For the past few Februaries, Microsoft CEO Steve Ballmer makes the trek to Wall Street to provide analysts with an annual "Strategic Update" overview, in which he covers the areas where Microsoft plans to invest and why.
This year, during his February 24 update, Ballmer was more about circling the wagons than staking out new, far-flung territories Microsoft planned to conquer in the next 10 years.
On Tuesday during his hour-plus presentation (which I listened to via a Webcast), Ballmer outlined seven areas "where we invest serious money." He told Wall Streeters that Microsoft planned to engage in careful cash management; to maintain "right-size enterprise overhead"; and to put about three percent of its spending into research and incubation projects in the coming year.
Ballmer emphasized that he believed "the economy will be relatively weak for a relatively long period of time" and was adjusting his investment priorities to reflect this fact.
Ballmer's list of seven investment areas for the coming year:
1. Windows -- Netbooks are the lone bright spot in the PC market. Microsoft needs to think through how it will handle SKU pricing with Windows 7 for netbooks, Ballmer acknowledged. While business PC sales are "the most impacted" part of the business due to the economy, it's still where Microsoft is having a lot of success upselling customers and convincing them to "attach" other Microsoft products. Ballmer called out Internet Explorer as an area where the company is losing market to its competitors, specifically Firefox. "Browsers are not commodities," Ballmer said. "There's a lot of work we need to do" to gain market share, he acknowledged. (Microsoft is expected to release IE 8 to the Web in March.)
2. Mobile -- Windows Mobile operating systems and gaming/Zune entertainment services -- not a combined hardware/software platform like the iPhone -- is where Microsoft is investing, Ballmer reiterated.
3. Desktop productivity -- This is Microsoft's most profitable business -- Office, SharePoint and ERP/CRM products and services -- area at present. No Office 14 until 2010, but higher-priced client-access licenses and strong "attach sales" of other Microsoft products are keeping the business strong.
4. Server and tools -- Ballmer cited the high percentage of annuity licensing deals as insulating the S&T business a bit from the IT spending slowdown. Ballmer cited new growth areas as its "Online" family of Microsoft-hosted services (like Exchange Online and SharePoint Online); the still-unrealized goal of getting more server customers to attach systems-management software; and new, soon-to-be-released Microsoft wares in the security-management, authentication, conferencing and collaboration space.
5. Enterprise software -- This is the segment that includes Microsoft's SQL Server database and middleware. Oracle is Microsoft's biggest competitor here and Microsoft's primary strategy is to take market share by finding a way to beat Oracle's higher prices and contract lock-ins, Ballmer said.
6. Search and advertising -- No new hints about what Microsoft is going to do, other than not throw in the towel. Ballmer talked up Cash Back; new deals with search distributors like Dell and Verizon Wireless; and better search and advertising algorithms as the keys to its strategy. Ballmer said he'd still like to figure out some way for Microsoft and Yahoo to "pool their resources" to take on Google, but pooh-poohed (for the umpteenth time) any talk of an acquisition. He admitted Microsoft still has about 3 to 4 percent of the global search share and that share is "the leading indicator" of progress in this market. "I don't want to be a Jerry Yang in this market," Ballmer quipped, referring to Yahoo's former CEO. I know "how shareholders can get frustrate by leaders who aren't serious about performance," Ballmer added.
7. Entertainment and TV -- It's not just about Xbox here, Ballmer told analysts. "The real opportunity is a device next to or in every TV set," whether that device is a PC, a gaming console, a set-top box, or a new appliance device. Microsoft's strategy is to bring its gaming, entertainment and other servics to the PC, phone and TV.
In previous years, these Strategic Updates weren't so much a reiteration of where Microsoft is putting its money today as where it planned to invest over the coming 10 years. It's clear -- and not surprising -- that the economic downturn is definitely putting a damper on Microsoft's blue-sky spending plans. Ballmer's acknowledgment, made multiple times today, that many investors want Microsoft to get out of search and advertising, was interesting -- as was his justification that "once you get out you can't get back in" for not abandoning the market owned by Google.
Do you think Ballmer has his priorities in line? Or is he leading Microsoft astray in one (or more) areas?