The Founding Fathers and Job Losses

• Posted: Saturday, January 24, 2009
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• Author: pradhana
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• Filed under: Business Analysis

By David Mitchell, SVP IT Research at Ovum

On the back of poorer than expected results, Microsoft announced that it is to eliminate up to 5,000 jobs over an 18-month period. At the same time, Intel announced that it was eliminating up to 6,000 jobs, with closures of factories in Oregon, Malaysia and the Philippines.

All job losses are not equal
Many IT firms have announced job cuts over the past few months. However, it is dangerous to view all of these in the same way. There are three core reasons behind some of the job cuts.

First, some companies are in genuine financial distress and need to make immediate cost reductions in order to make payroll. Many of the smaller companies that have shed jobs are in this category and for many they will still not guarantee their survival.

Second, larger companies have used redundancies to refocus their efforts – these are planned course corrections to improve future results rather than decisions forced upon them. Microsoft falls into this category. Intel is a larger course correction, but still a course correction. Third, companies shed jobs after M&A transactions, as integration removes duplication. Last year’s losses at HP were in this category.

Although it is sad for the people impacted, and for their families, the job losses at Microsoft are modest. An immediate reduction of 1,400 is a small proportion of the huge Microsoft workforce and less than the 15,000 redundancies that had been rumoured last week. It constitutes a minor course correction and refocusing for Microsoft rather than the beginning of the end. Microsoft must, and is, evolving both its products and its business models, and this move is part of that journey.

It is not a case of new world good, old world bad
It would be too easy to draw the conclusion, as some blogs have done, that this is the beginning of the end – with IT companies that largely rely on the traditional product sales and licensing models being usurped by subscription models, advertising-funded services and a host of other novel business models. This would be foolish or at least premature on the basis of the data that we’ve seen so far. Difficulties are being faced by these industry stalwarts, but other traditional enterprise IT giants are forging ahead – apparently still unscathed.

Part of the difficulty faced by Intel is the uptake of ‘Netbooks’, powered by lower-cost and apparently lower-margin processors. Its older product lines have suffered as the PC assets in businesses are further sweated, with their replacement cycles being extended to save costs in the current economic crisis. As a result, Intel’s profits dropped around 90% to £160 million in the last quarter of the year.

These two facets have also hit Microsoft. Netbooks runs Windows XP, which delivers a smaller revenue load to Microsoft. The slowdown in sales of mainstream PCs has also resulted in slower than anticipated uptake of Windows Vista, further impacting revenues in the Windows business, which have dropped 8%. Whether the Windows problems get laid at the door of the Windows Vista product or the relative slowdown of new PC units in business is a moot point.

Windows 7 really needs to be a success for Microsoft and the early feedback from beta testers is strong, although few have commented on the profound similarities between Windows Vista and Windows 7 – something that is especially ironic when it comes from those that lambasted Windows Vista.

Big companies continue, for the most part, to do well. It should be noted that Microsoft still posted a net profit of around £3 billion for the final quarter of last year – a large number in anyone’s books. Google continues to post impressive results, with quarter-on-quarter revenues up 18%. However, even its profits were down significantly, dropping 68% to £275 million, and the pace of hiring has subsided.

Those figures are muddied by one-time charges around Clearwire Corp and Time Warner, without which profits would have increased. IBM also posted strong figures during this week, with profits rising to 47.9% from 44.9% and showing good growth in both software and global services. HP, when it posted its most recent public results late last year, showed strong revenue growth, up 19%, with a small decline in percentage profit. /PR

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