Fixing Sprint May Take More Than Layoffs

It's January, and at Sprint Nextel (S), that means layoff time. In each of the past two years, the No. 3 U.S. wireless service provider kicked off the new year with an announcement that thousands of jobs would be eliminated.

This year is no exception. On Jan. 26, Sprint said it will eliminate as many as 8,000 employees. Investors welcomed the announcement, boosting the shares 2% to 2.51 on the news.

But some analysts say there may be little reason in the long run to revel in this latest attempt to reduce expenses. In spite of about 9,000 jobs eliminated in the previous two years, the company has suffered losses in four of the past five quarters and margins have been narrowing. "Cost-cutting measures like this are akin to a tourniquet," says Craig Moffett, an analyst at Sanford C. Bernstein & Co. "They can help stave the bleeding, but they can't save the patient."

Handing out pink slips may help reduce costs—Sprint will cut expenses by $1.2 billion a year in this recent round of cuts—but the moves aren't doing too much to address the company's biggest challenge: keeping subscribers from disconnecting service and switching to rivals including AT&T (T) and Verizon Wireless, which is owned by Verizon Communications (VZ) and Vodafone (VOD) of Britain.

Narrow Margins

Investors and analysts will get a clearer view of Sprint Nextel's challenges on Feb. 19, when the company is due to release fourth-quarter results. In that period, Sprint likely lost 1.1 million to 1.3 million traditional wireless customers, according to analysts' estimates. Subscriber losses may continue through late 2010, says Michael Gary Nelson, an analyst at Stanford Group Co..

Fourth-quarter revenue may have dropped 13% to $8.55 billion, the sixth straight decline, and margins may keep narrowing, in part because of costs related to the elimination of jobs, according to analysts surveyed by Thomson One. In Sprint's main wireless business, gross margins may slip to 21% in 2009, from 24% in 2008, according to UBS (UBS). Net losses may also continue through 2010.

For CEO Dan Hesse, the task of retaining customers is made more difficult by stiff competition, an already saturated market, and an economic environment that's causing consumers to tighten their belts. "The deck is stacked against them," Moffett says. What's more, as one of the biggest providers of wireless service to bankers, managers, and engineers, Sprint may lose out as Corporate America slashes jobs and other spending.

Rivals, meanwhile, are picking off the few new subscribers by offering devices and services Sprint Nextel lacks. AT&T, for instance, is the exclusive U.S. provider of the Apple (AAPL) iPhone. To its credit, Sprint has snagged an exclusive on the much anticipated Palm (PALM) Pre. But the 3.1-inch touchscreen phone isn't expected to hit stores until May.

Revamping Incentives

Sprint Nextel is taking several steps to stem losses and reverse course. It has stepped up spending on marketing. And on Jan. 26, the company tied its executive and employee incentives directly to subscriber retention and operating income metrics.

The company could also offer deeper discounts, such as bigger phone subsidies and cheaper calling plans, but that's a risky move for a company whose margins are already under pressure. In January, Sprint subsidiary Boost began offering unlimited calling, texting, and other services for $50 a month, paid in advance. The danger is that some current post-paid subscribers paying Sprint an average of $56 a month could switch to this lower-cost plan.

Further cost reductions may be in order. Sprint could hire an outside firm like Nokia Siemens Networks to manage its network, says Walter Piecyk, an analyst with Pali Research. And additional customer-care operations could be relegated to offshore call centers.

Fortunately for Sprint Nextel, the company has plenty of cash—about $4.1 billion at the end of the third quarter—and isn't expected to face a cash crunch imminently. But big debt eventually will come due, and investors' patience may wear thin even sooner. "Sprint still has a relatively long runway to turn this around," Nelson says. "But every quarter it's getting shorter."

Apocalypse in 2012? Date spawns theories, film

Just as "Y2K" and its batch of predictions about the year 2000 have become a distant memory, here comes "Twenty-twelve."

Fueled by a crop of books, Web sites with countdown clocks, and claims about ancient timekeepers, interest is growing in what some see as the dawn of a new era, and others as an expiration date for Earth: December 21, 2012.

The date marks the end of a 5,126-year cycle on the Long Count calendar developed by the Maya, the ancient civilization known for its advanced understanding of astronomy and for the great cities it left behind in Mexico and Central America.

(Some scholars believe the cycle ends a bit later -- on December 23, 2012.)

Speculation in some circles about whether the Maya chose this particular time because they thought something ominous would happen has sparked a number of doomsday theories.

The hype also has mainstream Maya scholars shaking their heads.

"There's going to be a whole generation of people who, when they think of the Maya, think of 2012, and to me that's just criminal," said David Stuart, director of the Mesoamerica Center at the University of Texas at Austin.

"There is no serious scholar who puts any stock in the idea that the Maya said anything meaningful about 2012."

But take the fact that December 21, 2012, coincides with the winter solstice, add claims the Maya picked the time period because it also marks an alignment of the sun with the center of the Milky Way galaxy, and you have the makings of an online sensation.

Type "2012" into an Internet search engine and you'll find survival guides, survival schools, predictions and "official stuff" to wear, including T-shirts with slogans such as "2012 The End" and "Doomsday 2012."

Theories about what might happen range from solar storms triggering volcano eruptions to a polar reversal that will make the Earth spin in the opposite direction.

If you think all of this would make a great sci-fi disaster movie, Hollywood is already one step ahead.

"2012," a special-effects flick starring John Cusack and directed by Roland Emmerich, of "The Day After Tomorrow" fame, is scheduled to be released this fall. The trailer shows a monk running to a bell tower on a mountaintop to sound the alarm as a huge wall of water washes over what appear to be the peaks of the Himalayas.

'Promoting a hoax'

One barometer of the interest in 2012 may be the "Ask an Astrobiologist" section of NASA's Web site, where senior scientist David Morrison answers questions from the public. On a recent visit, more than half of the inquiries on the most popular list were related to 2012.

"The purveyors of doom are promoting a hoax," Morrison wrote earlier this month in response to a question from a person who expressed fear about the date.

A scholar who has studied the Maya for 35 years said there is nothing ominous about 2012, despite the hype surrounding claims to the contrary.

"I think that the popular books... about what the Maya say is going to happen are really fabricated on the basis of very little evidence," said Anthony Aveni, a professor of astronomy, anthropology and Native American studies at Colgate University.

Aveni and Stuart are both writing their own books explaining the Mayan calendar and 2012, but Stuart said he's pessimistic that people will be interested in the real story when so many other books are making sensational claims.

Dozens of titles about 2012 have been published and more are scheduled to go on sale in the coming months. Current offerings include "Apocalypse 2012," in which author Lawrence Joseph outlines "terrible possibilities," such as the potential for natural disaster.

But Joseph admits he doesn't think the world is going to end.

"I do, however, believe that 2012 will prove to be... a very dramatic and probably transformative year," Joseph said.

The author acknowledged he's worried his book's title might scare people, but said he wanted to alert the public about possible dangers ahead.

He added that his publisher controls the book's title, though he had no issue with the final choice.

"If it had been called 'Serious Threats 2012' or 'Profound Considerations for 2012,' it would have never gotten published," Joseph said.

Growing interest

Another author said the doom and gloom approach is a great misunderstanding of 2012.

"The trendy doomsday people... should be treated for what they are: under-informed opportunists and alarmists who will move onto other things in 2013," said John Major Jenkins, whose books include "Galactic Alignment" and who describes himself as a self-taught independent Maya scholar.

Jenkins said that cycle endings were all about transformation and renewal -- not catastrophe -- for the Maya. He also makes the case that the period they chose coincides with an alignment of the December solstice sun with the center of the Milky Way, as viewed from Earth.

"Two thousand years ago the Maya believed that the world would be going through a great transformation when this alignment happened," Jenkins said.

But Aveni said there is no evidence that the Maya cared about this concept of the Milky Way, adding that the galactic center was not defined until the 1950s.

"What you have here is a modern age influence [and] modern concepts trying to garb the ancient Maya in modern clothing, and it just doesn't wash for me," Aveni said.

Meanwhile, he and other scholars are bracing for growing interest as the date approaches.

"The whole year leading up to it is going to be just crazy, I'm sorry to say," Stuart said.

"I just think it's sad, it really just frustrates me. People are really misunderstanding this really cool culture by focusing on this 2012 thing. It means more about us than it does about the Maya."

Microsoft and Yahoo: Deal or no deal?

NEW YORK (Fortune) -- It is conventional wisdom in tech circles that Microsoft and Yahoo will resuscitate talks about combining at least some parts of their businesses now that Yahoo has a new CEO, Carol Bartz.

"I think there's a 100% chance they'll have meaningful conversations," says Tom Wilde, CEO of video search company Everyzing. "In terms of something meaningful actually happening, I would put that at about 70%."

Microsoft, you'll recall, a year ago offered to buy Yahoo outright for $45 billion or $31 a share, a staggering 62% premium to Yahoo's stock price at the time. Yahoo's shares today trade at about $11 a share. Yahoo (YHOO, Fortune 500), to the surprise and consternation of many shareholders, spurned the Microsoft bid. Microsoft (MSFT, Fortune 500) later sought to acquire Yahoo's search business, to no avail.

But does a Microsoft-Yahoo tie-up still make sense? A lot has changed in the year since Microsoft CEO Steve Ballmer released his letter to Yahoo's then-CEO Jerry Yang, suggesting that "together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers." Here's a quick look at some of the reasons the companies sought to get together back then, and whether the rationales still make sense.

Reason No. 1: A chance to catch a growth wave

In announcing its buyout offer, Microsoft spent a lot of time talking about the potential growth of the online advertising market, and at the company's annual investor meeting in July, CEO Ballmer also hammered home the online ad opportunity, says Citigroup analyst Mark Mahaney.

In the months since Ballmer made his remarks, online advertising has taken a big hit. The Wall Street Journal, citing statistic from ad firm Efficient Frontier, recently reported that spending on search advertising spending fell 8% in the fourth quarter of 2008 from the same period in 2007.

Clearly the recession isn't helping any media outlets. But when the economy bounces back, will online advertising continue to take share from traditional media? "I know the recession has blown all estimates out of the water, but I don't think the secular growth thesis has changed, and I don't think the thesis would have changed for Microsoft," Mahaney says. If Microsoft still believes in the growth of the online ad market, it seems likely the company would look to strike a deal.

Reason No. 2: Google envy

Microsoft and Yahoo both are insanely jealous of Google (GOOG, Fortune 500), which came from behind to dominate the search ad business (it has about 75% market share compared to Yahoo's 20% and Microsoft's 5%). It also has done a good job of garnering consumer mindshare in some other businesses that Microsoft and Yahoo consider core, such as e-mail.

Google continues to give Microsoft and Yahoo agita. Microsoft last week reported flat online revenue and a loss of $471 million for the unit - and said it would lay off some 5,000 people. Yahoo is set to announce earnings this week, and analysts expect ad revenue from big marketers such as auto makers to hurt its results. Google, meanwhile, keeps rolling along, posting an 18% gain in fourth-quarter revenue last week. (Profits fell because it had to write down bad investments.)

Yahoo, of course, tried the if-you-can't-beat-'em approach last year when it attempted to forge an advertising partnership with Google. Antitrust concerns scuttled the deal, and left Yahoo without a turnaround strategy- and, having rebuffed Microsoft, without a partner.

Is Google unstoppable? Of course not. Online marketers actually want Google to have strong competition. Thus far, neither Microsoft nor Yahoo have been able to put up much of a fight in search advertising on their own, and skeptics question whether putting these two wounded players together would result in a venture strong enough to take on Google. But if Microsoft and Yahoo are filled with enough Google envy, they might just be able to come up with a strong enough product to compete with their rival.

Reason No. 3: Leadership vacuum

A few people close to Yahoo have suggested that the company should have taken Microsoft's original offer because it would have solved Yahoo's management problems. And these folks weren't just talking about Yahoo co-founder and former CEO Jerry Yang, who didn't exactly endear himself to outside shareholders. Yahoo has always struggled to find ways to make employees and executives accountable for their projects; Yahoo could probably have learned a thing or two about execution from Microsoft.

Now, of course, Yahoo has new management. Former Autodesk Chairman Carol Bartz earlier this month accepted the CEO post, and she's widely expected to bring discipline to Yahoo. She ultimately may decide to enter talks with Microsoft, but presumably it will be for strategic reasons - not because she thinks she can't lead Yahoo.

No matter what Bartz decides to do, there is one wild card in Yahoo's deck, and that's Yang. Though he announced his departure in mid-November, clearing the way for the board to find his replacement, Yang remains a very large shareholder of the company, and also sits on the board of directors.

If Yahoo decides to pursue some sort of deal with Microsoft, management will still have to sell Yang on the idea. He didn't seem to like the idea very much the last go around. If Yang has in any way warmed (or acquiesced) to the idea of a deal, that may be the biggest change to occur since Microsoft approached Yahoo a year ago.

Microsoft aiming to recover lost ground in mobile

Microsoft has made some stumbles in the mobile world, but a strategy shift made more than a year ago will soon pay dividends, the company's top Windows Mobile executive said in an interview with CNET News.

Andy Lees, the executive brought over from the server unit a year ago, said that Microsoft's efforts to make sure that its mobile software could run on a wide range of phones resulted in an operating system that failed to take advantage of advances in hardware.

"We aimed to go for a lower common denominator," Lees said. Microsoft was also limited by the origins of Windows Mobile, which was developed to power handheld computers that neither connected to a network nor handled voice.

"We started out when we were in PDAs (personal digital assistants) and then a phone got strapped to the back of the PDA," Lees said. The company also failed to recognize that phones--even those that were used for business--were still as much personal as they were professional.

Meanwhile, Apple and Google have joined the fray with operating systems designed from the ground up to take advantage of the latest in phone technology.

But Lees said that Microsoft embarked on a new strategy some time ago that will come to fruition over the next 18 months. The first steps in that strategy, he said, will be announced at the Mobile World Congress conference that takes place in Barcelona in the middle of next month.

"You are going to see a bunch of announcements at Mobile World Congress but also it is going to be the beginning of a 12-, 18-month period where you are going to see a whole bunch of different stuff," Lees said.

Part of Microsoft's new strategy, Lees said, is not relying on operating system upgrades to improve its products. The new approach, while still making money by selling a mobile operating system, places considerable focus on services that help connect the phone to the PC and Web as well as devices such as the Xbox.

Microsoft has two separate teams at work on the services piece. One is Microsoft's Windows Live group, while the other is a rather secretive group headed by former Mac unit head Roz Ho--a group that also includes the team Microsoft acquired when it bought Danger. Lees declined to say specifically what Ho is up to, however.

But Lees acknowledged the company also needs to improve that core operating system, which is widely seen as lagging that of most of its rivals.

For some time now, Microsoft has been working on a significant overhaul of its operating system, known as Windows Mobile 7. However, that project has hit delays, prompting Microsoft to push forward with an interim update, Windows Mobile 6.5, which the company is widely expected to detail next month. Lees declined to comment specifically on either version of the operating system, but promised the company would have more to say on the OS front in Barcelona.

Lees also promised that Microsoft would start working more closely with hardware makers. He pointed to deals late last year with LG and Samsung.

He noted that the power of the kinds of phones that come out next year will be incredible, well beyond even today's devices. Phones next year will have dual-core processors, super-fast data connections, and graphics power rivaling that of the original Xbox.

"That's a phenomenal thing on a phone," he said. The phones of the future will also have location information beyond just GPS sensors. "It will know where it is pointing, it will know which angle it is being held at."

Web browsing has been another weak spot for Microsoft. The company made up some ground late last year with a pocket browser that essentially crams the desktop Internet Explorer 6 into a Windows Mobile phone. But it lacks the kind of easy zooming and gesture recognition present on the iPhone or in Palm's Pre. Lees promised that Microsoft would surpass those interfaces by the end of the year.

Lees would not confirm details of a rumored rival to Apple's App Store, reportedly known as SkyMarket.

"There is some question whether we can more directly connect the developer and the end user," he said. "We're looking at that."

Apple dismissed the notion that Microsoft and others are catching up to the iPhone, however.

On a conference call with analysts last week, Apple CFO Peter Oppenheimer dismissed the growing competition from rivals saying Apple remained "years ahead" in the phone business.

"Our competitors are scrambling to try and copy our success," he said.

Intel Readies Push into Mobile Internet Devices

Apple didn't take kindly to disparaging remarks made publicly last fall by a pair of Intel (INTC) executives about the iPhone and its chips, designed by ARM Holdings. The computer maker was so incensed, in fact, that Chief Executive Steve Jobs called Intel's Chief Executive Paul Otellini to complain, people familiar with the matter say.

The jabs stopped and Intel publicly backed off its comments. But the episode is a reminder of Intel's larger ambitions for handheld computers and mobile phones, and how those plans could put it at loggerheads with some longtime partners. Intel, the world's largest chipmaker, is readying new chips and a version of the open-source Linux operating system specially designed to run a new class of "mobile Internet devices," or MIDs. Consumers could use the devices to play high-definition video, make Internet-powered phone calls, or download directions and local business listings on the go. The effort could presage an attempt by Intel to land its products in pocket-size smartphones, a category where Apple (AAPL) has sold 17.4 million units.

At the same time, as Intel tries to tap into the burgeoning market for smartphone and handheld chips, estimated by iSuppli to be worth $3 billion this year, its mobile Internet devices could also compete with the iPhone for buyers. Intel's Linux effort also poses a threat to longtime collaborator Microsoft (MSFT), which is trying to land its Windows Mobile operating system in more handheld devices. Intel is stocking up on Linux talent, partly to aid the handheld effort. "Intel is going to be entering solidly into Apple's space," says Rob Enderle, president and principal analyst at the Enderle Group. "It's going to make for an interesting next decade." Apple declined to comment.

Partnering with Device Makers

The Linux software, called Moblin 2 and expected to be in software developers' hands by March, will run new portable computers Intel calls "MIDs," set to arrive around midyear, Intel told BusinessWeek. Companies including Lenovo (LNVGY), Hitachi, and BenQ already make MIDs using previous designs, and Intel plans to announce new partners in February at a mobile technology conference in Barcelona, Spain.

By providing a free version of Linux for mobile devices that run its chips, Intel is hoping to jump-start a new breed of handheld computers, a category it's been largely shut out of. Most smartphones—including the iPhone and Palm's (PALM) new Pre, which garnered accolades at its Jan. 8 unveiling in Las Vegas—run chips designed by ARM and licensed by manufacturers including Qualcomm (QCOM), Samsung, and Texas Instruments (TXN). On Jan. 19, Qualcomm paid $65 million to Advanced Micro Devices (AMD) for technology and engineers to enhance its smartphone chips' multimedia capabilities. "Intel would like to promote the MID category at the expense of high-end smartphones," says Gordon Haff, an analyst at market researcher Illuminata.

The fight over which companies will supply the chips and software for smaller and more powerful handheld computers such as MIDs comes as the PC recedes from the center of tech industry action. Worldwide PC sales are expected to drop more than 5% this year. Waning demand has slashed Intel's fourth-quarter profit by 90%, and whacked Microsoft's second-quarter earnings as well.

Mobile Computing's Category Lines Blur

Meantime, handhelds are taking on many of the functions of full-fledged computers. Market researcher Gartner (IT) forecasts the worldwide smartphone market will grow 32% in 2009, to 190.8 million units. "The line between what's a smartphone, what's a mobile Internet device, what's an ultra mobile PC—it's all going to disappear," Dell (DELL) CEO Michael Dell said in an interview last year. Another sign of the changing times: Intel Chairman Craig Barrett, who presided as CEO over the PC boom of the late '90s, said on Jan. 23 he plans to retire in May.

Yet Intel's history in the mobile computing market has been checkered. The company sold its XScale mobile chip business to Marvell Technology (MRVL) in 2006, and some analysts are skeptical its latest run at handhelds will go better. "What Intel is trying to do with this mobile Internet device category is essentially tell people, 'The smartphone is too limited for a lot of applications…so you need this thing in between,'" says analyst Haff. "I've certainly yet to be convinced there's a market for something in between a smartphone and a netbook."

To help with the convincing, Intel is stocking up on staff skilled in the operating system that will run the devices. One of the world's most experienced Linux programmers, Alan Cox, will join Intel from Red Hat (RHT) in March and work on projects including Moblin. "They were more than happy to have him there," says Paul Cormier, an executive vice-president at Red Hat. At the beginning of January, Intel brought on board Peter Anvin, another key Linux developer.

Intel is also paying special attention to MIDs' software to try to ensure users find the devices compelling. The devices will feature new capabilities like touchscreens that recognize users' gestures and a graphical user interface that employs 3D and translucent icons. Moblin 2 will be free to hardware makers and distributed by companies including Canonical and Novell (NOVL). "What we've done in the PC space, we're driving into these smaller[-size] devices," says Doug Fisher, vice-president for Intel's software and services group. "We're doing some aggressive stuff to make sure Linux takes advantage" of MIDs, he says.

Modifying the Atom Netbook Processor

On the hardware side, Intel is adapting its Atom processor, used today mainly in low-priced portable netbook computers, for MIDs. Atom sales have been a bright spot in Intel's otherwise gloomy business; fourth-quarter sales of the chips rose 50% from the previous quarter, to $300 million. A lower-power version of Atom called Moorestown, scheduled to arrive in 2009 or 2010, will target MIDs, which need to run longer and cooler than netbooks do, and future Atom chips could target smartphones as well.

Developing free software for mobile Internet devices also gives Intel an alternative to Microsoft's Windows Mobile operating system, whose market share has been shrinking. Microsoft counters by saying it doubts the market potential for handhelds with relatively large screens that could be unwieldy to carry around. "I'm not sure there's a third category of device" between a cell phone and a netbook, says Andy Lees, a senior vice-president in Microsoft's mobile communications business. "The thing that distinguishes a phone is it goes in your pocket or purse. If you have a six-inch screen, that's no-man's land."

The fight over who'll supply the chips and software for new generations of mobile computers is straining some of the tech industry's most durable alliances. "Intel is very aggressive about developing a software platform that they can deliver on MIDs, and eventually cell phones, and deliver it with their [chips] for free," says analyst Enderle. "Apple and Microsoft are…collateral damage."

Circuit City: Vying for Liquidation Bargains

Daniel Romero eyed a wall of flat-screen TVs on the second floor of Circuit City's 26,000-square-foot store on Fifth Avenue in midtown Manhattan during his lunch break Jan. 22. Drawn by the bankrupt chain's liquidation sale, the 28-year-old print manager at Macy's (M) had already picked up a new controller for his Xbox 360 at a 30% markdown that day, and he was considering getting an extra Wii game controller as well.

The store was busy but not packed, and like most shoppers there, Romero wasn't about to buy a 46-inch Sony Bravia TV because a 10% discount cut the price from $1,699 to $1,529. "As far as all this high-end stuff," he said, "you can still probably find better online."

The liquidators who bought those TVs and the rest of Circuit City's inventory, estimated at a $1.8 billion retail value, are gambling that Romero and other shoppers will come around. After failing to find a buyer to take Circuit City out of bankruptcy, the 60-year-old Richmond (Va.) electronics giant announced Jan. 16 it would close its 567 remaining U.S. stores, lay off its 34,000 employees, and sell off its assets to pay back creditors.

The next morning the four liquidation firms that won the bid to sell Circuit City's inventory started going-out-of-business sales, advertising 10% to 30% discounts in what they say is the largest electronics liquidation ever.

Busy Liquidators

These are busy days for the liquidation industry, which consists of about a half-dozen big firms and scattered smaller players, as companies that in other times might have reorganized in bankruptcy are being forced by the ailing economy to liquidate. "It is the most active time that I've seen in this business," says Jim Schaye, president and CEO of Boston-based Hudson Capital Partners, one of the four liquidation firms handling the Circuit City sales.

Following a disastrous holiday shopping season in which many retailers seemed eager to almost give goods away in last-minute sales, the prices at Circuit City are evoking some disappointment, to judge by comments posted on Web sites frequented by bargain hunters. "Discounts are small," wrote one poster on insidesocal.com.

But, say liquidators, the discounts are about standard for this type of sale.

Hudson, in a joint venture with Great American Group, SB Capital Group, and Tiger Capital Group, successfully bid on Circuit City's inventory. They will pay 70.5% of the estimated $1.2 billion wholesale value for the merchandise. Liquidators assume the risk that the goods they buy may not sell in the time or at the price they expect. They also take over the cost of running the stores during the sale, including payroll, rent, and advertising. In exchange, they're acquiring goods that would fetch $1.8 billion at full retail price for about half that amount.

Discount Dynamics

Both the sale price and operating costs affect the kind of discounts consumers can expect to see on store shelves. Shoppers accustomed to seeing 30% to 40% discounts on last season's clothes shouldn't expect the same kind of fire sale for lower-margin gadgets. And while some of the prices aren't cut as deeply as some shoppers might hope, Schaye said liquidation sales trim the price of items that normally don't go on sale, such as the game accessories Romero picked up, or leftover iPods, which are rarely discounted. "How often do you see iPods at 10% off?" Schaye asks.

Indeed, at the Fifth Avenue Circuit City, bright red signs with yellow type advertised "Entire Store On Sale!" and "Nothing Held Back!" The signs promoted discounts of 10% to 30% off, although big-ticket items were nearly all 10%. Still, some shoppers weren't convinced. Ed Shelly, a student from Manhattan, dropped by the store in search of an HP (HPQ) wireless printer, after checking the Best Buy (BBY) store next door, which didn't have it in stock. Circuit City had the printer on sale for $117, 10% off the regular $130 price. Shelly held off to see whether the price goes down in the next couple of weeks. He said he'd buy it when it reaches $100 or less.

That psychology, typical of going-out-of-business sales, is heightened by the recession that has consumers paring back. Liquidators acknowledge that they'll sweeten the deals as the sale goes on, but they also warn that items in demand will move before then. "You certainly, after the next week and a half, won't be able to go in and buy an iPod," says Sandy Feldman, senior vice-president at Great American Group.

Still, liquidators worry they may have paid too much for inventory that newly thrifty shoppers may not buy. "We have to be very careful," Schaye says. "We can lose money very easily."

Why the SEC is probing Steve Jobs

NEW YORK (Fortune) -- Apple and its CEO-on-leave-but-still-active-sort-of Steve Jobs practically forced the Securities and Exchange Commission to look into the adequacy of the company¹s disclosures about Jobs's medical problems. But the investigation may have less to do with Jobs's health than with the SEC's.

The SEC, trying to reestablish its credibility after years of ignoring explicit and apparently dead-on warnings that Bernard Madoff was running a massive Ponzi scheme, could hardly afford to ignore Apple's latest in-your-face flip-flop concerning Jobs's battles with a rare form of pancreatic cancer, a subject that Jobs and the company's board have generally considered Jobs's personal, private matter and none of investors' business.

Though the precise scope of the probe, reported yesterday by Bloomberg and the Wall Street Journal, is still unclear, it was obviously triggered by Jobs's announcement last week that he would be taking a six-month medical leave notwithstanding a press statement just nine days earlier in which he reassured investors that his gaunt appearance was the result of a mere "hormonal imbalance" whose remedy would be "simple and straightforward." An Apple spokesman declined to comment on the media reports of an SEC inquiry.

Jobs was first diagnosed with the disease in October 2003, but disclosed nothing until Aug. 1, 2004, the day after his surgery, when he publicly pronounced himself "cured." Then, after Jobs's emaciated appearance last June spurred press inquiries over whether the cancer had returned, an Apple spokesman claimed Jobs was suffering from "a common bug." A month later the New York Times reported that Jobs had recently undergone more surgery to address nutritional problems apparently stemming from his cancer surgery.

Fears were stoked again - and Apple's (AAPL, Fortune 500) stock price began plunging - when Apple announced in December that Jobs would not be delivering his traditional keynote address at Macworld. Finally, on the morning of Jan. 5, in an effort to stanch the death-bed rumors, Apple issued its upbeat, now-infamous claim that, after conducting a "sophisticated" battery of blood tests, Jobs's doctors now believed he had an easily treatable "hormonal imbalance." Apple stock jumped more than 4% that day.

Columbia law professor Jack Coffee told Fortune last week that corporate executives' medical conditions, like any condition potentially affecting a company¹s performance, are subject to two general disclosure principles.

First, the company has a quarterly duty to disclose "any known risk, event, trend, or uncertainty" that could affect "future results of operations." Whether any given officer's medical condition rises to that level is a very difficult call, he said, hinging both upon the indispensability of the officer to the company and the severity of his or her medical condition.

Pancreatic cancer in Steve Jobs has to get a you awfully close to the trigger point, one would think. (The securities laws make no explicit exception for privacy rights. While most lawyers assume that officers of public corporations do have some legitimate privacy concerns that enter into this analysis, those concern don't trump investors' right to know what¹s going on.)

The second disclosure principle is easier to understand and apply, Coffee continued. Once the company does decide to disclose anything about an executive's health, that information has to be the truth, and the whole truth. "You can't lie," as the professor put it.

In Apple's case, the board of directors and CEO Jobs may be in slightly different legal postures. Though both have disclosure obligations, it is quite possible, due to medical confidentiality rules, that all the board's information about Jobs's medical condition comes entirely from Jobs.

Hypothetically, if a CEO were to mislead a board about his medical condition and the board then, relying upon the CEO's information, released a misleading account of the CEO's health status, the CEO would be committing securities fraud while the board would not be. That's because mere negligent false statements don't constitute securities fraud. To be fraud, the statements have to be made intentionally or recklessly.

(This writer has no reason to believe Jobs did mislead Apple's board, of course. It's quite possible that between Jan. 5 and Jan. 14 new information came to the attention of Jobs's doctors causing them to alter their evaluations. That's doubtless the main question the SEC wants to have answered.)

As frustrating as Apple's disclosures have been for its shareholders, I doubt we'll see much will come of this SEC inquiry. The strength of any case against Jobs or the Apple board is directly proportional to how much mortal danger Jobs is now in. And nobody wants to launch an enforcement action against a beloved American business icon who's fighting for his life.

Which is not to say that the SEC inquiry was ill-advised. On the contrary, the SEC needed to do one both to remind corporations that there are pertinent disclosure rules that apply here and, more important, to show dubious investors that someone really is still awake and stirring at the SEC.

Sony Ramps Up Its Reform Efforts

Hard times are forcing Sony (SNE) CEO Howard Stringer to give up his Mr. Nice Guy act. The Welsh-born American executive, who has used charm and wit to sell the rank and file on a modest reform agenda, is suddenly ramming through more drastic measures. That's because evaporating consumer demand and a sharp surge in the yen have left the Japanese tech giant no better off than it was when Stringer started three and a half years ago.

The company's future depends on whether Stringer can deliver. On Jan. 22, Sony issued its second profit warning in three months, saying it now forecasts a $2.9 billion annual operating loss—its first in 14 years—instead of $2.2 billion in profits. Sales are predicted to fall 13%, to $86 billion, rather than gain 1.4%, as had been projected.

Stringer blamed a "significant portion" of the expected losses on factors beyond Sony's control. The yen's rise has sharply eroded overseas earnings for many of Japan's top exporters, such as Toyota (TM), Honda, Panasonic (PC), and Sharp. It's especially painful for Sony because the company earns 80% of revenues in overseas markets. Plunging stocks also have hammered the company's insurance and banking unit, which has billions invested worldwide.

Sony's Software Weakness

Stringer admitted that the reforms he has pushed through since mid-2005 hadn't gone far enough. The company still suffers from bloated costs, an inefficient supply chain, and poisonous rivalries among divisions, he said. And while Sony had an "unbeatable" combination of top-notch consumer electronics, blockbuster movies, and TV programs and music, it hasn't fused them all into a winning whole. The reason: Sony's weakness in creating software to deliver online services. "There is still too much old Sony and not enough new, which at times means we are fighting our competitive wars at a disadvantage," he told journalists at the company's global headquarters in Tokyo. "We have to find a way to embrace network services."

Stringer had never before appeared at an earnings news conference, and his presence onstage, along with CFO Nobuyuki Oneda and President Ryoji Chubachi, underscored the seriousness of the problems Sony faces. Just last month the company announced cost cuts, thousands of layoffs, and plans to close five or six of its 57 factories worldwide. This time, Stringer stressed a need to move away from a traditional consensus-building to speedier, top-down decision-making. "Too often we have been late to market with new products," he said. "This practice cannot be tolerated going forward."

Stringer ordered his management team to conduct a top-to-bottom review of every business, which runs the gamut from flat-screen TVs to blockbuster movies. The goal is to slash administrative expenses, make product planning, design, and manufacturing more efficient, and improve supply-chain management. The company also will sharpen the focus on innovation and encourage managers to think about how consumers will use a product before concentrating on its technical capabilities. It is also raising its cost-cutting target through March 2010 to $2.8 billion, double the level from a month ago.

But a major obstacle continues to hamper Stringer's reform efforts: the core electronics division's money-losing TV business. Selling TVs has been a huge boost to Sony's brand in the past. But TV losses have reached $2.3 billion over the past four years, and earlier this month, Goldman Sachs predicted that Sony would lose an additional $1.1 billion on TVs this fiscal year through March. Electronics account for about 70% of overall revenues. Credit Suisse, meanwhile, forecasts an operating loss for Sony through next fiscal year ending March 2010.

Scaling Back Japan Production

To whip the TV unit into shape, Sony will scale back production in Japan, consolidating assembly at one of two domestic flat-panel TV factories. As a result, the company expects to sell 15 million liquid-crystal-display sets this fiscal year, from an earlier estimate for 16 million.

Of course, revamping TVs won't help Sony snatch the lead in portable music, where it trails Apple (AAPL), or in video games, where its PlayStation 3 is losing to Nintendo's Wii and Microsoft's (MSFT) Xbox 360. So why not stop trying to manufacture so many things and focus on development and design as Apple and Nintendo, which are raking in profits despite the downturn, have done? That's exactly what Stringer has in mind. Sony's manufacturing sites globally make everything from tiny image-sensor chips for cameras to DVD players to giant-screen TVs. The company already relies on contract manufacturers to make its low-end digital cameras and video game consoles. But Sony now will "aggressively evaluate significant outsourcing opportunities for basic manufacturing and assembly logistics and back-office operations," adopting as its template the semiconductor division's strategy of selling factories and shifting the work to contract manufacturers, Stringer said.

There's no shortage of companies willing to take on the work in the U.S. and Asia. Making the adjustment won't be easy, though. Many tech giants have tried to outsource manufacturing to tech companies in Asia, only to end up sending teams of designers and engineers to help those companies get up to speed. Still, said iSuppli analyst Adam Pick, "If managed properly, [the outsourcing shift] can be a phenomenal bonus."

Apple fans mark 25 years of Mac devotion

Long before fish swam in Macquariums, hipsters got Apple logo tattoos and thousands camped out for days to get into computer store openings, there was a machine.

Saturday marks the 25th anniversary of the original Macintosh, the first personal computer to draw masses, introduce the mouse and incorporate a graphical user interface, relying on images instead of text.

The Apple Inc. watershed product entered American consciousness amid fanfare, with a $1.5 million commercial, made by Ridley Scott, wowing audiences during Super Bowl XVIII. The piece's title, "1984," invoked author George Orwell's message and stood as a warning against conformity.

Two days after the ad ran, the Macintosh became available and life, as people knew it, changed. No longer were computers viewed as toys with which to play primitive games or as untouchable tools reserved for degreed engineers. We began to think different.

"The Macintosh demonstrated that it was possible and profitable to create a machine to be used by millions and millions of people," said Alex Soojung-Kim Pang, research director for the Institute for the Future, a Palo Alto, California, think tank, and chief force behind "Making the Macintosh: Technology and Culture in Silicon Valley," an online historical exhibit. "The gold standard now for personal electronics is, 'Is it easy enough for my grandmother to use it?' People on the Macintosh project were the first people to talk about a product in that way."

Pang, 44, remembered being "mesmerized" by the computer when he first saw it up close in his college bookstore. He wasn't alone. See iReporters share their Mac memories

For graphic designers like Zoë Korstvedt, now a Los Angeles creative director, the evolving Mac, with each added feature, was ripe with ah-ha moments.

To tinker with a piece, play with the text, "to visualize on your computer was just insane," she said. "My colleagues and I wonder how we did it [their jobs] before."

No wonder, then, that when Korstvedt, 44, married her first husband in 1989, she used half of their wedding money to buy her first home computer: a Mac SE/30, for which she forked over extra bucks for an upgrade to a whopping 8 megabytes of RAM. Nothing compared to the 12 gigs she now has. "I was styling," she said with a laugh.

Jeremy Mehrle, 30, of the St. Louis, Missouri, area is too young to know a world without Macs. This MacAddict began hoarding and tinkering with tossed-out computers, and then he discovered eBay. Today, the motion graphics designer's 1,400 square-foot basement is a museum to Apple computers, all-white and in gallery-style with about 80 fully-functioning machines on display.

"Some people think it's really cool. ... Others say 'It's Jeremy's thing, it's a little weird, whatever,'" he said. "I think if I had stacks everywhere, and you couldn't move in my house, people would be worried."

What's Mehrle's hobby, however, became a career for Dan Foust, 38, of Bloomington, Illinois. "Danapplemacman," as he's known on eBay, makes a living out of buying, and when necessary resuscitating, these computers before hawking them online to customers/collectors in places as far-flung as Italy and Australia.

So what would people pay for an original Macintosh?

"A complete boxed system?," he said. "I can't put a price on that."

The extremes to which people have gone in their love and loyalty for Apple (and specifically Macs) knows no bounds. Perhaps no one knows this better than Leander Kahney, news editor at Wired.com and author of Cult of Mac, as well as the more recently published Inside Steve's Brain. That would be Apple co-founder Steve Jobs' brain, of course.

From his phone in a San Francisco coffee shop, Kahney told tales of people allotting their limited vacation time to Macworld conferences, a man who has traveled to 40 Apple store openings and those who shaved Apple logos into their heads. As for the Apple tattoos, those, at first, really bothered him.

"I'm a bit of a leftie," he said. The idea of "corporate worship" didn't initially sit well with him -- although he's not afraid to admit his own obsession. "It's a very deep relationship people have with their computers. ... If the computer's not working, it's more important than the car breaking down."

Speaking of worship, Israeli filmmakers Ron and Kobi Shely created "MacHEADS: The Movie," a 50-minute documentary that'll be available next week on Amazon's video on demand service and, soon after, on iTunes. The film includes footage from The Church of Mac in Los Angeles, where a preacher and congregants gathered to glorify the computer at a service that ended with, "Praise Steve."

"Although we read a lot about the [Mac] phenomenon," Ron Shely said by phone from Tel Aviv of the two-year film project, "we didn't realize how big this social movement really is."

And that, beyond the products, is what has been so powerful about the Mac brand, said Peter Friess, president of The Tech Museum of Innovation in San Jose, California.

Steve Jobs "really has changed the world," Friess said. "You hardly find people who changed cultures. He changed culture."

Decades before Jobs' health became a topic of discussion, Friess was lucky enough to meet the man. At the time, German-born Friess was a lowly watchmaker, repairing clocks in the basement of Munich's Deutsches Museum, the largest science and technology museum in the world.

The year was 1984, and Friess thought a Macintosh might come in handy, so he called Apple Germany to see if he might be able to get one. The answer, as he recalled it, "'You're very lucky. Steve Jobs is in town. We'll come over and give you one.'"

Ever since, he's been amazed and exceedingly intrigued by every new computer. "My wife goes crazy," Friess, 49, admitted. "Every Apple computer I buy, the first thing I do is take it apart, just to see what's inside."

For Gary Allen, 61, of Berkeley, California, his interest is less inside than it is outside the company's stores. He runs ifoAppleStore.com, the first three letters taken from his police dispatch days, meaning "in front of."

The site's genesis dates back to 2001 when Apple store No. 9 opened, in Palo Alto, and he and his son went early. Way early -- as in the night before. The crowds, and natural community, grew on Allen, who began seeing new-found friends at other openings. They were like groupies chasing a band.

So he started a Web site, to help fans keep in touch, and soon other Apple enthusiasts began writing from across the globe, sharing tips about new stores, as well as testimonies and photos. The site, he said, averages about 4 million visitors a month.

Allen, who guessed he's been to 22 store openings so far, once stood in the rain for days in Tokyo so he could snag the first spot in line. He's seen old friends at openings in Germany and Italy. Last summer, he and his now 21-year-old son experienced what he called "the perfect storm," hitting Boston, Beijing and Sydney. Next stop: Paris.

He may not speak the same language as the thousands who surround him in these various cities, but that doesn't much matter when people speak the same language of computer love.

"Apple enthusiasts, it turns out," Allen said, "are the same wherever you go."

Microsoft Slams on the Brakes

Two days after President Barack Obama, in his inaugural speech, told the country to brace itself for tough times, the head of one of the most valuable U.S. companies echoed the sentiment. "We're certainly in the midst of a once-in-a-lifetime set of economic conditions," Microsoft (MSFT) Chief Executive Steve Ballmer told analysts during a conference call discussing fiscal second-quarter results. "The economy is resetting to a lower level."

In other words, we've entered a new paradigm. The mortgage-market collapse, financial market turmoil, and restricted lending have taken a big toll on demand for computers and other products that run Microsoft's software, and it's time to settle in for a long slump. There's no recovery on the horizon, Ballmer warned. The economy could remain in the doldrums for "a year, two years—I don't know what it will be—and then start to build back," Ballmer said.

As with other tech bellwethers including Intel (INTC), the "resetting" is hitting Microsoft hard. Second-quarter sales rose a mere 2%, to $16.63 billion, compared with analysts' already-lowered average forecast of $17 billion, according to the earnings report, which was released Jan. 22. Net income fell 11%, to $4.17 billion. And Microsoft said it lacked enough clarity to provide a forecast for the next two quarters. Microsoft's stock tumbled 11.7%, to 17.11, helping fuel a 1.94% decline in the New York Stock Exchange.

So what's a behemoth of a company like Microsoft to do in the midst of so great a downturn? Organic growth is hard to come by for the maker of software running more personal computers than there are cars in operation. And the company's biggest attempt to grow through acquisition, a proposed takeover of Yahoo! (YHOO) in 2008, foundered.

Slimming Down

Instead, Microsoft is slimming down more than ever. "We're significantly putting the brakes on," Ballmer said. In its first-ever broad-based layoff, the company is eliminating about 5,000 jobs, or 5.5% of its 91,000-person workforce. The net reduction will be less than 3,000 because Microsoft will keep hiring in key areas. But the move "shows they are serious about taking at least some initial steps to get their business model more aligned" with the economic conditions, says Technology Business Research analyst Alan Krans. Microsoft also plans to cut travel expenses by 20% and eliminate merit bonuses for the year that begins in August.

Diminished demand for PCs is taking the biggest toll on Microsoft's flagship Windows business, where sales fell 8% to $3.98 billion—far off the company's forecast for 10% to 12% growth three months ago. Executives said sales fell across the board, but especially in price-sensitive emerging markets and among corporate buyers. Many of the PCs that were sold were low-priced netbooks that tend to go for less than $300. For the version of Windows in those machines, Microsoft gets less than half as much as it does for the version in a full-blown PC.

Falling PC sales also hurt sales of the company's Office suite of productivity applications, which includes e-mail and spreadsheet creation tools. That's partly because most netbooks do not have the memory to run it, and because people who use these stripped-down devices do much of their computing on the Web.

Behind Google's Glowing Earnings

Even as the economy skids, Google (GOOG) keeps on rolling—just a little more slowly than it used to. Bucking the stalling economy and worsening outlook for online advertising, the search advertising titan on Jan. 22 reported better-than-expected fourth-quarter results. The numbers suggest Google will keep grabbing more of the online ad market from traditional media and from struggling online rivals such as Yahoo! (YHOO) and Microsoft (MSFT).

Shares of Google, which fell 56% last year, slipped almost 3% in extended trading after an initial 4% gain. Enthusiasm for the company's fourth-quarter results was muted by questions about whether Google can keep posting solid gains as advertisers rein in spending. Investors also appeared to balk at an employee stock option exchange that will cost Google $460 million. Before the closing bell, the stock had climbed 1% to 306.50.

Google, which gets paid each time someone clicks on text ads placed on search results pages, had earnings of $5.10 a share, excluding some one-time expenses and stock option costs. That was up from $4.92 a year earlier. Net income, however, fell 68% to $382 million, thanks mainly to those charges, which include $1.1 billion in noncash charges to reflect the declining value of Google's stakes in Time Warner's (TWX) AOL unit and the wireless service provider Clearwire (CLWR).

Good Numbers in Bad Times

Sales rose 18%, to $5.7 billion, a considerable slowing of growth from previous quarters but still seen as positive in the current economy. "It was a very good quarter at a time when [Wall] Street was starting to penalize the company for the economy," says Sandeep Aggarwal, an analyst with financial-services firm Collins Stewart. After subtracting commissions paid to partners for sending traffic to Google, sales rose 21%, to $4.22 billion, about $100 million more than analysts expected.

Coming in a quarter when the economy's troubles deepened considerably, the results encouraged analysts who had been lowering their expectations about Google's performance. "The performance was really very impressive," says Jeffrey Lindsay, an analyst with Sanford C. Bernstein. "If they could do this well [during a tough quarter], this is pretty much how they'll perform through 2009."

Google's results indicate that search advertising, while not immune to the economy, continues to look more attractive to marketers than other kinds of ads.

Researcher eMarketer estimates spending on search advertising will rise 15%, to $12.3 billion, this year, while spending on display ads will rise 7%, to $4.9 billion—though many analysts think display won't even do that well. Search ads generally catch people when they're close to a purchase, and their clicks and purchases can be measured more precisely than with other kinds of ads. "Paid search is every bit as robust as people theorized it might be," Lindsay says. "It's the platform advertisers will hang on to [till] the bitter end."

Apple's Impressive Quarterly Numbers

There's nothing like a solid quarter to take the market's mind off bad news elsewhere. That happened on Jan. 21, when Apple (AAPL) released a report showing better-than-expected profit and record revenue and iPod unit sales. Sales in the fiscal first quarter rose 6% to $10.17 billion while profits increased to $1.61 billion, or $1.78 a share, outpacing the average analyst estimate of $1.39.

Headlines like that could make it easy to forget temporarily that the U.S. is in the throes of a recession and consumers and companies are reining in spending on consumer electronics. The slump is taking a toll on much of the rest of the technology industry, from chipmakers such as Intel (INTC) to makers of computer accessories such as Logitech (LOGI). It's hitting home at Apple, too. For example, U.S. sales of the iPod declined.

But results in other areas more than made up for the drop. Growth in iPod sales came from outside the U.S., Apple Chief Operating Officer Tim Cook told analysts on a conference call. "iPod sales ended up much better than anyone thought," says Shaw Wu of Kaufman Brothers Equity Research.

iPhone Encouragement

Apple exhibited strength in sales of its iPhone, as well. The company sold 4.36 million units, an 88% increase from a year earlier. The company spreads iPhone sales over two years, accounting for $1.2 billion in revenue in the most recent period. Chief Financial Officer Peter Oppenheimer said the "total sales value" of iPhones sold during the quarter was $2.6 billion. During calendar 2008, Apple sold 13.7 million iPhones, beating its goal of selling 10 million units in that period. It expects to have the iPhone selling in more than 70 countries by the end of this quarter.

Sales of Macintosh computers grew 9%, hitting 2.5 million units. Apple continued to benefit from the release in the previous quarter of a new line of notebooks. Desktop sales declined 25%, falling to 728,000 units, from 977,000 a year ago. Oppenheimer pointed out that sales of the iMac, Apple's consumer desktop, surged by more than 50% in August 2007, when the product was upgraded. He also said the drop reflects a broad shift in consumer preferences for notebooks.

In all, the results fueled a surge in Apple shares. In extended trading, the stock rose more than 9%, to 90.55. Earlier, the shares had risen almost 6%, to 82.83.

The numbers also appear to have diverted attention from a report that the Securities & Exchange Commission is probing how Apple handled news of a decline in Steve Jobs' health. The CEO said on Jan. 14 that he's handing over day-to-day operations to Cook while he recuperates from an illness that's proving more complicated than he originally thought. That came days after he said he was suffering from an easily remedied "hormone imbalance." The SEC wants to know whether Apple was as forthcoming about his illness as it should have been, according to Bloomberg News. During the conference call, analysts didn't ask Apple executives about inquiries by the SEC.

Future Fight over Intellectual Property?

They did, however, inquire whether Cook felt he was a de facto successor in the event Jobs does not return to work. Cook took the opportunity to make an extended statement about the state of the company. "There is an extraordinary breadth and depth and tenure to Apple's executive team," he said. "They manage 35,000 employees, all of whom are wicked smart.…I strongly believe that Apple is doing the best work in its history." No mention was made of Jobs other than when Oppenheimer said, "He continues as CEO of the company."

And as upbeat as last quarter's results were, the current period may prove more challenging. Oppenheimer said Apple expects to record revenue of $7.6 billion to $8 billion, and to report per-share profit of 90¢ to $1. Analysts were expecting sales of $8.2 billion and per-share earnings of $1.13.

Cook also hinted at another battle the company may be girding to fight. Asked about potential iPhone competitors from Palm (PALM) and from Google (GOOG) and its many hardware partners, he said, "We like competition as long as our competitors don't rip off our IP [intellectual property], and we're going to go after anyone who does." Cook declined to name any companies that might be engaged in such theft, but warned "we're ready to suit up and go against anyone."

Microsoft slashes up to 5,000 jobs

Software maker Microsoft Corp. announced Thursday it will cut up to 5,000 jobs in the next year and a half, or 5.5% of its global workforce, citing further deterioration of global economic conditions.

The company also posted lower fiscal second-quarter earnings that missed analysts' forecasts.

Microsoft will slash 1,400 positions immediately, with the rest of the cuts coming by June 2010. The company also said it will freeze employees' pay in 2009.

Microsoft said it will save about $1.5 billion in operating expenses and $700 million in 2009 capital expenditure from the job cuts and pay freeze.

"Economic activity slowed beyond our expectations in the quarter, and we acted quickly to reduce our cost structure and mitigate its impact," said Chris Liddell, Microsoft's chief financial officer, on a conference call. "We are planning for economic uncertainty to continue through the remainder of the fiscal year, almost certainly leading to lower revenue and earnings for the second half relative to the previous year."

Thursday's was the first mass job cut announcement in Microsoft's 34-year history. Prior to the cuts, Microsoft had been hiring rapidly, growing its global workforce by 14% since September 2007. But even as it cuts staff, the company said it will continue to hire a few thousand employees in the current quarter, mainly in its online advertising division.

Many analysts on the conference call questioned whether Microsoft was cutting enough, given the strong headwinds it is facing in a tough economic environment. Some believe that more cuts could be on the way, as the company takes a slow approach to evaluate its capital situation.

"Obviously, no one has any real visibility as to how things are going to go," said Brent Williams, analyst at The Benchmark Co. "But if they cut too much, too fast, it's going to hurt them."

Shares of the company fell more than 9% in midday on the news.

Earnings disappoint

Microsoft (MSFT, Fortune 500) also announced second-quarter net income of $4.17 billion, down 11% from a year earlier. The company reported earnings per share of 47 cents, missing analysts' estimates of 49 cents, according to a consensus compiled by Briefing.com

The Redmond, Wash.-based company reported revenue of $16.63 billion for the quarter, up 2% from $16.37 billion a year earlier.

The software maker said software sales, including its Vista operating system, slumped 8% on weak PC sales as well as a continued shift toward lower-priced laptop computers.

Microsoft's Online Services division, which includes the online portal MSN and its online advertising sales, continued to lose money - $471 million in the quarter - even as that sector's sales were up 7% from the same quarter a year earlier. Microsoft continued to struggle to compete with rivals Google and Yahoo (YHOO, Fortune 500) in the online advertising business.

But sales grew in other areas. Revenue from its entertainment and devices division, which includes the Xbox 360, rose 3% over the same period a year earlier. Microsoft said holiday Xbox sales were strong, selling a record 6 million game consoles in the quarter.

The company also performed well in its server unit, with revenue growing 15% in that sector.

Still, some analysts question Microsoft's strategy of participating in seemingly every aspect of the tech market.

"In the short term, it's all about PC unit demand, but once they surmount that problem, they go back to their longer-term strategic issues: they can't match the speed, economics, or the quality and reliability of their competitors," said Williams. "They may ultimately suffer a fate worse than death - big, but irrelevant."

Weak sales likely to continue

Microsoft did not offer specific earnings and revenue guidance for the coming quarter "due to the volatility of market conditions going forward," but it said consumer, business and advertising sales will likely continue to decline for at least the next six months.

The company said Xbox sales will probably decline at least through June as well, as consumer confidence and spending wanes.

Microsoft also suggested that investors should not rely on previous fiscal 2009 estimates.

"The economy is resetting to a lower level of consumer spending due to reduced leverage in the economy," said Microsoft CEO Steve Ballmer on the conference call. "Consumers have less money to buy discretionary second and third PCs."

Microsoft's announcement comes a day after rival Apple Inc. (AAPL, Fortune 500) reported net income rose 2% in the most recent quarter, trouncing analysts' expectations. Ballmer noted that Apple's Macintosh computer sales were strong in the quarter, but he predicted that trend may drop off soon.

"The price premiums that people pay for Macs versus PCs will be looked at much more critically in the next two quarters," said Ballmer. "Neither the consumer nor business side is immune to the economic conditions."

Though Ballmer called the current economic dislocation "unprecedented," he called the recent downturn in the tech sector "just a pause."

"Nothing will stop the forward march of our industry or Microsoft," Ballmer said. "There will soon be renewed growth in the tech industry and certainly in Microsoft."

Google (GOOG, Fortune 500) is set to release its quarterly financial report after the market's close Thursday.

Social-networking sites share breaking news

Janis Krums was heading to New Jersey on a ferry when he clicked a snapshot with his iPhone of US Airways Flight 1549 partially submerged in the Hudson River. He uploaded the picture to his Twitter account and then forgot about it as he assisted in the rescue of the plane's passengers.

The deluge of image views crashed the servers of TwitPic, the application that allows Twitter users to send photos with their Twitter updates or "tweets."

"I posted it because I thought 'That's pretty newsworthy' and I wanted to share it with the people who follow me on Twitter," Krums said. "I was letting some of the survivors use my phone and it wasn't until later that I looked and saw that I had quite a few messages."

More people are turning to social networking sites like Twitter, Facebook and Flickr when news breaks to share stories and pictures.

In an era when even the president of the United States has a Facebook page and spectators texted and tweeted about Inauguration Day, the power of online and digital social networking is clear.

Barack Obama tapped into the stream for his grass-roots presidential campaign and the Israeli Consulate in New York used its Twitter account to disseminate information during the recent Israeli-Palestinian conflict in Gaza.

Twitter doesn't release figures on the total number of registered users, but according to Compete, which offers analytics on Web sites, the site had more than 4.4 million unique visitors as of December 2008. Facebook has more than 150 million active users and Flickr has more than 34 million registered users worldwide.

Accounts of the deadly attacks last fall in Mumbai, India, the May 2008 earthquake in China and last week's plane crash show what used to be just a virtual gathering place to communicate pet peeves or plans for the weekend has evolved into a go-to spot for eyewitness news -- sometimes even before mainstream media has had time to crack the story.

Twitter co-founder Biz Stone said Twitter users were the first to alert others last summer after an earthquake hit Southern California. "The earthquake struck at 11:42 [a.m.] PST and at 11:42 PST people started twittering," he said.

Twitter allows its users to post messages, or tweets, to their accounts that are then distributed to those who are "following" that user online. Stone noted that there was an Associated Press story on the quake that he saw posted nine minutes later on their site and said that during those nine minutes there were more than 3,600 tweets.

"That's when it sort of struck home for me," he said. "With Twitter, we have this real-time feed of what people around the world are seeing, thinking and feeling."

Such citizen journalism is in some cases happening almost accidentally, said Susan Jacobson, an assistant professor at Temple University in Philadelphia, Pennsylvania, who researches the impact of technology on journalism.

"Most people are just sending this information off to their friends," Jacobson said. "The main thing to take from sites like Twitter and Facebook is that they are informal modes of news dissemination."

Part of that informality includes brevity -- tweets have a maximum capacity of 140 characters, and Facebook statuses can only be a few lines -- and the possibility of inaccurate information. Jacobson said users, especially those who have grown up in the digital age, are very much aware of that.

"Young people, I think, have an innate radar about what is legitimate and what is not," she said. "They realize that not everything they read and see on the Web is true."

Stephen Hultquist, a Boulder, Colorado, consultant who gets a great deal of his breaking news from Twitter, said traditional media sources also make mistakes or give skewed reports.

"If anything, Twitter reminds me that everyone is human and they all have their own views and a paradigm through which they see the world," said Hultquist who had a unique appreciation of the quick, firsthand tweets that came after the earthquake in China last year.

"I was five miles from the epicenter of the earthquake in 1989 that happened right before a World Series game and I noticed that the media that was reporting on it wasn't getting it all right," he said.

Immediacy, said iReporter Jim Davidson, is one reason he posted his images of the downed plane in the Hudson on Flickr in addition to CNN.com. "When something like this happens, it's an easy way to syndicate it," said Davidson, who lives two blocks from the Hudson in Hoboken, New Jersey.

Social networking sites also enable spry reactions to news. Rob Reale of New York City started a Facebook group soon after the crash for the "Fans of Sully Sullenberger -- and the crew of Flight 1549" to celebrate the pilot who is being hailed as a hero for deftly landing the plane. The group quickly swelled to more than 27,000 members, some of whom posted video and photos and provided information that Reale used to update the page.

"I felt like the Facebook group was an opportunity to spread the good news," Reale said of the crash, which all survived. "Part of it was getting the word out and part of it was keeping that good feeling going."

Chris Krewson, executive online editor for the Philadelphia Inquirer, has a personal Twitter account in addition to posting tweets for his paper. Mainstream media is learning to better utilize online social networking to connect with its audience, he said.

"People are already talking about the news," Krewson added. "This is just a way for us to involve ourselves in the conversation."

Highest IT Salaries: San Francisco, London

Even as some of the world's biggest IT employers trim staff to withstand the recession, wages for those who remain employed in tech appear to be holding up.

Pay for IT jobs is buoyant at companies that are eliminating staff since employees who keep their jobs "often are more senior people who cost a bit more" and work longer hours, says Al Lee, director of quantitative analysis at PayScale, a Web site that gathers information on salary info. "I wouldn't expect to see any downward trends in pay in these jobs." PayScale shared its information exclusively with BusinessWeek.com.

IT salaries are especially high in such markets as London and San Francisco, where big-name tech companies employ a large portion of the workforce, according to PayScale, which based its analysis on information entered on its site in 2008. Workers in major tech centers command earnings that average up to 33% more than the U.S. median, PayScale says.

The Valley Is Still Tops

Of the five U.S. markets included in the PayScale survey, San Francisco topped the list of average wages in each of 10 different job titles, including software developer and IT project manager. In the Bay Area, home to such Internet giants as Google (GOOG) and computer makers such as Apple (AAPL), software development managers ranked highest in pay, at $136,000 per year. The lowest-paid IT jobs in San Francisco are help desk specialists, who earn $53,300 a year, PayScale says.

Outside Silicon Valley, pay tends to be tied to demand in local industries. In Seattle, home to Microsoft (MSFT) and Amazon.com (AMZN), software developers make an average of $88,400, higher than in most places.

The salaries tracked by PayScale may not remain high in coming months, as laid-off workers find new IT jobs, in some cases settling for lower wages, Lee says. "I expect annual increases will be much more modest" next year, he says. Also weighing on increases is a noticeable decline in the size of bonuses reported on the site, PayScale says.

Growing Government Positions

Overall, new job postings are down about 35% since last year on Dice, an online job board for technology positions around the country. According to Tom Silver, Dice's chief marketing officer, new postings on the site for jobs in the Silicon Valley area have dropped about 50%, to 2,700, since January 2008.

One market not covered in PayScale's research is faring well on Dice. In the Washington-Baltimore corridor, job postings were flat at about 7,400, roughly the same level as a year ago. "This is attributed to the growing number of government or government-related positions" in tech, Silver says.

Outside the U.S., PayScale found stark differences in IT wages. In five tech-heavy markets—London, Sydney, Toronto, Singapore, and Bangalore—pay is highest in London. There, IT project managers make $107,000, a 30% premium over the median U.S. pay for the same position.

Meanwhile, in Bangalore, India, a help desk specialist makes only $10,700, or close to one-fourth what an average U.S. worker would make in the same role.

Sums Are Relative

Of course, IT job seekers have more to consider than just potential salary when deciding where to move. In tough times, it's especially important to consider the cost of living in a big city. PayScale found that experienced IT workers in Austin, Tex., have their median pay adjusted for cost of living, since about 90¢ has the same buying power in that city that $1 has, on average, across the country. By comparison, San Franciscans pay $1.74 to buy the same goods that the rest of the country buys with $1.

Moving from a low-wage area to one where pay is higher can sometimes work against employees. Explains Charles Geoly, managing director of executive recruiting firm Russell Reynolds: "If you have an individual who lives in Arizona, a place relatively hard hit by the downturn, and he or she is being recruited to Boston, a place that's not been hit quite as bad, the relative drop in equity value increases the switching cost for the employer." On the whole, Geoly says demand for his firm's services were down in 2008, but companies are still willing to pay nearly what they used to in order to fill their top posts with the best candidates.

Even during a recession, relative pay is less important to some job seekers than landing a satisfying job. According to PayScale's Lee, software developers who build video games at startups are less likely to be paid as much as someone who, for example, builds a new payroll system at a big corporation. "A lot of gaming companies tend to pay a little less than companies like IBM (IBM)," Lee says, "mostly because it's the kind of work people really like to be a part of."

Justices refuse to reconsider law restricting Internet porn

The Supreme Court has blocked further consideration of a federal law designed to keep sexual material from underage users of the Web.

The justices without comment Wednesday rejected an appeal from the federal government to reinstate the Child Online Protection Act (COPA), passed by Congress in 1998. The high court and subsequent federal courts said the law -- which has never taken effect -- had serious free speech problems.

The Bush administration was a strong supporter of the law and the Justice Department led the fight in court to revive it.

The justices issued their ruling a day after all nine were on hand for the inauguration of President Barack Obama. Retired Justice Sandra Day O'Connor also attended the ceremony.

The case tested the free speech rights of adults against the power of Congress to control Internet commerce. The Supreme Court twice ruled against COPA, arguing that it represented government censorship rather than lawful regulation of adult-themed pornography businesses. The law would have prevented private businesses from creating and distributing "harmful" content that minors could access on the Internet.

Free speech advocates said adults would be barred access to otherwise legal material and that parental-control devices and various filtering technology are less intrusive ways to protect children.

The high court in 2004 upheld a preliminary injunction against the law and sent the case back to lower courts for consideration of the arguments. In their opinion at the time, the 5-4 majority concluded COPA "likely violates the First Amendment."

"The government has not shown that the less restrictive alternatives proposed ... should be disregarded," Justice Anthony Kennedy wrote in the 2004 decision. "Those alternatives, indeed, may be more effective" than the law passed by Congress. "Filters are less restrictive" he said, and thus pose less risk of muzzling free speech. "They impose selective restrictions on speech at the receiving end, not universal restrictions at the source."

He added, "There is a potential for extraordinary harm and a serious chill upon protected speech" if the law takes effect."

In reconsidering the law, a federal appeals court in Philadelphia, Pennsylvania, again ruled the law unconstitutional.

Online inauguration videos set records

With many workers stuck at their desks during the late-morning swearing-in of President Obama on Tuesday, more people than ever went online to watch live video of the historic inauguration.

News sites, including CNN.com, shattered records for viewers watching live streaming video online. And, sometimes for the first time, news sites carried video feeds on their front pages.

About 7.7 million people watched the inauguration on Tuesday online at the same time, according to Akamai Technologies Inc. That likely makes the inauguration the single most-watched event in the history of live Web video, according to the company, which handles Web traffic for more than 150 news sites worldwide, including nytimes.com, Ustream, Viacom, WSJ.com and others.

Across the day, nearly 27 million people watched streaming video on CNN.com Live on Tuesday, according to CNN spokeswoman Jennifer Martin. That's more than five times the site's previous record, set on Election Day, when 5.3 million people watched streaming video of the day's events.

CNN.com Live estimates that it streamed 1.3 million simultaneous video feeds just before Obama's inaugural address Tuesday. That may be a record for live video on the Internet. YouTube set a record with 700,000 viewers on a variety show on Election Day in November, the Los Angeles Times reported.

The record has not been confirmed by third-party sources.

The New York Times declined to release its Tuesday numbers, but spokeswoman Stacy Green said nytimes.com saw more streaming Web users than ever. CBSNews.com also reported a record day for online video, said Sarah Cain, a spokeswoman for the network.

Sites tried to attract viewers in new ways, linking their news coverage with social media networks like Facebook and Twitter.

Obama himself got in on the action, posting this message to his Twitter account just after the inauguration Tuesday: "We just made history. All of this happened because you gave your time, talent and passion. All of this happened because of you."

For some viewers, the inauguration was a first-time experiment with streaming video online, and the high traffic on most sites didn't always make that transition easy.

Some news sites' coverage froze during the inauguration, according to Keynote Systems Inc., which tracks Web performance. The Internet's top 40 sites slowed by as much as 60 percent by the time the ceremony started at 11 a.m., according to The Associated Press.

On CNN.com, some streaming-video watchers who were pushed into a temporary "waiting room" were shown this tongue-in-cheek message: "You made it! However, so did everyone else."

Chris Ariens, editor of the blog WebNewser, said he watched live online video coverage from CNN, MSNBC, ABC and CBS. All froze, leading Ariens to revert back to a television in his office.

"I think the bottom line was, while it was great to be able to, from the ease of your desktop, watch some of the coverage, when push came to shove, you had to go back to television," he said.

A blogger for CBSNews.com acknowledged trouble with its online video.

"Just as massive crowds filled the National Mall in Washington, millions of users flocked to online video feeds," James M. Klatell wrote in a CBSNews.com blog entry Tuesday. "Maybe we're not as far into the Internet Age as we thought."

The hiccups in Web video should not be discouraging for viewers or news companies, said Al Tompkins, who teaches broadcasting and online news at the Poynter Institute, a school for journalists in Florida.

If anything, he said, the trouble with streaming video should show companies there's great consumer demand for video online.

"They need to know that if they build it they will come, and [Tuesday] was a great example that there is a demand for video," Tompkins said.

Some viewers turned to radio and other forms of media to fill in the gaps in online video technology. Others gathered around office computers to watch the ceremony online.

Tompkins said viewership of Web video was high Tuesday partly because it was available on so many sites -- and because many workers were trapped at their desks during the inauguration.

Clint Cantwell, who works in public relations in New York, left his office near Times Square briefly to take in the excitement outside. Then he returned to his desk to watch streaming coverage.

The video stalled at times, but the audio worked, and Cantwell said he genuinely enjoyed watching an inauguration for the first time online.

"In the past, you pretty much had to be at home or in an office with television to be able to experience what's in Washington," said Cantwell, who also sent photos to CNN's iReport, a public submission site that saw an unprecedented 12,000 entries on Tuesday.

Although the inauguration set records for Web video, it's unclear exactly how the ceremony ranked against other news events in terms of total hits online.

Globally, Akamai reported, 5.4 million visitors were visiting Web pages per minute at noon Tuesday, with most of the crowd in North America.

Four other news events have garnered more Web attention than Tuesday's inauguration, according to Akamai's Web site. The top-ranking news event in terms of views per minute was Obama's election in November, with 8.6 million views per minute. A World Cup match and two basketball games also ranked higher than the inauguration.

CNN.com partnered with Facebook, the social networking site, to let online friends share commentary while watching the inauguration live.

Facebook reported unprecedented traffic during the event, with the site averaging 4,000 status updates per hour Tuesday morning. The online comments reportedly peaked at 8,500 updates per minute during Obama's inaugural speech.

News consumers have been turning to the Internet in increasing numbers for years. Last year, for the first time, the Pew Research Center reported that more Americans said they got most of their national and international news online than in print.

Tompkins, the journalism teacher, said it's up to news companies to keep advancing the way they cover big events.

Online TV Sites Battle for Viewers

On TV, content is king. But on the Web, community may reign supreme. Throughout television history, the way to lure most viewers was to air the best shows. It doesn't necessarily work that way on the Web, where many shows can be seen on multiple sites.

Take the recent announcement by CBS (CBS) that it would begin airing shows like Showtime's Dexter and Sony Pictures Television's (SNE) Bewitched on TV.com, CBS's online site for full-length video. But none of the more than 1,000 new programs are exclusive to TV.com. And the episodes of Bewitched, the classic sit-com featuring the nose-wrinkling witch Samantha, are already on rival Hulu, the joint site of NBC Universal and News Corp. (NWS). "Every major studio right now is following a nonexclusive strategy" online, says Arash Amel, senior analyst with London-based media researcher Screen Digest. "The question for these sites is beginning to be, 'how do you differentiate yourself beyond the content you have?' "

The answer for TV.com and others is to encourage users to form a community. Host sites including TV.com, Joost, Sling.com (SATS), Veoh, Fancast (CMCSA), and Hulu are letting users post reviews, build profile pages, form fan groups, vote in interactive polls, and share activity logs with friends.

boosting advertising value

Like newspapers and other media outlets hoping social networking elements will foster loyalty among users, TV sites want to find ways to keep viewers on the site longer and get them to recruit friends. It's too early to tell what impact the new features will have on the bottom line, but the aim is to entice more content producers to put programming on their sites—and to boost the value to advertisers.

Building online communities for video sites has been tried before. The standard-bearer for online video, Google-owned YouTube (GOOG), came into prominence partly because of its focus on community. Its multitudes of short, often whimsical clips uploaded by users are well suited for commenting, rating, and sharing with friends. But YouTube's lack of professionally produced content has also deterred advertisers.

With the market for online video advertising set to grow to $850 million in 2009, from $587 million last year, YouTube is expected to cede some its share of the market to the growing number of sites with studio-produced content. "The professional sites are one of the main drivers for that 45% growth this year," says David Hallerman, a senior analyst at researcher eMarketer.