Microsoft Can't Have It AllMicrosoft Can't Have It All

At Microsoft's earnings call on Thursday, the company announced measures to cut costs and staff. Normally, Wall Street looks at belt tightening as a positive thing and rewards the stock with a bit of a bump, but not this time. Part of it was lowered expectations for the next two quarters, but I also suspect the market saw through Microsoft's tepid cuts. Microsoft isn't really addressing their problems.These "5,000 layoffs" at Microsoft are something of a mirage. Only about 1,400 are happening immediately; the rest are attrition over the next 18 months as part of Microsoft's standard performance review process. Oh, plus the obligatory cutbacks on travel expenses. At the same time, Microsoft says they may hire up to 2,000 positions in 2009 to staff up in growing business sectors. It's almost as if they want to look like they're serious about cutting back when they know they're not.

In the meantime, the Windows cash cow isn't delivering as much milk as it once did. Windows client sales fell 8%, thanks to the cool reception that Vista has gotten. The fact that the hottest growth sector, netbooks, can't run Vista is also a problem. Sure, Microsoft gets some money for XP, but it's not as much as they get for Vista. The Vista fiasco is old news, though, so let's focus on more recent missteps.

Microsoft is everywhere with everything nowadays. Take audio and video. They've got a music player, the Zune, with only about 4% market share and plummeting revenues. They're coming out with a new MSN Music service that delivers DRM-encumbered tunes at the same time the rest of the industry is headed the other way. The hulks of WebTV/MSN TV and UltimateTV still clutter the Microsoft halls. None of it is strategic.

I spent the early part of my career working at General Electric during the Jack Welch era. His philosophy was that GE should be at the top of every industry sector where it competed, or it shouldn't be in that business at all. Microsoft seems like just the opposite. Nobody will begrudge Microsoft trying new things, especially with emerging technologies, but it's important to know when to fold 'em as well.

Microsoft should have made some hard decisions before the economy forced their hand, but now is still better than later. The company needs to focus by taking a Welchian look at every business group, and deciding whether each one deserves to be part of the core business. Focus on the money makers like Windows, Office, and developer tools, plus consulting and training for the Microsoft ecosystem. Pump it up, spin it off, or shut it down.

The good conventional wisdom on cutbacks says, cut once and cut deep. That approach ends the speculation about who and what is going to get the axe, and it gets the company focused on its work. Microsoft didn't do that this time around. Most likely that means the next year at Microsoft will bring additional realignments, closings, and perhaps even more layoffs. They don't need that kind of distraction.