Microsoft to Shift Strategy

Microsoft Corp. said Thursday it will focus on winning more small-business customers and less on releasing blockbuster consumer products such as its Windows XP operating system, significantly boosting its research and development and hiring 5,000 workers.

With sales of personal computers slipping, the world’s biggest software company has more to gain by selling higher-end software to companies, executives said. With large firms reluctant to spend more on Microsoft, the company has more potential in small and medium-size firms, Chairman Bill Gates said. “The amount of price opportunity in large accounts is modest,” he said.

Gates also said the company will add 10% to its staff this year, and will increase research and development spending by 20% to $5.2 billion. “It’s an aggressive approach, but one that I certainly believe in,” he said.

In a later interview with reporters and analysts, Gates said the company’s taste for acquisitions and outside investments has changed substantially in the wake of Microsoft’s losses in telecommunications and other companies.

Microsoft’s shares fell $3.40, or 7%, to $42.83 Thursday on the Nasdaq Stock Market.

After the markets closed, Microsoft Chief Financial Officer John Connors said the company did well by reporting a 7% increase in operating income in the last year while rivals reported declines.

He acknowledged, however, that Microsoft will not be as profitable as in the past due to sales increases from lower-margin, non-PC products. “We will see our gross profit margin tick down over time,” he said.

Connors said Microsoft’s operating income should increase 6% to 8% as revenue increases 11% to 13% this fiscal year, assuming the economy doesn’t worsen and PC shipments increase slightly.

Microsoft is making gains on products for business but is still assembling a set of server software for various functions, including customer management and database applications.

Executives said they had high hopes for the Tablet PC, a one-piece machine with a detachable keyboard and handwriting recognition that is due in November.

Analysts were reserved about the Tablet. “I don’t think it’s going to do well,” said UBS Warburg analyst Don Young. “The PC industry is dying for a reason to go get a new product.” Young owns no Microsoft shares and has a “strong buy” recommendation on the stock. UBS does investment banking business with Microsoft.