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Your economy has encountered an error. This job will now be closed down. The message from Microsoft is clear: the world’s largest software company is feeling the recession. Thursday’s second-quarter results, which showed an 8 per cent drop in operating income and knocked its shares down 11 per cent, prompted the company to abandon attempts to forecast sales and profits in the months ahead. There will be up to 5,000 permanent jobs cut over the next 18 months – about 5 per cent of the total – with perhaps 15 per cent of the contract workforce to go as well.

The cause is a slowdown in the PC market: sales of its Windows operating system still provide a quarter of the group’s revenues. Companies and consumers are delaying desktop computer purchases: sales of traditional PCs fell 10 per cent in the last quarter. Netbook sales are still going strong – and four-fifths of buyers still choose to take Microsoft software with the cheap hardware – but that comes at the cost of demand for full-specification machines. Installing Windows XP in a netbook is worth $20-$30 to Microsoft, according to Barclays Capital, compared with the $70 it can make from putting its newer Vista software in a full-speed, high-specification laptop.

There were some positive highlights. Microsoft trumpeted its 26th consecutive quarter of growth in its server business. The Xbox 360 continues to outsell the Playstation 3. But declining earnings and the sight of the first company-wide job cuts heighten fears that Microsoft is a mature company facing decline as the software market shifts underneath it. Even so, the share price is now back to 1998 levels, when sales and profits were less than a quarter of this year’s estimate. Microsoft now trades on less than 10 times prospective earnings. A rapid transition to online alternatives to Microsoft products is unlikely at a time when IT budgets are being frozen. Assumptions may need rebooting.

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