By Jeff Segal, breakingviews.com
Last Updated: 6:14PM GMT 22 Jan 2009
And it's cutting 5,000 jobs, the first big layoffs in its 33-year history. The economic mess has highlighted Microsoft's vulnerabilities. It is time for boss Steve Ballmer to stop dabbling in unprofitable business ventures and focus on his exposed core product lines.
Even in the downturn, Microsoft remains the 800-pound gorilla of the software industry. It earned $4.2bn last quarter. But that's an 11pc drop from a year ago and well below what the market expected.
Shareholders responded by wiping some $14bn of value off Microsoft's market capitalisation following the announcement.Its layoffs are even more worrying than its earnings disappointment.
When Microsoft's cash flow was surging, keeping 90,000 employees on hand seemed worthwhile. Its desire to cut costs now is a sign that it sees tougher times ahead.
Indeed, sales of its Windows operating system - the company's bread and butter - were down 8pc last quarter as consumers bought fewer PCs.
Software, including Windows and a host of other offerings, generates nearly all of the company's operating income.
Yet Microsoft has been diverting much of its resources from its core businesses toward side projects like video games, music players and online search. None of those contribute significantly to its bottom line.
Microsoft's Xbox gaming console only entered the black in 2008 after seven years in the red. Its Zune music player has been bedevilled by bugs. And its MSN search engine commands less than one-tenth of the US search market.
Meanwhile, Microsoft's mainstays are under pressure from companies like Google that are pursuing so-called cloud computing initiatives - essentially, free online software products - to target its cash cows.
To keep a dip from turning into a rout, Ballmer needs to abandon Microsoft's host of also-ran distractions and train his focus back on the core business.
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