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Monday, May 1, 2006 - Page updated at 02:00 PM

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Microsoft looking long-term, Ballmer reassures employees

Seattle Times technology reporter

After Microsoft surprised Wall Street last week with plans to spend big in the coming fiscal year, Chief Executive Steve Ballmer reassured employees — and the stock market — that the company is looking toward the long-term.

Investors greeted the increased spending with a sell-off Friday that sent the stock on its biggest one-day tumble in five years, a reaction Ballmer described as "a lesson that the entire leadership team at Microsoft will learn from."

"2007 is a critical execution year for the company and the divisional presidents, Kevin Turner and I are immediately going to redouble our efforts on business execution and financial discipline," he wrote in a 3 page memo to employees obtained by The Seattle Times.

The memo first emerged this morning on financial news wire Bloomberg News. It appears to have mollified investors who sold off Microsoft shares in droves on Friday, pushing the stock to a 52-week low. Microsoft shares closed up 14 cents, or 0.6 percent, to $24.29 today.

Ballmer expressed his confidence in the company's decisions to invest across several fronts, including video games and the battle against Google for Internet supremacy.

"Throughout our history, Microsoft has won by making big, bold bets," Ballmer wrote. "I believe that now is not the time to scale back the scope of our ambition or the scale of our investment. While our opportunities are greater than ever, we also face new competitors, faster-moving markets and new customer demands."

Ballmer articulated Microsoft's strategy with the kind of detail analysts asked for but didn't get during the company's quarterly conference call on Thursday. Some analysts cited the rise in fiscal 2007 expenses — perhaps $2 billion to $2.4 billion above expectations — without that detail as a contributor to the Friday sell-off.

First, Ballmer wrote, the company has to grow its core business with the launch of new versions of its flagship products, Windows Vista and Office 2007.

"These will be the largest launches in company history by every measure and the first time since 1995 that we have launched these flagship products simultaneously. We are making a considerable marketing and sales investment for these launches," he wrote.

Microsoft must build on those products to capture such other areas as business management, servers, high-performance computing and emerging markets in developing countries, Ballmer wrote.

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In the video-game console market, the company is striving to build on its head-start over Sony and Nintendo — a sprint that has and will continue to cost Microsoft in the short-term.

"[T]he cost of producing Xbox 360 consoles was higher than expected, while at the same time we decided to manufacture and sell as many consoles as possible to build on our lead in the race to be number one in the video game business," he wrote, adding that Microsoft will have 5 million consoles sold by July.

In other entertainment efforts, Ballmer wrote that a decade's worth of investment in IPTV — enhanced television delivered via broadband — is about to pay off.

He put Google squarely in the company's crosshairs, describing "heavy investments" in Internet search, advertising and data storage that will "show how serious we are about Live services." Live is Microsoft's name for a series of software services and platforms delivered over the Internet.

Advertising revenue is a critical part of the emerging Internet services market. Microsoft is hosting important advertising customers in Redmond this week for its Strategic Account Summit.

"[O]ur goal is to create the Web's largest advertising network, giving us an engine that will enable us to monetize our services and compete against Google," he wrote. "These are long-term efforts and we may not see results overnight. But we are making smart investments that will enable us to win in this vital area."

Benjamin J. Romano: 206-464-2149 or bromano@seattletimes.com

Copyright © 2006 The Seattle Times Company

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