Microsoft's Moves Suggest Renewed Focus on Core Business, Windows 7

Microsoft's recent cuts of applications and services suggest not only that the recession is having an effect on the company's bottom line, but also that Microsoft has a larger corporate strategy of retrenching and focusing on core products such as the upcoming Windows 7 operating system and Office 2010.

Many of the programs and services in question found themselves eliminated in the first few months of 2009, as the recession deepened; among those cut were Soapbox—Microsoft's YouTube competitor—and a few long-running legacy programs. Given how many of the programs were more experimental and niche-oriented, the cuts suggest that Microsoft is culling unsuccessful attempts to penetrate new areas in order to focus on its traditional strengths.

Other eliminations have likely been a consequence of Microsoft's Yahoo search advertising deal in July.

On Aug. 9, Microsoft announced that it had closed a deal with French advertising agency Publicis Groupe to sell Razorfish, its digital marketing agency, for $530 million in cash and stock. Microsoft had originally acquired Razorfish as part of its $6 billion acquisition of aQuantive in 2007, back when Microsoft was looking to build a substantive online advertising platform. The advertising and publishing tools bundled with aQuantive included DrivePM, which matched ad campaigns to publisher inventory.

"We are grateful for the contributions that Razorfish has made to our online advertising business since joining the company," Microsoft CEO Steve Ballmer said in a statement announcing the deal. "We look forward to continuing to work with Razorfish as one of our agencies."

The deal gives Microsoft access to Publicis Groupe clients, offering them display and search advertising "on favorable terms" for a five-year period. More to the point, Razorfish may have found itself a misfit in the Microsoft stable after the latter's deal with Yahoo, which resulted in Yahoo operating the worldwide sales force for both companies' search advertisers.

The Microsoft-Yahoo deal came together as both companies found themselves in a desperate battle with Google for U.S. search engine market share. According to one research report, Microsoft's Bing and Yahoo found themselves with 8.4 and 19.6 percent of that market, respectively, versus Google at around 65 percent. That, combined with the revenue-dampening effects of a global recession, likely drove Microsoft to the bargaining table with Yahoo—and to cut Razorfish.

But Razorfish was also a radically different animal than many of the programs and initiatives that Microsoft has been cutting lately. Over the past few months, many of the reductions have taken place among Microsoft's legacy applications. Money Plus was 17 years old when Microsoft announced it would be cut on June 11; Encarta, an encyclopedia program, had existed 16 years at the time of its demise. Microsoft blamed the evolving nature of the IT industry and the Web in its decision to terminate both applications.

Other applications were newer, but failed to take hold of the market. Originally launched in December 2006, YouTube competitor Soapbox proved unable to help Microsoft gain more than 2 percent of the online video market, and was subsequently slated to be killed in August 2009. PerformancePoint Server 2007 was discontinued in April, after Microsoft decided that its enterprise strategy needed to shift, and its monitoring and analytics capabilities were combined into Microsoft Office SharePoint Server Enterprise.

Still other eliminated applications appealed more to niche markets. Popfly, Microsoft's 2-year-old programming tool for nonprogrammers, was cut in July; Microsoft claimed that the "economic situation" had caused it to "refocus and reevaluate our priorities." Popfly did not turn out to be one of those priorities.

For more on Microsoft's eliminated programs, click here.

These eliminations suggest that Microsoft's strategic repositioning extends further than merely pushing its upcoming Windows 7 and Office 2010; the elimination of underperforming and legacy programs hints that Microsoft has recognized the need to reorient its priorities around the core businesses, such as operating systems and productivity suites, which have increasingly been under attack by Google, Apple and other competitors.

The recession has likely added zeal to Microsoft's cutting; for the fourth quarter of 2009, the company reported a 17 percent decline in year-over-year revenue, with earnings of $13.10 billion. Chris Liddell, Microsoft's chief financial officer, said during a July 23 earnings call that average PC sale declines of 16 to 18 percent were largely to blame, as it also led to a reduction in the demand for new Microsoft products.

"I think that highly strategically focused companies can use a downturn like this to reconsider what they're doing, and decide what's working and not working," Charles King, an analyst with Pund-IT Research, said in an interview with eWEEK. "At the end of the day, Steve Ballmer and other executives have been looking at strategic groups and asking, 'How well is this working?' And if it's not working well, 'How long will it take to get this working right?' And if the time frame doesn't work, 'Let's cut it now.'"

The extended period of program-cutting, according to King, reveals a good deal about Microsoft's strategy for expanding into new markets.

"They're a company that recognizes that the marketplace is changing very rapidly, and it's important for them to get into businesses beyond their expertise and comfort zone, and compete in new areas," King said. "Sometimes that works, and sometimes that doesn't."

In the late 1990s, for example, Microsoft invested billions in cable television companies with the intention of integrating software and applications into digital programming. That effort stalled, but others—such as the push into gaming with the Xbox—have paid off more substantially.

Currently, Microsoft seems to believe that its traditional products—including Windows 7 and Office 2010—have the best chance of paying off, while its smaller and riskier endeavors are better cut. Microsoft's push for Windows 7 includes price reductions and a massive ad campaign, while Office 2010 is being partially offered as a free Web-based service, the better to compete against Google Apps and other cloud-based services.