Microsoft Slams on the Brakes

With no recovery in sight, CEO Ballmer is cutting costs. But without long-promised innovation, the giant will struggle to outperform the world economy.

Two days after President Barack Obama, in his inaugural speech, told the country to brace itself for tough times, the head of one of the most valuable U.S. companies echoed the sentiment. "We're certainly in the midst of a once-in-a-lifetime set of economic conditions," Microsoft Chief Executive Steve Ballmer told analysts during a conference call discussing fiscal second-quarter results. "The economy is resetting to a lower level."

In other words, we've entered a new paradigm. The mortgage-market collapse, financial market turmoil, and restricted lending have taken a big toll on demand for computers and other products that run Microsoft's software, and it's time to settle in for a long slump. There's no recovery on the horizon, Ballmer warned. The economy could remain in the doldrums for "a year, two years—I don't know what it will be—and then start to build back," Ballmer said.

As with other tech bellwethers including Intel, the "resetting" is hitting Microsoft hard. Second-quarter sales rose a mere 2%, to $16.63 billion, compared with analysts' already-lowered average forecast of $17 billion, according to the earnings report, which was released Jan. 22. Net income fell 11%, to $4.17 billion. And Microsoft said it lacked enough clarity to provide a forecast for the next two quarters. Microsoft's stock tumbled 11.7%, to 17.11, helping fuel a 1.94% decline in the New York Stock Exchange.

So what's a behemoth of a company like Microsoft to do in the midst of so great a downturn? Organic growth is hard to come by for the maker of software running more personal computers than there are cars in operation. And the company's biggest attempt to grow through acquisition, a proposed takeover of Yahoo! in 2008, foundered.