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Summary:

We have been warning everyone for months that the mass appeal of low-cost netbooks was going to hit the major players hard.  You’ve probably heard today that Microsoft plans to lay off 5,000 employees over the next 18 months due to the hard times.  Details are […]

ms-logoWe have been warning everyone for months that the mass appeal of low-cost netbooks was going to hit the major players hard.  You’ve probably heard today that Microsoft plans to lay off 5,000 employees over the next 18 months due to the hard times.  Details are emerging that OEM revenue, that licensing money Microsoft gets for each computer sold, has taken a huge $465 million hit.  This hit is due to the popularity of netbooks that usually have either Linux or cheap Windows XP installed.  From the Microsoft 10-Q filing:

“The decline in OEM revenue reflects an 11 percentage point decrease in the OEM premium mix to 64%, primarily driven by growth of licenses related to sales of netbook PCs, as well as changes in the geographic and product mixes.

We have also been warning that having Windows 7 become the preferred operating system for netbooks would continue to hammer Microsoft’s revenue picture and this warning is now very distinct.  There is no way they can charge a big licensing fee to OEMs for a $300 netbook and it will be interesting to see how this shakes out when Windows 7 is released later this year.

The layoffs are expected to come from Microsoft’s Entertainment and Devices segment affecting Zune, Xbox and Windows Mobile.  This could be a hit in the Windows Mobile evolution depending on how these cuts are leveed.  It’s a sad day for us mobile geeks.

(via All About Microsoft)

  1. They have a word for companies that can’t adjust to changing business conditions: bankrupt.

    I don’t know any other phrase for when a company has to confront the reality that perhaps they’ve been charging too much and their consumers have reacted except: bulls make money, bears make money but hogs get slaughtered.

    And I’m wondering how many H1-B workers got cut with this action? Kind of hard to explain how you’re continuing to employ alien workers that are supposedly on the payroll because you couldn’t find enough skilled local labor… when you’re making local labor available by laying it off.

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  2. I think you misread – the layoffs are mostly expected in R&D, IT, and other “overhead” areas, not Entertainment and Devices.

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  3. Well I’m no expert on this sort of stuff but MS don’t charge big OEM’s that much for Windows licenses (maybe about $30-$50 per PC) but I wouldn’t be surprised if they dropped the price to get XP onto Netbooks when they started to take off. That probably explains why they have so many restrictions on the hardware specs for a Netbook’s XP license.

    Now when WIndows 7 comes out, I’d expect that they will charge the same for a Netbook license as for any other PC and the OEMs will simply pass this on to the customer. Nobody would complain if a $300 Netbook suddenly costs $330 and comes with the latest and greatest version of Windows.

    Anyway, this is all idle speculation on my part.

    BTW Scotty, there’s no need to attack foreign workers. They’re people too and have as much right to a job as you do. If a corporation like MS can move their business and money around the world then there’s no good reason why individual workers shouldn’t be able to do the same. Just because times are getting tough doesn’t mean that it’s necessary to resort to racism.

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  4. SandraL, the bulk of the immediate 1400 layoffs are in the E&D divisions according to Mary Jo Foley:

    http://blogs.zdnet.com/microsoft/?p=1836

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  5. This is actually after effects of Vista.

    Vista is too bloated for netbooks (and even low end PC’s) so Linux or XP are not only preferred, in many cases it is the only OS that can run on these low spec machines.

    Combine this with VERY strong growth in the mac market (mid to high-end PC) and this spells danger for MS in the consumer end of things.

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  6. This is just market forces coming to bear on Microsoft.

    The alternative to a lower price and being on netbooks with Windows 7 is to keep the price as high as it is and not be on netbooks.

    Microsoft had an opportunity to make a lightweight OS for use on UMPCs before netbooks came out. UMPCs did not sell well because their price was high and did not always have the specs to smoothly run Vista.

    Any complaints from MS is just sour grapes, and that don’t feed the fox.

    Woadan

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  7. I think corporate sales are also a significant amount of Microsoft’s revenue and how many companies that you know upgraded to Vista? OTOH, that could lead to a high demand for Windows 7 because you are not going to see mass numbers of companies switching to OS X.

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  8. I have always thought MS OSes are drastically overpriced and bug-ridden. They don’t spend enough resources on fixing all those bugs in their existing products. Instead they force you to move to new release which they will gladly provide with the help of your friends at Visa, MasterCard and Discover. I wish they would just fix the software I have already paid for. I get an uncomfortable feeling that someone at MS is always tugging at my wallet.

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  9. it is not only the system itself, but also the whole office business that is touched by this competition. office home & student edition e.g. in switzerland is down to chf 110.- (49.- with a new pc) from this summer about chf 250.-. ms even had to support (behind courtains) the development of an importfilter for openoffice files.

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  10. Somehow I don’t think that the headline is quite justified. Do your really think that the only (or even main) reason for Microsoft to lay off 5,000 people is found in netbooks? By any chance, have you heard about the economic crisis? And the cut-backs in overall IT spending? And the fact that Vista in general has not been as successful as hoped? (my employer hasn’t upgraded any of our Win32 machines, it alone would number likely in the 100,000 Vista licenses… same with Office, by the way).

    Also, if the OS/Systems division isn’t making the money they expect, why would they cut in the E&D division? Maybe Zune is a flop? Maybe Win Mobile is becoming rapidly irrelevant?

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