(Source: Jim Wilson/The New York Times)

Amid poorer than expected earnings and job cuts, Microsoft is hoping that Windows 7 will be the killer app that it's been desperately missing (box mockup by dimre01).  (Source: Forums)
Q1 2009 for Microsoft was bad, very bad

Microsoft is hoping that the blogosphere buzz around Windows 7 will translate into a hit.  It desperately needs one.  Amid big competitors like Google, Apple, and IBM posting modest growth despite the slowing economy, Microsoft shows serious signs of trouble. 

Windows market share has dipped beneath 90 percent for the first time in years.  Internet Explorer is down into the 60s in world browser market share, falling from the high 80s in 2004.  And Windows Vista, while overall a solid product, has been the blunt of much public apathy, business scorn, and press lashings.  To top it off, it’s facing a fresh round of antitrust charges from the European Union.

Even arguably Microsoft's biggest success -- the Xbox 360 -- despite boasting an excellent attach rate has fallen behind in the console war to the bestselling Nintendo Wii.  And other Microsoft business sectors like its internet offerings, and Zune player have yet to achieve enough of a foothold to become a serious contender for dominant market share.  In short, Microsoft, always a terrific innovator, is arguably without a killer app or product for the first time in years.

This was evidenced in Microsoft's earnings report, just released.  Microsoft announced that its Q2 2009 profit sank from $4.71B USD a year ago to $4.17B USD, a loss of 12 percent.  Total revenue was $16.63B USD, but this was only possible thanks to higher server, tools and entertainment sales.  Client sales revenue, which includes Windows products, fell 8 percent.

Wall Street analysts predicted revenue of $17.08B USD, which Microsoft missed by a fair margin.  Worse, it says more decreases in revenue and earnings are expected to come in the following quarters this year.

Heather Bellini an analyst at UBS AG in New York, comments, "If they don’t have big operating-expense reductions, they are going to get a very bad reaction from shareholders.  I don’t care if they get rid of contractors, full-time employees, facilities, health benefits --just get the costs out."

Indeed, Microsoft announced that it's cutting jobs, as Ms. Bellini and other analysts predicted.  It will be cutting 5,000 employees out of its workforce of 94,286 (with 20,000 to 30,000 contractors).  It will also reduce its operating budget by $1.5B USD, to try to avoid angering its shareholders.  It is declining to give revenue and earnings targets for the remainder of the year saying the market is "too volatile" to estimate these metrics.

Ultimately, Microsoft is still posting big profits -- $4.17B USD in profit is enough to make even some of the biggest companies drool.  It’s also sitting on a big cash pile, though it may have burned through some of it.  So why the concern?

The real problem isn't so much that Microsoft missed a target or that its revenue fell, it’s that Microsoft’s shares in its most important markets, its underlying sources of income, are slipping. 

However, it won't go down without a fight, and with Windows 7 coming later this year, Microsoft may finally have a new hit on its hands.  Meanwhile, it will have to wait and try to come up with new strategies to try to generate bigger sales its existing products.

"It looks like the iPhone 4 might be their Vista, and I'm okay with that." -- Microsoft COO Kevin Turner

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