Gates says the digital economy is at ‘the end of the beginning’

Published 9:00 pm Thursday, July 26, 2001

Associated Press

SEATTLE — Microsoft chairman Bill Gates opened the company’s annual financial analysts’ meeting Thursday by quoting Winston Churchill on World War II:

"This is not the end, it is not even the beginning of the end. But it is, perhaps, the end of the beginning."

The digital economy circa 2001, Gates said, is in a similar situation, except that the technology era is "going to take a little bit longer" than the war.

The message: As the technology industry experiences a dramatic downturn, Microsoft is intent on not just surviving, but thriving.

"It’s a time of transformation in our business, and in our business models," said Rick Belluzzo, Microsoft president and chief operating officer, eagerly outlining plans to expand into new fields ranging from personal digital assistants to game consoles.

That transformation will include some belt-tightening, Belluzzo said. The company plans to add only half as many jobs in fiscal 2002 as it did in fiscal 2001, which ended June 30. That translates into less than 4,000 new jobs, or 5,000 to 6,500 new employees, including attrition.

But these cutbacks were downplayed as Gates and Belluzzo offered an optimistic view of a future in which Microsoft can be as successful in the coming decade as it was in the last one.

The question is, can it work?

It doesn’t seem that long ago that Microsoft regularly boasted yearly revenue and net income growth upward — sometimes way upward — of 20 percent, driven by rapid growth of the personal computing market and its dominance of the desktop operating system.

But the software giant has not been immune to the downturn in the U.S. economy, and has been hit hard by drastically lower demand for personal computers.

Sagging under the weight of a $2.6 billion charge for poor investments, Microsoft saw a 22 percent drop in earnings per share for the fiscal year ended June 30. Earnings per share were $1.32, down from $1.70 a year earlier.

Revenue grew 10 percent over fiscal 2000 figures, to $25.3 billion from $22.9 billion.

The company also warned that revenue expectations would be lower for the current quarter, which ends in September.

Jonathan Geurkink, an analyst with Wells Fargo Van Kaspar who tracks Microsoft, says the warning was not atypical — the company is known to be especially cautious when it fears a slowdown is coming.

Still, he said, Microsoft may simply have gotten too big to sustain massive growth.

"They’re going on to be a $30 billion revenue software company, and pretty soon it’s hard to grow that revenue at the rates that they have in the 1990s," Geurkink said. "It’s just kind of ‘law of large numbers’ stuff."

Microsoft is intent on breaking those laws as it moves aggressively into new businesses. It has already had some success with a traditional model — entering markets where more expensive competitors are faltering to offer a cheaper alternative.

Brendan Barnicle, an analyst with Pacific Crest Securities who tracks Microsoft, said that’s worked with SQL server, a product that has "90 to 95 percent of the functionality but at like 40 percent of the price" when compared with competitors.

The strategy may also work with Office XP, the new version of Microsoft’s software for businesses, Geurkink said, as cash-crunched companies decide they can’t afford a major technology change but are willing to spend some money on upgrades.

Indeed, Microsoft will still be dependent its traditional cash cows — Office and Windows — in the coming year.

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