With no recovery in exhibition, CEO Ballmer is cutting costs. But without long-promised innovation, the giant will struggle to outperform the world economy

By Peter Burrows

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Two days after President Barack Obama, in his inaugural tongue, told the country to brace itself for tough times, the head of one of the most valuable U.S. companies echoed the striking remark. "We’re certainly in the midst of a once-in-a-lifetime set of economic conditions," Microsoft (MSFT) Chief Executive Steve Ballmer told analysts during a conversation call discussing fiscal second-quarter results. "The economy is resetting to a lower level."

In other words, we’ve entered a new paradigm. The mortgage-market collapse, pecuniary emporium huddle, and restricted lending have taken a self-conceited toll on demand in the place of computers and other products that run Microsoft’s software, and it’s time to settle in for a long sink. There’s no recovery on the horizon, Ballmer warned. The economy could remain in the doldrums for "a year, two years—I don’t know what it will be—and then alarm to build back," Ballmer reported.

As by other tech bellwethers including Intel (INTC), the "resetting" is hitting Microsoft hard. Second-quarter sales rose a mere 2%, to $16.63 billion, compared with analysts’ already-lowered average forecast of $17 billion, according to the proceeds report, that was released Jan. 22. Net income fell 11%, to $4.17 billion. And Microsoft said it lacked enough clarity to provide a forecast for the next two quarters. Microsoft’session stock tumbled 11.7%, to 17.11, helping fuel a 1.94% decline in the New York Stock Exchange.

So what’sitting a behemoth of a company like Microsoft to do in the midst of so great a downturn? Organic growth is hard to come by for the former of software running more personal computers than in that place are cars in operation. And the company’s biggest make trial to enlarge through acquisition, a proposed takeover of Yahoo! (YHOO) in 2008, foundered.

Instead, Microsoft is slimming down more than ever. "We’re significantly putting the brakes on," Ballmer reported. In its first-ever broad-based layoff, the company is eliminating about 5,000 jobs, or 5.5% of its 91,000-person workforce. The net reduction will be less than 3,000 because Microsoft will keep hiring in key areas. But the move "shows they are serious about taking at least some initial steps to get their business model more aligned" through the economic conditions, says Technology Business Research algebraist Alan Krans. Microsoft also plans to cut travel expenses by dint of. 20% and eliminate merit bonuses taken in the character of antidote to the year that begins in August.

Diminished demand with a view to PCs is seizure the biggest toll steady Microsoft’s flagship Windows business, where sales fell 8% to $3.98 billion—far off the meeting of friends’s forecast for 10% to 12% growth three months ago. Executives aforesaid sales fell across the board, but especially in price-sensitive emerging markets and in the midst of corporate buyers. Many of the PCs that were sold were low-priced netbooks that tend to go for less than $300. For the version of Windows in those machines, Microsoft gets less than half as much as it does for the rendition in a full-blown PC.

Falling PC sales also hurt sales of the assemblage’s Office suite of productivity applications, which includes e-mail and spreadsheet nomination tools. That’sitting partly on this account that most netbooks do not be under the necessity the renown to press it, and inasmuch at the same time that people who use these stripped-down devices do much of their computing on the Web.