MOUNTAIN VIEW, Calif. — With sales of computers deteriorating by the day, the PC industry’s dominant players — Microsoft and Intel — have arrived at the stark realization that the slump in sales could last a long time, perhaps years.
“We are certainly in the midst of a once-in-a-lifetime set of economic conditions,” Microsoft’s chief executive, Steven A. Ballmer, told investors Thursday in a conference call to discuss the company’s dismal second-quarter financial results. “Our model is not for a quick rebound. Our model is things go down, and then they reset. The economy shrinks.”
To help it cope with that lower base of demand, Microsoft said that it would lay off up to 5,000 employees, or about 5 percent of its work force — the first significant cuts in the company’s 34-year history. The layoffs follow a rare decline in sales of Microsoft’s Windows operating system for personal and business computers in the second fiscal quarter. Net income for the period, which ended Dec. 31, fell 11 percent to $4.17 billion.
Other major players in the personal computer industry are reporting similar drops in demand and paring their work forces to adjust.
Intel, the leading maker of chips for PCs, said Wednesday that it would lay off 5,000 to 6,000 workers and shut production at some plants after revenue dropped 23 percent and net income fell 90 percent in the fourth quarter.
Advanced Micro Devices, also a large supplier of PC chips, reported a 33 percent decline in fourth-quarter revenue Thursday to $1.16 billion, while posting a $1.42 billion loss. Earlier this month, A.M.D. said it would reduce its work force by close to 9 percent.
Weakening sales for technology companies are hardly unusual in an economic downturn. Even Google, which reported a big increase in fourth-quarter revenue and operating profit on Thursday, has seen its growth slow. Microsoft executives suggested Thursday that this downturn is different from previous slumps, like the collapse in tech spending that followed the 2001 dot-com bust.
Rather than a recession, companies are witnessing a fall in consumer and business spending that could last for years and set a new low base for sales, Mr. Ballmer said. “The economy is resetting to a lower level of business and consumer spending,” he said.
Mr. Ballmer also said Microsoft would take a wait-and-see approach about acquisitions because company executives thought the price of potential targets would fall further. That gloomy assessment offers little hope to investors trying to figure out when tech stocks, which have plunged with the overall market, will hit bottom.
Both Microsoft and Intel, which are generally conservative in their public outlooks, declined to provide forecasts for future sales, saying they were uncomfortable with the proposition in an erratic economy.
“That’s especially unusual for Microsoft,” said Brendan Barnicle, a software analyst with Pacific Crest Securities. “Historically, they have had some of the most accurate gauges of PCs, and they didn’t even try to offer guidance.”
Analysts expect PC sales to fall about 8 percent in 2009, marking just the second time in the last two decades, including 2001, that PC sales will have declined for the year. Analysts at the research company Forrester say that surveys show people are putting off PC purchases and spending less on systems they do buy.
Other PC component makers like Nvidia, Seagate Technology and Western Digital have also grappled with evaporating sales and significant layoffs.
The reports from all of the component and software makers have set an ominous mood for Hewlett-Packard and Dell, the largest PC manufacturers, which report their financial results next month.
Some of Microsoft’s immediate issues stem from changing trends in the PC market as well as missteps as it has tried to move into newer markets like Web search and Internet-based software delivery, or cloud computing.
Microsoft’s revenue for the second quarter rose 2 percent, to $16.63 billion, and its earnings of 47 cents in the quarter missed the consensus forecast from Thomson Reuters by 2 cents. While sales of business software and Xbox gaming consoles aided the results, revenue from Windows dropped 8 percent, to $3.98 billion from $4.33 billion last year.
One factor that hurt sales of Windows was the rise of netbooks — a type of cheap, compact laptop that is growing in popularity, especially in Asia. The devices use less powerful chips than typical PCs, and as a result, Microsoft must offer the less bulky Windows XP instead of Vista on the netbooks and sell it at a discount in order to remain competitive with the open-source Linux operating system.
Looking long term, Microsoft’s traditional PC software business could face even more pressure because 30 to 40 percent of the revenue comes from corporate subscriptions that stretch over a number of years. Layoffs and reduced capital spending mean that Microsoft, based in Redmond, Wash., may see fewer subscriptions when renewal periods come up for customers.
With so much dependence on the Windows and Office franchises, Microsoft has been trying to diversify its business. Most notably, the company made a failed bid for Yahoo to try to bolster its online search business and compete better against Google.
Microsoft said Thursday that it would replace some of the fired workers with new hires, many of them to handle search, as it tries to grow new businesses.
“They have never dealt with a situation where PCs didn’t just keep going up, and there’s this sense that now is the time to start and write its next chapter,” Mr. Barnicle said. Microsoft’s online business continued to lose money in the quarter, placing added pressure on the company to do something more drastic.
Richard Williams, an analyst at Cross Research, complained that Microsoft’s layoffs and other cost cuts appeared cosmetic because it employs 94,000 people.
“Microsoft really needs to materially boost its effort in the Web,” he said. “The match with Yahoo makes even more sense now.”
