What to watch at Microsoft in '09

Microsoft in 2009 will grapple with much of the same economic uncertainty as other companies in the Seattle region and around the world – with billions of dollars and thousands of jobs potentially hanging in the balance.

The big question is how much the global financial turmoil will affect sales of Microsoft’s flagship PC and computer-server software, as other companies pull back on their technology spending to weather the storm.  That, in turn, will determine how much Microsoft needs to cut its own budget.

Microsoft said in October that it would reduce planned spending by as much as $500 million in the current fiscal year, ending June 30. Some Wall Street analysts have since cut their earnings projections for the company. The full near-term impact may not be known until Microsoft announces quarterly earnings Jan. 22.

But the economy is far from the only challenge facing the Redmond company. These are some of the key issues worth watching at Microsoft in the coming year.

JOB CUTS? Microsoft CEO Steve Ballmer said in November that employment growth would be much slower this fiscal year and probably next, but the company has declined to comment on the possibility of reducing its work force.

If they were to occur, substantial layoffs would be unprecedented for the company. Microsoft continued to grow through the dot-com bust, albeit at a slower rate.

Microsoft has ramped up its hiring significantly in recent years, now employing more than 94,000 people globally, including more than 40,000 in the Seattle area.  Those numbers don’t include thousands of contract workers who work for the company under temporary employment agreements. Those contract positions could be among the most vulnerable if the company decides to cut back.

INTERNET SEARCH: Microsoft has left the door open to the possibility of an Internet search deal or partnership with Yahoo, following its unsuccessful attempt to acquire all of the Sunnyvale, Calif., company last year.

Combining the Yahoo and Microsoft Live Search units would quickly give Microsoft nearly 30 percent of the U.S. market, putting it in a stronger position to challenge Google. The question is whether the companies can come to terms.

Microsoft has separately been exploring the possibility of a new brand for its search engine, and that could provide an alternative if a Yahoo deal doesn’t come through.

In the broader online business, all eyes will be on Qi Lu, the former Yahoo executive who is taking over as the new president of Microsoft’s Online Services Business.  How much of an impact can he make on the business, and how quickly?

WINDOWS 7:  The next version of Microsoft’s flagship PC operating system will give the company a chance to redeem itself following Windows Vista’s stumbles. Technical reviewers and others in the industry have responded favorably to Microsoft’s early previews of Windows 7, Windows Vista’s successor.

Microsoft hasn’t given a date for Windows 7’s official debut, but there are signs that the company is aiming to release the new operating system in time for the 2009 holiday season. More details could come as soon as Jan. 7 at the Consumer Electronics Show in Las Vegas, where Ballmer will be speaking.

Whenever it happens, the transition from Windows Vista to Windows 7 promises to be smoother than the one from XP to Vista, because the changes aren’t as radical.

WINDOWS MOBILE: Microsoft’s operating system for mobile phones is facing an increasing challenge from the iPhone. Apple’s device gained traction in the past year as the company shifted to third-generation wireless technology and won fans by offering third-party software through the Apple App Store.

The question in the coming year is how Microsoft will react. The company has said it will bring its Zune software to Windows Mobile devices, creating a stronger connection between the mobile operating system and its music initiatives. But taking on the iPhone – in addition to BlackBerry and Nokia devices – may require a more significant overhaul in Microsoft’s strategy in this area.

WINDOWS AZURE: Microsoft last year unveiled plans for this new cloud-computing platform, which will let other companies and developers use Microsoft’s worldwide network of data centers to offer their own online services.

Microsoft is competing heavily in this area with such companies as Google, Amazon.com and Salesforce.com, and one question in the coming year is whether any will emerge as the clear leader. Developers also will be looking to Microsoft for a more definitive rollout schedule and plans for the Azure platform.

SERVER & TOOLS: This Microsoft division will provide an important gauge of the economy’s effect on the company. Such programs as Windows Server and the SQL Server database management software have made this unit a quiet financial stalwart, consistently posting steady growth in quarterly revenue and profits.

But any cutbacks in corporate technology spending could be more noticeable in this division than in others that rely more heavily on consumer spending.

VIDEO GAMES: Microsoft’s Xbox 360 game console appeared to benefit from earlier price cuts during the recent holiday season, strengthening its position against Sony’s higher-priced PlayStation 3 console. But the Nintendo Wii continues to dominate.

For Microsoft’s video-game unit, the key challenges in the next year will be holding off Sony, chipping away at Nintendo’s lead, broadening the market for the Xbox 360, and boosting profits for the Entertainment & Devices Division.