For Microsoft, the pain is just starting

Microsoft has begun to hit bottom.

Microsoft cuts 5,000 jobs. That's the big news of the week. Not just because the layoffs will cut one in 20 of Microsoft's 91,000 employees. Not only because it signals just how hard Microsoft has been hurt by the failure of Vista and by shifts in the way big customers license and use software. Not even because of the grim sign it represents for the rest of the IT industry.

No, it's big because it means Microsoft has begun to hit bottom.

And it's about time. For the past couple of decades, we've been referring to Microsoft as the new IBM. But Microsoft has never learned the lessons of the original IBM -- not even the ones that Microsoft forced Big Blue to learn.

Consider: Back in early 1993, IBM had never had a round of layoffs , not even the kind of nips and tucks that Microsoft has used to trim about 1,000 employees over the past few years. When you worked at IBM, unless you fouled up badly, you had a job for life.

That all changed 16 years ago. IBM's mainframe-centric business model had failed, largely because of computing shifts to PCs and servers running Microsoft software. IBM's culture was sluggish, and it buried innovation. Result: The company's profits were headed off a cliff.

It took a new chairman and CEO, Lou Gerstner, to take the company apart and reassemble it around IT services. Along the way, there were layoffs -- a lot of layoffs. Many, many good people were hurt. So was IBM's reputation in towns like Poughkeepsie, where some workers were on the street.

Today, IBM is healthy again. And the IT industry is healthier for not being dominated by Big Blue's mainframes.

It's easy to understand why Microsoft hasn't learned that lesson from IBM. This is Microsoft, after all. It has a lock on its markets. It has customers over a barrel. It's the 800-pound gorilla of the IT world, and it has been for as long as anyone at the company can remember.

Of course, all those things were true of IBM, too.

But Microsoft's situation is nowhere near as bad as IBM's was in 1993, is it? After all, Microsoft's profits haven't crashed -- they've just dropped 11%, and that's in the middle of a recession.

Microsoft's revenue is still rising -- though a closer look shows that it's inching up at less than the rate of inflation.

And Microsoft's stock? Last Thursday, as Microsoft was announcing the layoffs, one cable-TV reporter commented that MSFT has "gone nowhere for years." Actually, the stock has lost nearly half its value over the past year.

So now, for the first time, Microsoft -- like IBM 16 years ago -- is resorting to a major layoff.

It won't be enough, any more than a layoff was enough for IBM.

Microsoft has been coasting for years on Windows and Office. Those have been the cash cows that enabled the company to fumble its way through years of halfhearted "innovation" and watered-down imitation. Microsoft has lost ground (or never gained a footing) in search versus Google, music players versus Apple, Web browsers versus Firefox.

Worse still, Microsoft has forgotten how to improve even those cash-cow products. Office 2007 is a mess for usability. Vista is a disaster in almost every way.

And now, Microsoft has begun to hit bottom financially, too. It's not all the way down yet. There's a lot more pain to come -- both in Redmond and across the IT business.

But that has to happen before Microsoft can change its leadership, its culture, its business and, ultimately, its value to customers.

Now that will be big news.

Frank Hayes is Computerworld's senior news columnist. Contact him at frank_hayes@computerworld.com.

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