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Wall Street on Friday wiped more than $30bn from Microsoft’s stock market value after the software company revealed a dramatic shift in strategy to boost its investment in the internet and other new markets.

The heightened spending points to an escalation in Microsoft’s efforts to jump-start its flagging MSN online business to take on Google and Yahoo and an attempt to steal a march on Sony in the video games business before this year’s launch of PlayStation 3, analysts said. It also suggests that Microsoft is emerging from a five-year period of grappling with the aftermath of the rapid growth of the 1990s.

Steve Ballmer, who took over from Bill Gates as chief executive officer six years ago, has presided over an overhaul that has seen Microsoft try to adjust to its sheer size and the maturing PC market. “Bill is back – he’s now thinking about the Microsoft that has to be built,” said Mark Stahlman, analyst at Caris & Co in New York. “Ballmer doesn’t do strategy.”

With a new version of Windows due to be launched soon and a range of other new products lifting its sales, Wall Street had looked forward to a period of steadily rising profits. That “instant gratification” has now been delayed as Microsoft ploughs back some of the profits from its latest product cycle into new markets, said Rick Sherlund, analyst at Goldman Sachs.

Analysts blamed Friday’s sharp stock price fall on a lack of detail in Microsoft’s announcement of its new spending plans, which will add $2bn-$2.5bn to its operating costs in its next fiscal year. The news emerged late on Thursday as the company announced its earnings and gave forecasts for its next financial year, beginning in July.

Earnings per share will now rise by only 8-12 per cent, well below the 16 per cent analysts had expected. The change in direction was announced by Chris Liddell, the company’s chief financial officer, though he said further details would not be available until an analyst meeting at the end of July.

“I think Gates and Ballmer should have been on the call, and they should have talked about this some time ago,” said Mr Sherlund.

While Microsoft said the higher spending would be spread across a number of products, the shift was widely seen as an attempt to catch up with Google and Yahoo in the fast-growing online business. The company’s quarterly earnings revealed that the MSN business overall was still shrinking and its search advertising business was growing at only 7 per cent, far below the levels achieved by its internet rivals.

Shares in Microsoft closed nearly 11.4 per cent lower at $24.15 in New York.

Copyright The Financial Times Limited 2017. All rights reserved.
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