Microsoft will lay off 5000 staff over the next 18 months. This is partly due to an 8% decline in client revenue attributed to “continued shift to lower priced netbooks”. Netbook sales have been robust. Buyers prefer Windows XP over Vista on netbooks because of performance issues, but Microsoft makes lower margins on XP. This is essentially the problem. Industry analysts are awaiting Windows 7, its Windows release.

But it won’t help.

Microsoft says Windows 7 is netbook-friendly (and it might well be), but that’s irrelevant. The issue is higher margins. If Microsoft prices Windows 7 like Vista, it’s going to raise the total price of netbooks. That is unacceptable. After all, the USP of the netbook is Cheap.

Now, I think the company’s realized the underlying problem: Mobile and Desktop are moving towards each other.

The company is more likely to make higher margins on its Mobile Operating System than on its Desktop Operating System. High-priced smartphones are becoming increasingly popular and also more sophisticated. On the other hand, PCs are getting smaller and lighter – and cheaper.

Most commentators have already identified Mobile and the Cloud as the defining markets for the immediate future and they’re probably right. Microsoft has plays (albeit relatively weak ones) in both these in the form of Windows Mobile and Windows Live.

I think we’re going to see a shift in investment toward these two markets, and away from the PC market. At the minimum, expect a quick rollout of Office Live soon (either free or monetized) and Windows Mobile 6.5.