updated 2/24/2009 4:17:11 PM ET 2009-02-24T21:17:11

Microsoft Corp. reiterated its belief that the economic crisis will persist at least into the second half of 2009 but attempted to reassure analysts Tuesday that it will continue to cut costs and spend wisely.

Microsoft shares fell 3 percent in midday trading.

Speaking at a meeting in New York, Chief Executive Officer Steve Ballmer said Microsoft is looking to the television maker RCA as a role model. RCA spent money on research and development through the Great Depression, then dominated its market, he said.

(In fact, RCA became one of the country’s biggest conglomerates, but it also went a route Ballmer is unlikely to suggest for Microsoft: In the 1980s RCA was acquired by General Electric Co. and then saw its consumer electronics brand sold to Thomson SA of France.)

Ballmer pointed to areas of Microsoft’s business that will be hit hardest by the downturn and sketched out the products and projects that will get the bulk of the company’s $27.5 billion in annual operating expenses.

(Msnbc.com is a joint venture of Microsoft and NBC Universal.)

Microsoft, which recently resorted to its first mass layoffs, will feel the economic pain most acutely in its units that sell the Windows operating system and Office desktop software, Ballmer said. Yet Microsoft plans to spend most heavily on those two segments as the company readies forthcoming versions, Windows 7 and Office 14, and pumps more money into advertising. Microsoft has said it expects to release Windows 7 by January 2010.

The CEO also said Microsoft has poured resources into a new version of the Internet Explorer Web browser to reverse losses in market share.

Ballmer addressed Microsoft’s strategy for “netbooks,” the brightest spot in today’s PC industry. Today, most of these inexpensive, low-powered laptops run a basic version of Windows XP because its replacement system, Vista, requires too many computing resources. Windows XP is less profitable for Microsoft, however, so the company has said that the full versions of Windows 7 will work well on these small laptops.

Video: Microsoft ticked at Yahoo, Apple

Microsoft also will offer a version of Windows at the same price as XP — most likely the pared-down Windows 7 Starter Edition — but it is also working on ways to persuade netbook buyers to pay more for full-featured Windows 7 versions.

The Redmond, Wash.-based software maker will continue to fight Google for more of the Web search and advertising markets, even Microsoft’s two main tries at improving its hand — beefing up its technology and bidding for Yahoo Inc. — have largely flopped.

“You give up, you can’t get back in the game,” Ballmer said.

“We know we have to be responsible and reasonable about the total amount of money that we invest. I don’t want to wind up being known as the Jerry Yang of this market,” Ballmer said, referring to the Yahoo co-founder who was cast aside as CEO after turning down Microsoft’s $47.5 billion acquisition bid and failing to reverse Yahoo’s financial slide.

Ballmer would still like to make a search-related deal with Yahoo that would result in more competition for Google, and said Yahoo’s new management might help reopen talks. Investors sent Yahoo shares up 56 cents, or 4.7 percent, to $12.53. But Ballmer reiterated having no interest in acquiring all of Yahoo.

Even in the recession, sales of smart phones are expected to rise. Yet Ballmer said Microsoft still does not plan to make its own cell phones. He said Microsoft’s advantage comes in selling the Windows Mobile software on many partners’ phones, some of which are much less expensive than Apple Inc.’s iPhone. Microsoft plans to overhaul its cell phone operating system and launch Windows Mobile 7 in 2010.

Microsoft shares were down 51 cents at $16.70 in afternoon trading.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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