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Home  News  Amid Belt-Tightening, Microsoft Talks of a Bright Future
Amid Belt-Tightening, Microsoft Talks of a Bright Future

July 7, 2004

In his annual e-mail message to Microsoft's employees yesterday, Steven A. Ballmer, the chief executive, declared that the personal computer industry and his company were still growth businesses, and he predicted that the number of PC's in use worldwide would increase 60 percent, to one billion, by 2010.

But Mr. Ballmer left no doubt that Microsoft must behave more like the mature company it has become to reduce the constant scrutiny it faces from antitrust regulators around the world and the pressure it increasingly faces from investors.

Microsoft invested when most technology companies shed workers and projects during the industry slump, and as a result its expenses have increased faster than the company's revenues over the last three years.

"This obviously is not a trend we can continue," Mr. Ballmer wrote to Microsoft's 57,000 full-time workers. "This year, we are targeting nearly $1 billion in efficiency improvement and cost reduction across the company, primarily by rethinking how we do things."

Part of the rethinking has included Microsoft's recently announced moves to reduce coverage for employees on branded prescription drugs and to reduce the discount that employees receive on purchases of Microsoft stock to 10 percent from 15 percent.

"Belt-tightening is what more mature companies do," observed Michael Cusumano, a professor at the Sloan School of Management at Massachusetts Institute of Technology.

In a telephone interview yesterday afternoon, Mr. Ballmer said he was more optimistic about Microsoft's prospects than at any time in the last three years. He noted the strength and upward trend in its mainstay desktop software businesses, server software, and the encouraging improvement in emerging businesses like its MSN Web sites and Xbox video game consoles and games.

Mr. Ballmer also added that Microsoft was more confident about competing against the rising challenge of open-source software like the Linux operating system, which is distributed free. Microsoft's competitive response is to emphasize what it contends is the lower total cost of owning, maintaining and supporting its Windows operating system.

Much of Mr. Ballmer's lengthy e-mail message - an annual document about strategy and the state of the company - focuses on the management steps taken to do everything from trimming costs to improving product design to reducing security flaws in software products. And Mr. Ballmer alluded to the tricky balance that must be struck when placing tighter management controls on a company known for its freewheeling, entrepreneurial heritage.

"This will be a place with some structure, but structure that aids teamwork, not politics and bureaucracy," he wrote.

The cutbacks in worker benefits have prompted complaints from Microsoft employees, and Mr. Ballmer addressed the internal grumbling in his memo. "We need you to understand the broader context for these changes," he wrote, "even if we did not communicate that context in advance."

Using some of Microsoft's $56 billion in cash to maintain worker benefits, Mr. Ballmer explained, is not an option. "The cash is the shareholders' money," he wrote, "so we need to either invest in new opportunities or return it to them."

In the interview, Mr. Ballmer said his optimism about Microsoft's growth potential and his commitment to belt-tightening were not contradictory. "For us to have a bright future, we have to have an appropriate cost structure," he said.

Some Wall Street analysts, notably Richard Sherlund of Goldman Sachs, have suggested that Microsoft will soon announce a program to increase its stagnant stock price, perhaps with a share repurchase program of up to $40 billion. The chances of such a move, they say, rose sharply last week after a federal appeals court upheld the Bush administration's antitrust settlement with Microsoft.

In the interview, Mr. Ballmer said, "By the end of this month, we will try to give a clear strategy on cash to our shareholders."

Still, he hinted that the price tag on its program might be smaller than some analysts have projected. "We're a technology company with a lot of growth opportunities," he said. "Our cash needs are always bigger than naked-eye observers might think."

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