MICHELE NORRIS, host:
From NPR News, this is All Things Considered. I'm Michele Norris. First this hour, the economic downturn has hit one of the most successful companies in history - Microsoft. Today Microsoft announced plans to eliminate 5,000 jobs, the first major layoffs in its history. And 1,500 of those employees were told to pack their bags today. From Seattle, NPR's Wendy Kaufman reports.
WENDY KAUFMAN: Rumors of layoffs at Microsoft have been swirling for weeks, so the layoffs, though unprecedented, were not a big surprise. What was surprising was how quickly things deteriorated in the company's revenue and profit picture. In its quarterly earnings released today, Microsoft said its revenue of more than $16.5 billion was $900 million below the company's own expectations. Net income was down 11 percent from a year ago, and the company said the outlook for the next year or two isn't pretty. In a conference call with analysts and reporters, Microsoft CEO Steve Ballmer said the perspective should not be one of recession.
(Soundbite of Microsoft conference call)
Mr. STEVE BALLMER (CEO, Microsoft): What I would say, rather, is the economy is resetting to a lower level of business and consumer spending that's based largely on the reduced leverage in the economy.
KAUFMAN: In addition to job cuts totaling more than five percent of its current employee base, Microsoft is making big cuts in its vast contract worker ranks. Staff hiring will continue in certain areas, including online search where Microsoft continues to trail Google. Microsoft says it expects total employee headcount will be two to three percent lower by the middle of next year.
As CEO Ballmer noted, lower PC sales are a big problem for the company. Analyst Matt Rosoff of the independent research firm Directions on Microsoft points out that the company was caught off guard by the decline.
Mr. MATT ROSOFF (Analyst, Directions on Microsoft): Microsoft actually expected that PC sales would continue to grow in the fourth quarter of last year compared with the previous year. That obviously didn't happen. And because Microsoft earns so much money from Windows, which ships on over 90 percent of PCs, when PC sales slow down, Microsoft slows down.
KAUFMAN: Chipmaker Intel is also feeling the pinch. Just yesterday, the company said it would cut up to 6,000 jobs, more than six percent of its workforce. But Microsoft has another big problem - the boom in so called Netbook computers, small inexpensive machines. Mary Jo Foley, the editor of ZNet's All About Microsoft Blog explains that Microsoft's revenues and profits could be squeezed if it has to sell its operating system to Netbook computer makers for substantially less than it would charge a traditional PC maker.
Ms. MARY JO FOLEY (Editor, All About Microsoft Blog, ZDNet): They've always been able to always count on increasing the amount of money they charge PC makers for every new release of Windows that comes out. But, say, if a Netbook only costs $300, you can't go to a PC maker like an Acer and say, OK, we want $100 for Windows when the whole PC only costs $300.
KAUFMAN: Microsoft's quarterly earnings were a big disappointment to financial analysts. Many were expecting, or at least hoping, for even bigger job cuts. And there was something else Wall Street found troubling. Citing the volatility of market conditions, the company said it would no longer offer predictions for its revenue and profit. Wendy Kaufman, NPR News, Seattle.