Microsoft has big growth plans even as economy limps

Microsoft CEO Steve Ballmer told financial analysts Monday that the weak economy and declining PC sales would continue to challenge the company but that Microsoft would focus on growing market share within its seven core businesses.

Ballmer, pulling a page from his infamous “developers, developers, developers” rant, said despite the down economy that Microsoft is telling its employees the focus is on “share, share, share, share.”

Ballmer made his remarks at the company’s annual fiscal mid-year update for financial analysts. CFO Chris Liddell, who joined Ballmer at the meeting in New York City, said the revenue side of Microsoft would be difficult going forward and that the company was working hard to cut expenses. “We are looking to manage that side more intensively,” he said.

The message was similar to the one Microsoft gave a month ago when it cut 1,400 employees and “reset” it’s business and financial outlook..

Ballmer framed his share message with strategy details for all of Microsoft's “seven big businesses.” He said those seven areas are Windows, Windows Mobile, desktop productivity especially Office, server, enterprise software especially SQL Server, search/advertising, and entertainment/TV.

Ballmer gave hints to developing product road maps and timeframes for upcoming software including adding a netbook version of Windows 7; a 2010 release for Office 14; a new server version and a new version of System Center tools when Windows 7 ships; a low-cost, low-functionality server version called Foundations slated to appear in the next year or so; a high-end version of SQL Server called DataCenter; and a version that runs on the cloud OS Windows Azure. He said Windows and Windows Mobile would become closer in many ways.

“There is still a real distinction between what is a phone and what is a PC, yet the amount of technology that can be shared across that border continues to go up,” he said.

Ballmer graded all the businesses in terms of profitability calling Windows profitable, Widows Mobile somewhat unprofitable, desktop productivity very profitable, server very profitable, enterprise software very profitable, search/advertising very unprofitable and entertainment/TV profitable.

He then ran down the strategy with each business.

* Windows: Ballmer said the economy would continue to put pressure on PC sales as consumers cut back on “big ticket” items. “It will impact revenue,” he said.

He said the slowdown in corporate spending will hurt both PC sales and sever sales, and he added that the No. 1 competitor for Windows was pirated versions of the software.

He said that was a tough battle because the pirates have a “good price and a heck of a product.”

But Microsoft is also focusing on Linux and Apple, which Ballmer predicted would “increase share somewhat.”

And he predicted that “we will see Google as a competitor in the desktop operating system market more than we ever had before,” with Android-based devices including phones and laptops.

Ballmer also noted a continued push into netbooks and said a full Windows 7 version for netbooks would be offered next to Windows XP versions, which are slimmed down so they can run on the device.

He outlined technology and marketing investments in Internet Explorer 8 that are focused on gaining browser share.

“Browsers are not commodities… and we have a lot of work we need to do in that dimension,’ he said.

* Windows Mobile: Ballmer reiterated Microsoft would not be building its own phone and he noted last week's announcements on Windows Mobile 6.5 and Windows Marketplace for Mobile, an online outlet where users can find applications.

He acknowledged that the consumer market momentum is with Apple and to a lesser extent BlackBerry, but said Windows Mobile had strength with manufacturers and service providers.

He said the switch by users from feature phones to smartphones is key for Microsoft.

“I do think the guys in the best position are the guys with phones at low price points,” he said.

But he did chide Google for its strategy on free mobile software and said Microsoft was going with a real price and real investment around its software-based mobile model and alignment with Windows.

* Desktop productivity: Ballmer said long-term annuity agreements would dampen the economic impact on this segment, but that the business was not immune.

He focused on Office and said enterprise buyers bring the greatest revenue “because we attach more value. We help the user log in, we help IT manage the desktop, we help with collaboration, we run e-mail.”

And Ballmer ticked off new technologies that Microsoft will sell into the enterprise including security management, identity management, authentication, next-generation portal, collaboration and conferencing.

He noted Office 14 would not ship this year, but said it would be followed by new versions of SharePoint, Exchange and Office Live.

* Server: Ballmer said the company would introduce a lost-cost, low-functionality version of the server called Foundations in the next month or two

“We will have something akin to netbooks at the server level,” he said.

He added that Microsoft would “go to market” with Windows Azure by the end of the year.

Microsoft will pin investment around capabilities focused on Web, Web hosting and scientific applications, which are areas Linux now dominates and where Microsoft could steal share.

Ballmer also said a new server version would come in the Windows 7 timeframe.

* Enterprise software: Ballmer said while Oracle has higher revenue share in the database market that Microsoft leads in unit share, and given the economy, “I think the time to take share from Oracle, who recently raised prices, has never been better.”

He called out the next version of SQL Server and its BI functionality and said it would be followed with a new high-end version coming in the next year or so called Datacenter.

He also said there would be an Azure database version for the cloud that would “reach fruition” at Microsoft's Professional Developer’s Conference this year.

* Search/advertising: Ballmer said Microsoft would not give up even though it is up against incredible odds to succeed.

“This is a huge opportunity, if you give up you cannot get back in the game,” he said.

He said Microsoft was not again looking to acquire Yahoo, but said it made sense for the two to work together to create a better competitor against Google.

* Entertainment/TV: Ballmer said while Xbox is the default that the real opportunity is having a device that sits next to, or is inside, the television. Microsoft is working to have Xbox and Zune services on all screens — PC, phone and TV.

Ballmer closed by saying overall the company would be careful and cautious as it moved forward.

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