I was surprised at Microsoft’s recent layoff news:  (a) this is their first major layoff, and (b) they’re only laying off 5%.  The financial analysts are calling this the indicator of general technology/software woes.

The technology sector is definitely challenged, but Microsoft’s problems are quite unique. They’re an old-line software company with a market structure and core business changing out from under them:

• Most high-volume, general purpose software components (e.g. OS, productivity, etc.) will be free or pseudo-free (ad supported).    Key exceptions:   games, and small apps (e.g. $1 iPhone apps).

• Most apps will be delivered as on-line services, with subscription or ad-based revenue models.   Exceptions:   apps needing heavy client-side interactivity, computation or data manipulation (e.g. PhotoShop).

• Many software companies won’t sell software at all, they’ll sell the value the software generates (e.g. Google, Kayak.com, etc.)

Microsoft has cash and a huge installed base, so they’re not going away anytime soon.  But market structure changes are the toughest transitions for any company to navigate, and Microsoft hasn’t yet done a great job showing they’re up to the task.  Witness:  botched discussions with Yahoo, and I’m still amazed that Microsoft hasn’t jumped on a app store for Windows that makes it ridiculously easy to find, buy and install small-dollar applets.

My bet:  without bold moves, they gradually fade to an “inertia existence” (e.g. IBM, Sun), without the margins typically enjoyed by the gorilla.