Original URL: http://www.theregister.co.uk/2009/01/23/microsoft_job_cuts_analysis/

Microsoft cuts 5,000 jobs - but Ballmer's hiring

Redmond treads water

By Gavin Clarke

Posted in Financial News, 23rd January 2009 01:44 GMT

Analysis Microsoft just announced the first job cuts in its history. You know things are bad. But how bad?

Thanks to the tanking PC market, Redmond undershot its own expectations for the normally lucrative second-quarter by nearly $1bn. With Windows revenue dipping eight per cent to $4bn, Microsoft blamed consumers for not buying a second or third home PC and businesses for cutting their investments in IT.

The one bright spot: Netbook sales grew 10 per cent. But this too had a downside. Netbooks typically run Window XP, not high-priced copies of Windows Vista. Which hurt Microsoft even further.

And so the company said it will cut 5,000 full-time employees during the next year and a half, with 1,400 going immediately.

The initial reaction was a sharp intake of breath.

It's worth taking a pause, though: Those 5,000 unlucky individuals represent a mere five per cent of an army that's mushroomed to 90,000 during just four years.

Microsoft is trimming the fat and giving itself plenty of time to do it - until the middle of 2010. Redmond is hoping that the recession will be over by the middle of next year, when its costs will be controlled, and that it won't damage the work it has done to build out online search, advertising, and services. Once the recession is past, Microsoft believes it can resume business as usual - minus the rehires.

What we saw Thursday was not a hunkering for a downturn that nobody can predict the end of. We got a small cut in head count plus the standard, cautionary freezes on marketing, travel expenses, and pay rises and the postponement of new offices to control costs this year and next.

But this is Microsoft, a behemoth whose payroll has grown by 50 per cent in four years as it invested billions to aggressively expand into new markets.

Reading between the lines, there seems to be more going on than the company is discussed. And it says management is so invested at an ideological level in its Web 2.0 services, it can't be seen to fail or back down.

The official Microsoft party line is that the job cuts will be made in marketing, sales, finance, legal, human resources, and IT - all the standard staples during such circumstances.

Tellingly, though, there will also be cuts in research and development - an interesting step for a company so invested in R&D. Even in the face of these cuts, chief executive Steve Ballmer recommitted Microsoft to investment in R&D. He flagged up Windows 7, cloud computing, and Windows mobile.

But despite what Ballmer would have you believe, it seems that cuts are coming online.

Commenters on the MiniMicrosoft blog have quoted emails from different Microsoft divisional managers in various parts of the company assuring them that "NO full-time positions...are included in the immediate job eliminations that Steve discussed in today's mail." That mail can be read here.

These alleged emails were allegedly sent by the senior vice president of central marketing, the world-wide vice president of public sector, and the head of Microsoft India, thereby indicating that full-time staff in all these areas are safe - at least for the moment.

MiniMicrosoft is written by an anonymous Microsoft employee who flagged up layoffs at Microsoft last December. It's fair to assume the readers are also from - or connected to - Microsoft, so they know what they're talking about.

So where are the cuts coming?

Judging from MiniMicrosoft, people have read emails that said cuts are coming in Microsoft's loss-making (and hugely inflated) online services business - and the units that support them.

Satya Nadella - the president of Microsoft's search, portal, and advertising platform group, responsible for Live Search, the MSN portal and AdCenter - has apparently sent an email warning of cuts.

That group has seen massive expansion through acquisition and received billions of dollars of additional R&D to build search and ad serving. Yet it has struggled to hold its third place rather than grow market share. During the second quarter, revenue from the entire online business was flat at $866m. By contrast, market leader Google saw revenue grow 18 per cent to $5.7bn.

Cuts are also expected in global foundation services, the group inside Microsoft that supports the burgeoning online Microsoft services. An email warning of cuts has apparently been posted by the vice president for global foundation services, Debra Chrapaty.

Her group provides data centers, security, and operations support for MSN, Window Live, Microsoft collaboration, and collaboration services in addition to 150 additional Microsoft services and web portals. These include a raft of Web 2.0 services, plus search and AdCenter.

Blog commentators also indicate cuts and restructuring in the offline world. This includes the 17,000-strong worldwide service group, which supports customers and partners running Microsoft's software, and the Microsoft Business Division, which is home to Office.

With tightening revenue, it was clear that Microsoft's online business would get hit. When Ballmer spoke, though, he was blunt to the point of rudeness to imply it was business as usual and the company's pushing on with its investment online.

Asked if Microsoft would review its portfolio and "diversify certain assets or technologies" - translated: cut-loss making activities where it has no market share - Ballmer responded bluntly: "I like our portfolio." Pause. "The board likes our portfolio."

It was a response notable for its tartness in the normally cordial environment of a Wall Street call to discuss quarterly performance.

Furthermore, while chief financial officer Chris Liddell was explaining the 5,000 going are full-time staff, not contractors, Ballmer piped up that Microsoft would be making fresh hires.

Was this just tough talk to shore up Wall Street and justify the course Ballmer's leading, a course that has troubled and underwhelmed observers?

What ever it was, you can expect more cuts if Microsoft's trimming doesn't work and sales of new Windows copies go as badly in Q3 as they did in Q2. Right on, Microsoft's making the serious change from large, annuity-based corporate licenses on PCs, servers, and tools.

Indeed, things might be even worse than they seem now - we just don't know. Liddell admitted that the 5,000 people going excludes contractors. Contractors are not included in the head count by Microsoft but are counted as "cost".

The contractor "cost" will be cut by 15 per cent Liddell said, indicating that more cuts being enacted than were announced Thursday or that more cuts are imminent. ®