The founding fathers and job losses

David Mitchell/Ovum
28 Jan 2009

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.

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 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 merger and acquisition transactions, as integration removes duplication. Last year's losses at HP were in this category.

Although it is sad for the people affected, 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.

Netbooks and Windows

It would be too easy to draw the conclusion, as some blogs have, 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 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 Windows Vista or the relative slowdown of new PC units in business is a moot point.

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