Microsoft - the tough decisions

(By Philip Carnelley – Friday 12th June 2009 7:30am). Following layoffs announced earlier this year (5,000 back-office jobs – about 5% of the workforce) Microsoft is streamlining its rambling product portfolio and will “end-of-life” over a dozen products.

For me the most resonant is Encarta, its one-time ground breaking encyclopaedia, which largely killed the iconic Encyclopaedia Britannica by offering the same information on CD for a fraction of a price. I still remember my parents deliberating over whether to buy the 24-volume Britannica at (for them) vast expense, by weekly instalments. Ironically Encarta was in turn killed by free online information on the Web like Wikipedia. Other high-profile Microsoft ‘casualties’ include Autoroute (killed by a combination of free online planners and the sat nav), Flight Simulator and Microsoft Money.

Microsoft’s ‘heart’ is business related software, which it uses to cross subsidise its consumer products. But it can’t continue to do this indefinitely. Its core Office franchise remains incredibly profitable, with an enviable 75% operating margin, and this has been bankrolling most everything else. Microsoft’s business applications division lost money for years but is now returning margins of 65%. Windows infrastructure software generates 37% margins and has formed a virtuous circle with Office.

But netbooks are driving down the Windows price point and boosting the use of Linux. I don’t think Microsoft has ever really made money on X-boxes, and its online services division is losing over $1b p.a. Further, its ‘Trojan horse’ into online services, Internet Explorer, will surely be weakened by EU anti-trust moves to ensure consumers are offered an IE-free version or a choice of browser in Windows 7.

Windows Mobile remains a niche, while Blackberries and iPhone sales soar. But Microsoft’s core business software is also under threat. Many small businesses want to buy cheaper netbooks rather than fully fledged laptops; meanwhile, Google and the rest of the ‘Cloud’ community is threatening to eat Microsoft’s lunch. No wonder Microsoft is trimming the fat. Even with a return to economic growth, Microsoft needs some new ideas if it isn’t to descend into the role of an industry bystander rather than an industry leader.