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Friday, July 19, 2013

As Detroit Wobbles, So Does Microsoft

A day of reckoning arrived on Thursday for a once vibrant icon of industry. Separately, Detroit filed for bankruptcy.

It seems almost appropriate that Microsoft delivered one of its worst financial performances in memory on the same day that Detroit became the largest American city to file for bankruptcy protection. For years, people have noted parallels between the decline of the auto industry and the maturing of the PC business, comparisons that have become more credible as evidence accumulates of a shift to a post-PC era.

The parallels aren’t diminished by the fact that Steve Ballmer, Microsoft’s chief executive, is a Detroit native, whose father was a longtime Ford manager, and that Mr. Ballmer has sought the counsel of Alan Mulally, Ford’s chief executive, on Microsoft management issues.

The gloom had gotten so heavy that investors, who have not been kind to Microsoft for the past decade or so, had even started to cut the company some slack. Since the beginning of the year, they seemed to see encouraging signs that Microsoft, the software company more closely identified with the PC business than any other, was figuring out how to adapt to mobile, cloud computing and other megatrends disrupting the tech business. Its shares were up more than 30 percent for the year when the week began.

Now Wall Street is back to doubting Microsoft. Investors punished its stock on Friday, driving it down more than 11 percent.

In a research note on Friday, Rick Sherlund, an analyst with Nomura Equity Research and a veteran Microsoft watcher, noted how Wall Street had warmed to Microsoft’s message lately. “Not so fast,” Mr. Sherlund wrote. “It was discouraging to read down the table and see that every division was below expectations.”

Mr. Sherlund added that the disappointing results could increase the prospects that an activist shareholder would agitate for change at the company, perhaps initially by seeking a seat on the board of directors.

One of the most troubling signs of Microsoft’s troubles is the nearly $1 billion charge it took to cover slow sales of Surface RT, a member of its new family of tablet computers.

The Surface devices were Microsoft’s first attempt to pull an Apple and make its own computer hardware. And the company decided that the Surface RT, the less expensive model, would run on chips made by ARM, instead of the more powerful (and expensive) chips made by Intel. Microsoft went through the hassle of making its Windows operating system work on ARM chips, because its tablet strategy would not seem credible otherwise. ARM chips power most of the world’s smartphones and tablets because they are well suited for battery-powered devices.

But Surface RT devices have sold poorly â€" so poorly that Microsoft was forced to cut the price of the device by $150, to $349. Another version of Surface that runs on Intel chips, which have the benefit of running traditional PC applications, has not sold well either, by all reports.

Microsoft will not give up. Unlike Detroit, Microsoft is not short on money. With more than $77 billion in cash and cash equivalents, the company has years to finance to find a successful new business formula. Last week, it announced a corporate reorganization that could sharpen its product making.

But the process will take time. In an interview on Thursday, Amy Hood, the company’s chief financial officer, made it clear that company is not expecting a sudden change in its fortunes in the mobile market.

“I expect this to be a journey where we continue to make incremental progress,” she said.