Ballmer: Microsoft Faces Once-In-A-Lifetime Conditions

Calling the current downturn "unprecedented," Microsoft CEO Steve Ballmer Thursday warned Wall Street analysts that the technology industry is grappling with a "once-in-a-lifetime set of economic conditions."

"The perspective I would bring is not one of recession, but the economy is resetting to a lower level of business and consumer spending based largely on reduced leverage in the economy," Ballmer said.

Ballmer's comments came after the software giant, a $60 billion technology bellwether that has more than 100,000 partners in the U.S., announced that it was eliminating 5,000 positions and an estimated 15 percent of outside contractor positions.

The layoffs come after Microsoft posted an 11 percent drop in net income to $4.17 billion on a paltry 2 percent increase in sales to $16.63 billion for its second fiscal quarter ended Dec. 31.

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Ballmer noted that 50 percent of all U.S. business capital spending goes toward IT. That said, businesses are cutting back on PC purchases and pushing out the PC refresh cycle, he added. What's more, he said, the consumer PC market is being hit hard by a drop in discretionary spending, leading to lower sales of second and third PCs in the home.

"Neither the business nor the consumer side of the technology industry is immune to these economic conditions," Ballmer said.

Ballmer said Microsoft made the current round of cuts with the assumption that the economy is not poised for a quick rebound. "Our model is things go down and they reset," he said. "The economy shrinks and then it doesn't rebound. It builds from a lower base effectively."

Ballmer expects business customers to go through one round of rethinking budgets and then rebound more quickly with regard to PC sales than the more "volatile" consumer business.

Microsoft said its Windows operating system client business was severely impacted by the economic slump, dropping 8 percent in the quarter on a 7 to 10 percent drop in traditional PC sales. "We are not used to a down market," Ballmer said. That business, however, could get a boost as a result of customers looking more critically at the "price premium" they pay for Apple systems, he said.

Microsoft Senior Vice President and CFO Chris Liddell said the vendor's Windows client business is also being impacted by channel partners holding lower inventory.

Next: The Bright Spots In The Quarterly Results

Among the bright spots in the Microsoft second quarterly results were a 15 percent sales jump in Microsoft's server & tools business and 16 percent increase in sales in the company's consulting business. Microsoft's search advertising business also experienced a double-digit increase in sales.

Both Liddell and Ballmer were grilled by analysts concerned that the cutbacks were not deeper. Liddell, for his part, said the cut of $600 million in operating expenses for the second quarter and $1.5 billion through the end of the fiscal year was appropriate.

Ballmer said Microsoft's business model and margin structure is "far more volatile on upside and downside on fluctuations in revenue." He also stressed that even with the 5,000 internal employees being eliminated, Microsoft plans to add several thousand employees in growth areas such as search.

Arnie Bellini, the CEO of ConnectWise, a Tampa, Fla.-based Microsoft solution provider and maker of the ConnectWise IT business automation software for VARs, said Microsoft is experiencing the same kind of fallout that IBM did when it transitioned from a hardware-focused model to a services company.

"IBM was the Greek empire and Microsoft is the Roman Empire. The outer borders of Microsoft are starting to be invaded by the likes of Google and others," Bellini said. "Microsoft is going to have to retreat to high-profit new businesses, and that will be services and technology-as-a-service (TaaS). At some point, the line between hardware, software, and services will all be blurred and get sucked up into the cloud."

Bellini said the Microsoft results are just another sign that solution providers must move to a TaaS business model. That means playing heavily in virtualization and cloud computing, he said. "TaaS is going to take off like a rocket, and IT solution providers better be ready for it because it is a new game," he said.