You probably think you know the world’s biggest software company pretty well. Microsoft is Windows and Office. Microsoft is the billionaire Bill Gates and chest-beating chief executive Steve Ballmer. Microsoft is loved, it is hated, but above all, Microsoft is big.
Last week, however, things shifted just a little. It wasn’t that the company rekindled its infatuation with the search engine business, with it closing a deal with Yahoo. Nor was it the way the company capitulated in its long-running arguments with the EU by announcing plans to help customers download other Web browsers to Windows PCs.
The real change? Microsoft got smaller.
Like most businesses, Microsoft’s revenues for this year were lower than the previous year. Unlike other companies, it was more than just a symptom of the recession — it was a moment in history. The announcement marked the first time in its 34 years Microsoft had seen its business shrink from one year to the next.
Data from the company’s files show that Microsoft has enjoyed continuous, unalloyed growth, mostly at a remarkable pace.
During the company’s golden years, it gained a formidable grip on the computer market and its revenues grew between 30 percent and 50 percent each year. Even when the Microsoft juggernaut slowed down after 2000, it didn’t stop — revenues continued to grow by an average of 13 percent each year, turning it from a significant organization into one of the planet’s most powerful corporations. It was one of the fastest-growing businesses in history — going from revenues of US$347 million in its first year as a public company to highs of US$60 billion last year.
“Microsoft has always seen itself as a growth company,” said Matt Rosoff of the independent analyst firm Directions on Microsoft. “There were some calls from Wall Street earlier this decade for Microsoft to reposition itself as a value company — to stop investing so much in research and development, to stop trying to compete in new areas like game consoles and search. They’ve resisted that pressure and said they still believe there are significant growth opportunities.”
However, if growth is so much a part of the company’s DNA, what happens when it disappears?
Users of the Mini-Microsoft blog (http://bit.ly/bjmicrosoft1) — a site run by an anonymous Microsoft manager that has become a chatboard for employees to discuss the company without divulging their identity — generally agreed that it was seriously bad news.
“I’m glad I got laid off in January,” said one user. “I see clearly now that Microsoft has truly jumped the shark and is a company in a long, slow decline.”
It isn’t an entirely new situation, however. While revenues have never dropped before, it has had to deal with dips in profit. There have been lean years (2006) and there have been unprofitable ones — 2001 and 2002 saw Microsoft make its first losses as the planet struggled to come to terms with the dot.com bust and the attacks in New York and Washington in 2001.
Microsoft had been planning for the downturn, said Warren Wilson, a senior analyst with Ovum.
“I think they’ve seen it coming for some time. It’s the worst recession since the Great Depression and I think Microsoft has watched its customers struggle, and has watched the impact building,” Wilson said.
Although Ballmer has been markedly downbeat about the prospect of the economy lifting, few insiders are publicly suggesting that next year will be worse.
“They’re looking at a very robust wave of product launches over the next year, starting with Windows 7, Windows Server in the months after that and Office 2010 next year,” Wilson said. “I think they have a feeling that the worst is behind them — that they’ve weathered the worst of the storm.”
Does the global downturn explain everything that is going on at the company?
It’s certainly true that, despite the gloom, many of Microsoft’s biggest rivals aren’t faring so badly. IBM saw revenues drop too, but its profits rose because of cost-cutting. Google’s ship remains steady in the face of an advertising slowdown, while Apple seems to be ignoring the recession almost entirely, merrily posting blockbuster profits thanks to the iPhone.
This is the sort of thing that worries Mini-Microsoft’s users — and while they could easily be accused of over-reacting (after all, Microsoft is still a business with almost US$60 billion in revenues this year) the comments betray that there is a serious psychological impact to suddenly being on the back foot after so many years of having the Midas touch.
Wilson said the employees should take comfort in the company’s ability to succeed under pressure over the years.
“I think it’s an unprecedented situation, they did as good a job as anyone in the industry of anticipating it,” he said. “One of the reasons they’ve done as well as they have for as long as they have is because they stay paranoid, despite their position at the top of the software industry.”
Rosoff agreed that things would bounce back, ultimately believing that Microsoft’s size may prove to be its biggest strength, rather than a weakness.
“When things start to rebound, they could be poised to rebound faster than everyone else — just like they fell faster this time,” Rosoff said. “They have enough breadth that, if the economy starts to pick up in China, it could help them sooner than it could help a company like Apple, which is very focused on the US.”
What if next year doesn’t improve enough? Will this inglorious moment in Microsoft’s history prove to be enough of a shock to the system to change things?
Probably not.
“I think they’re likely to continue to keep doing what they have been doing. I don’t think this is going to be a catalyst,” Rosoff said. “If they were to continue to suffer revenue shortfalls after the rest of the economy recovers, that would be bad. If they ever suffer a loss, that would be pretty catastrophic.”
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