Last updated: July 27, 2007 12:26 am

Microsoft defends its diversification

Microsoft has entered a new growth phase, though its long-term bets on new businesses like online advertising and consumer electronics may be beyond the patience of many investors, Steve Ballmer, chief executive, said on Thursday.

Speaking at the company’s annual financial analyst meeting, the Microsoft boss delivered a characteristically blunt defence of the company’s push into consumer internet and device markets in the face of continuing big losses and what he conceded were doubts on the part of some shareholders.

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His comments came a week after Microsoft revealed that revenues in its latest fiscal year grew by 15 per cent, the fastest rate in seven years. However, it also sustained losses of nearly $1.5bn in the latest quarter from its consumer electronics and online operations, much of it from defects in the Xbox 360 games console.

After more than doubling in the past five years to nearly $20bn, Microsoft’s operating profits are now greater than any other company outside the financial services and oil industries, Mr Ballmer said.

“That puts a lot of pressure on us to make big bets, to make a lot of bets, and to execute on them very well,” he said. “We need to have this outlet for our software creativity, to continue to innovate and grow.”

Online advertising and consumer electronics will eventually grow to rival desktop and server software as Microsoft’s biggest businesses, he said, forcing Microsoft to learn new ways of doing business. “We’re going to have multiple competencies and multiple business models all living in one body.”

Concerns about the continuing high costs of entering these new markets, as well as the competitive threat from Google, has left Microsoft’s shares little changed from where they stood five years ago.

Mr Ballmer brushed off what he characterised as a short-term view by investors, most of whom do not look beyond three years. “Great things, at least in this business, don’t always happen overnight,” he said.

The Microsoft chief also tried to brush off suggestions that internet-based services offered by Google and others would undermine the company’s core software businesses.

“People tend to get weird and extreme about this,” he said, arguing that desktop and server computing will remain big markets even as computing “in the cloud” grows.

“There is a big disruption going on in our business,” Mr Ballmer said. “If that scares people, they probably ought not to be in our stock.”

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