth, particularly at Microsoft," Ballmer said.

He spoke of opportunities for Microsoft in the Xbox, which hit record sales during the Holiday shopping season, as well as mobile and online search. The latter two are areas where Microsoft has struggled despite billions of dollars of investment.

He also called out the 80 per cent attach rate of Windows to netbooks, sales of which jumped ten per cent during the company's quarter. Only problem with that is that netbooks are shipping Windows XP rather than high-earning copies of Windows Vista Premium.

Ballmer acknowledged Microsoft has its "work cut out in businesses where we don't have leading positions. We are prioritizing and we are focusing on the most important stuff as we go forward."

Judging by what Ballmer said, though, everything is a priority, so it's difficult to see what's truly important. This kind of mindless optimism is hard to consume when the revenue's not coming in, and hard decisions need to be made on where to prioritize the investment dollars.

To give you an idea of where Microsoft is, second-quarter revenue grew just two per cent to $16.63bn. That's compared to the same quarter last year, when revenue grew a third and set a record at $16.36bn.

Unlike last time, there are also rumblings of trouble in the PC channel that Microsoft has relied on for decades to pump out PCs. Recent months have seen Circuit City and CompUSA expire, killing major routes to market for Windows on the high street and online. Microsoft said Thursday that revenue from the channel was down two per cent, citing "lower-than-usual inventory" in the channel, possibly reflecting the exit of these outlets.

Ballmer also kept Microsoft firmly tethered to investment in online services, something analysts and observers have struggled to understand. Despite spending billions on technology and M&A, Microsoft's market share in search and paid advertising remains small.

Just as chief financial officer Chris Liddell explained Microsoft 5,000 cuts are among its full-time employees, Ballmer popped up to say he'll add "a few thousand back in areas like search, where we see online opportunity". It was like the right hand not knowing - or not caring - what the left was doing.

In short, don't expect Microsoft to scale back following years of massive expansion; rather, expect it to break the 100,000 employee-barrier and continue pumping billions into everything from cash-back programs to search to build its online presence.

"We don't plan on shrinking it [Microsoft's cost base]," Ballmer said. "We do plan on putting the brakes on." ®

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