Microsoft launch an advertising campaign called Laptop Hunters where they give people a set amount of money to find a laptop to meet their needs. If they get it for less they keep the cash. The recent commercial has a kid and his mom shopping for a new laptop.

This marketing campaign does get enough credit for being smart and effective. Microsoft’s response to Apple’s commercials has been direct and bold. Given the current economic environment, people are much more focused on making every dollar count. And these commercials hit and the heart of Apple’s premium pricing which has helped them amass a war chest of cash. Now that premium pricing will be under pressure.

For Wall Street, this was a big surprise given IBM and Apple had strong quarters. People were expecting Microsoft to perform well given its diversified business. I think Microsoft performance is a result of a broader economic downturn that could become much worst before  it gets better. And a growing problem with the effect of netbooks and losing share to Apple. With the economy in more of a reset mode than a recession I think we are in for a long downturn and IT spending will be impacted broadly.

 With this news Steve Ballmer announced that Microsoft would cut 5,000 jobs and reduce other costs across the company. You can read his whole email below.

From: Steve Ballmer
Sent: Thursday, January 22, 2009 6:07 AM
To: Microsoft – All Employees (QBDG)
Subject: Realigning Resources and Reducing Costs

 

In response to the realities of a deteriorating economy, we’re taking important steps to realign Microsoft’s business. I want to tell you about what we’re doing and why.

Today we announced second quarter revenue of $16.6 billion. This number is an increase of just 2 percent compared with the second quarter of last year and it is approximately $900 million below our earlier expectations. 

The fact that we are growing at all during the worst recession in two generations reflects our strong business fundamentals and is a testament to your hard work. Our products provide great value to our customers. Our financial position is solid. We have made long-term investments that continue to pay off.

But it is also clear that we are not immune to the effects of the economy. Consumers and businesses have reined in spending, which is affecting PC shipments and IT expenditures.

Our response to this environment must combine a commitment to long-term investments in innovation with prompt action to reduce our costs.

During the second quarter we started down the right path. As the economy deteriorated, we acted quickly. As a result, we reduced operating expenses during the quarter by $600 million. I appreciate the agility you have shown in enabling us to achieve this result.

Now we need to do more. We must make adjustments to ensure that our investments are tightly aligned with current and future revenue opportunities. The current environment requires that we continue to increase our efficiency.

As part of the process of adjustments, we will eliminate up to 5,000 positions in R&D, marketing, sales, finance, LCA, HR, and IT over the next 18 months, of which 1,400 will occur today. We’ll also open new positions to support key investment areas during this same period of time. Our net headcount in these functions will decline by 2,000 to 3,000 over the next 18 months. In addition, our workforce in support, consulting, operations, billing, manufacturing, and data center operations will continue to change in direct response to customer needs.

Our leaders all have specific goals to manage costs prudently and thoughtfully. They have the flexibility to adjust the size of their teams so they are appropriately matched to revenue potential, to add headcount where they need to increase investments in order to ensure future success, and to drive efficiency.

To increase efficiency, we’re taking a series of aggressive steps. We’ll cut travel expenditures 20 percent and make significant reductions in spending on vendors and contingent staff. We’ve scaled back Puget Sound campus expansion and reduced marketing budgets. We’ll also reduce costs by eliminating merit increases for FY10 that would have taken effect in September of this calendar year.

 

Each of these steps will be difficult. Our priority remains doing right by our customers and our employees. For employees who are directly affected, I know this will be a difficult time for you and I want to assure you that we will provide help and support during this transition. We have established an outplacement center in the Puget Sound region and we’ll provide outplacement services in many other locations to help you find new jobs. Some of you may find jobs internally. For those who don’t, we will also offer severance pay and other benefits.

The decision to eliminate jobs is a very difficult one. Our people are the foundation of everything we have achieved and we place the highest value on the commitment and hard work that you have dedicated to building this company. But we believe these job eliminations are crucial to our ability to adjust the company’s cost structure so that we have the resources to drive future profitable growth. I encourage you to attend tomorrow’s Town Hall at 9am PST in Café 34 or watch the webcast.

 

While this is the most challenging economic climate we have ever faced, I want to reiterate my confidence in the strength of our competitive position and soundness of our approach. With these changes in place, I feel confident that we will have the resources we need to continue to invest in long-term computing trends that offer the greatest opportunity to deliver value to our customers and shareholders, benefit to society, and growth for Microsoft. With our approach to investing for the long term and managing our expenses, I know Microsoft will emerge an even stronger industry leader than it is today.

Thank you for your continued commitment and hard work.

Steve

Last October Microsoft solidified Facebook’s value to the world, $15 billion. Microsoft got a paltry 1.6% stake in the company for $240 million.  Some thought that Steve Ballmer had lost his mind. But what people didn’t realize is how smart he really was. To Microsoft, $240 million is a rounding error, so if they were really crazy they would have bought more of Facebook at an insane valuation. What was brilliant about this move was it established a public valuation for Facebook that was so high and unjustified no one on the planet would touch them. Unless you are Li Ka-shing the Chinese billionarie that put up $60 million at that valuation. Essentially it was a poison pill for anyone that would try to acquire them. (hint, hint, Google)

Even Facebook internally didn’t believe the $15 billion valuation. According to inside sources they were offering employees options at $10 billion and some employees got options at $5 billion. Mark Zuckerberg recently canceled a employee stock buying program when no company would agree that Facebook was worth $4 billion. So what is it worth now? Valleywag was reporting rumors of of people willing to sell their stock at $2.50-4.00, that would put Facebook’s valuation at $1.3 billion. If you look at the numbers Facebook is worth much less. 

They are buring a ton of cash adding new employees and increasing CAPEX spend on new servers to support their growth. Michael Arrington highlighted there burn rate back in October but matters get even worse with their valuation plummeting. Facebook has raised around $500M in funding. They probably have only about 100-150M still in the bank. Their global expansion could easily get more pricey and put them in a cash crunch. Facebook will be forced to do a down round in financing or raise debt. And in this market unless maybe Microsoft or Google would be Facebook’s bank to bootstrap their growth they are going to run out of options fast. Here is my take on their 2009 outlook.

Facebook’s 2009 Projections:

• 250M users
• 1B page views
• $.40 revenue per thousand page views
• $400M revenue – (Microsoft contributes 80% of revenue)
• $200M COGS
• $250M OPEX
• $-50M contribution margin

The key question for Facebook is will they have a breakthrough on the business model. Because right now that are just building a social portal business which will never scale and be as profitable as search. All of their previous attempts to add “the social” to advertising have backfired. Facebook’s Beacon product was a PR disaster.

The other big impact this will have on Facebook is recruiting. Hundreds of the best and brightest people bailed from their day jobs at Yahoo, Google, and other tech companies in the valley to ride the Facebook wave in hopes to get rich. With the valuation plummeting and fear that Facebook might run out of cash it is certainly a riskier option now. Several key people have already left the company including Adam D’Angelo co-founder and CTO, Jeff Hammerbacher, and Matt Cohler. The future does not look bright for Zuckerberg and team.

There was a lot of speculation on who Microsoft would hire for this top position. Lu is an interesting choice because he has fundmentally been an R&D guy. About coming to Microsoft, Lu says “I am genuinely excited about the opportunities ahead for Microsoft to make an enormous impact on the online industry.”  Here is the email Ballmer sent to employees following the announcement.

From: Steve Ballmer
Sent: Thursday, December 04, 2008 1:39 PM
To: Microsoft – All Employees (QBDG)
Subject: New Leader of Online Services Group

Search, advertising and online services are critical to Microsoft’s long-term strategy. To succeed, we need the right talent. Today, I’m pleased to announce that Qi Lu will join Microsoft as president of our Online Services Group. Qi will oversee all efforts in search, our online advertising platform, and all of our online information and communications services. Qi will join Microsoft on Jan. 5 and report to me.

Qi is one of the most respected technical minds in the industry. He comes to Microsoft after 10 years at Yahoo, where he most recently served as executive vice president of engineering for all of Yahoo’s search and advertising development efforts. Before joining Yahoo, Qi was a researcher at IBM’s Almaden Research Center. He has a doctorate in computer science from Carnegie Mellon, and he holds 20 U.S. patents.

Qi’s combination of deep technical expertise, proven leadership capability and broad business knowledge is rare in our industry. There is no one better qualified to guide our work to reinvent search and online advertising.

While I’m excited that Qi is joining Microsoft, I’m sorry to share the news that Brian McAndrews has decided to transition out of the company. Brian came to us with the acquisition of aQuantive in 2007. Since then, he has helped build a world-class business in online advertising that provides a solid foundation for future growth. I have great respect for the important contributions Brian has made to Microsoft, and I wish him the very best in the future.

On Monday at 4 p.m. Pacific Time, Qi will join me at Café RedWest for an Employee Town Hall. I encourage you to attend or to watch the webcast. If you have questions for Qi or me, please send them in advance to and we’ll try to answer as many as possible.

Steve