Steve Ballmer: National Retail Federation Annual Convention & EXPO

ANNOUNCER: Ladies and gentlemen, please welcome the CEO of Microsoft, Steve Ballmer.

STEVE BALLMER: Well, thanks. It’s an honor and a privilege for me to have a chance to be here with you all today. I hope everybody was paying very close attention to the opening video. I was really shocked and horrified that we produced such a video with Billy leaving a box sitting out in the aisle of that store. I wanted to make sure everybody knows that we’re going to shape that video up next time. No retailer in this crowd would ever allow that to happen.

It is a real privilege for me to have a chance to be here with you today. In a sense, it’s a bit ironic, I think. This is the 96th NRF Meeting. If you think just vaguely on how much technology has changed over the last five years, 10 years, let alone over the last 96 years, whatever that means. There must have been something they called technology back then, but who knows what it was is a very, very good question. And we sit here 96 years later, and I come before you not a retailer, although I did a three-month sales training assignment, calling on Pathmarks, and ShopRites, and Acme’s across the way here, grocery stores, that’s my experience. But we do know a lot about how technology has changed and enhanced and morphed what it means to run a retailer, and what it means to be a shopper and a buyer today as a consumer in the world of today.

We were talking about what it meant for me to try to share with you a long-term vision of what technology might mean in the retail industry, and I have to say I was a little torn. Sometimes our folks like to remind me that three weeks [is] long-term in retail, but I thought maybe I would articulate some principles and some ideas, and some things that we see going on that no matter what your planning horizon, whether you’re thinking about a systems refresh for the next seven years, whether you’re thinking about the way the consumer is going to think about things for the next 10, or whether you’re simply trying to get some very appropriate and important things done in the next three months or six months, should be, I hope, interesting and important to you. And that’s the perspective I want to give, and then I’ll look forward to having a chance to hear a little bit what’s on your mind, questions, comments and thoughts.

I think a good starting point is with where retail is, and particularly where the consumer is. And everybody in this room is more expert than I am. We spend a lot of time at Microsoft, and frankly I’ve spent a lot of time personally getting in touch with, not only the consumer, but with what’s going on in retail, but the folks who run businesses, the folks in this room who run those businesses every day, these are trends, these are things which should be self-evident to you, but they help guide and shape us as we think about where technology is going, and how it will help the retail industry evolve.

The starting point has got to be with the consumer, and the consumer is absolutely in a different position today, and going forward, than the consumer was in the past. Consumers’ ability to get information, to be empowered, to know what’s out there, to make intelligent decisions, to stay organized, to dispassionately assess alternatives, to be in control has never been higher. I thought the most bizarre Time Magazine Person of the Year award was this one, 1984, the Time Magazine Person of the Year was the personal computer, the first time it wasn’t a human being. This year, the Time Magazine Person of the Year they said was “you,” you the consumer, who is more in control of lives and information, and expects more in the way of personalization, and tailoring, and customization than ever before. Consumers expect, and it will only continue to build, to be able to find, to search, to get information, to shop from their homes over the Internet, from their mobile devices, they expect to be at the center of everything that the businesses that serve them do. And that is not going to change. And the ability for consumers to get information and to be served in a variety of ways is only going to increase.

Competition is evolving and changing in the retail world. Over the last few months, I’ve had the pleasure of talking to major electronics retailers in Europe and in the United States. That’s certainly a business that shows the way in terms of the globalization that we see going on in retail across the world. We see what’s going on in places like India and China, where I think organized retail is taking off in an unbelievable way. I had the fortune in my last trip to India to sit down with a fellow who had been in business school with me, named Mukesh Ambani, Mukesh is the CEO of a company called Reliance, and he thinks they will open in India, his company alone, will open up about a third as much to half as much retail space in India alone in the next three years as in all of Wal-Mart today. And you see that in these emerging markets systematically around the globe. Competition, very much more global, and very much more focused in on giving the consumer exactly what they want with great differentiation in the retail experiences, and the retail format.

Employees, when I started really in the business on behalf of Microsoft of working with retailers, and retail was really one of the industries that Microsoft first got involved with, because retail stores were some of the first to really embrace the personal computer as an important technology, but certainly over that period of time I’ve seen a real change in the way retailers think about their employee, and employees role in decision making. Seventeen, 18, 19 years ago, there was a sort of an expectation and a thought that said, hey, we’ll design everything here at the center, and our employees will merely operate the system. Today, I see a real focus on empowering employees, putting information, whether it’s the sales clerk on the floor, whether it’s the person in distribution or doing the shelf stocking, whether it’s the merchant at headquarters, there’s a real focus on putting information available to people so that they can make superior decisions to sell that one extra product, to get the customer exactly what they want or need, to make sure that people spot and see trends in terms of what’s really selling, and can accordingly map and change merchandise mix. So that kind of real-time decision making very broadly amongst the employee base is a real trend and theme that we see.

Last, but certainly not least, is this move to think about the retail enterprise as much more integrated, and from a technology perspective much more interoperable. Whether it’s what people want to do with multi-channel distribution, the ability to move information seamlessly from merchandising systems, distribution systems, store systems, decision-support systems, there’s a real focus on making sure that the enterprise really comes together, and there’s real-time visibility throughout the retail organization.

Big changes, big changes that we see happening in this industry, and they’ll only accelerate as you saw in the little video that we showed, people will change the way they think about shopping and buying even more. When the dot-com bubble first rose up five, six, seven years ago, there was this whole wave of discussion, is bricks and mortar dead, here comes online, and then pop, there went the bubble, and all of a sudden kind of there was sort of a gradual wind-down in kind of the importance of online. And now things are fairly in balance. But the thing I think people missed through that is that technology will continue to change the way the consumer really works. How do I get my list of what I’m going to buy, how do I find information, where do I turn, do I have a mobile device that really is rich, it’s built in, I can just pose any query. I have an 8-year-old son, and we went out yesterday looking for his videogame he wanted with his Christmas money from grandma. And I have to say, I started out the old fashioned Troglodyte way. We just went to a store and expected it to be there. Well, we found it out of stock. And then I said, ah-ha, we’ve got to do this the modern way. And, frankly speaking, I’m really glad, I would have missed the Seattle Seahawks-Chicago Bears game if technology hadn’t leapt in to rescue me to help me find exactly the store I could find closest to my house that had my son’s choice in stock. So really understanding that technology is not only going to continue to change the way you work, but the way consumers want to work with you, I think, is an incredibly important thing to keep in mind.

We think technology innovation then is very much a centerpiece for how you have to think about the future of your businesses. I am personally fascinated by it, and an aficionado of what goes on in retail. It may be the fact that 15 percent of Microsoft’s revenue comes through retail. It may be that my only other job was at Procter & Gamble, focused in on grocery retail, but I am very much fascinated by all of the things that will be enabled in this changing retail climate. The way technology will help you strengthen customer relationships, improve enterprise operations, and really enable real-time business decisions, I think, is quite amazing. And everybody, as I said, in the room probably has a little bit different time horizon, but the fundamental value that technology will continue to bring I think is quite important.

I will also say that in my travels I see quite a wide spectrum of thought amongst various retailers about technology. For some people technology is kind of a back of mind, let’s not focus in on it too much, let’s not get carried away, and that may not be inappropriate in some forms of retail, but I think it’s very, very dangerous to not keep, not just in terms of your own productivity, your own checkout speeds, your own internal operations, but really this fundamental theme, what will the customer expect, how will the customer expect to work with me in the future. And that is an area where, as I said, we see a lot of changes. Customers will expect to be able to access information about you, your product, availability, prices, services, online, and to find those things comfortably and conveniently. Today, I would say we operate in a world that is still relatively primitive. Just take search as an experience, search is a very indirect way today to get at information that people want as they make buying and shopping decisions. You do a search, you find a site, the site may take them exactly to the information, but you don’t get there very quickly. If I want to say, show me the closest store and the price where the following product is in stock, consumers will be able to get that back from search engines, from shopping sites over the next few years, and really opening yourselves up so that you can participate in that world, and be available to the consumer, be it on a mobile device, mobile phone, be it from a PC, or, of course, directly physically is very, very important.

Loyalty. Loyalty, I think, will continue to increase as a point of differentiation amongst retailers, particularly as more and more customers, even if they don’t shop online or buy online, do go and get information, and become organized in a different way online. And so your ability to really understand your customers, know what they’re worth to you, study them, give them appropriate benefits, and drive loyalty programs, I think will just continue to increase. And the smart retailers will use technology well in serving the customers, but will then take that intelligence and use it again to really drive loyalty.

Assisted selling, in store kiosks, design points, call centers, online. If you just think about what’s happening in some retailers, where the customer-service experience has always been a key part, and then ask, how can technology enhance that? Think about what’s gone on in or what can go on in furniture retailing and home improvement, there’s so many retail operations where customer service is of vital importance that it really makes a difference.

I think a little bit about some work we’ve been doing with Best Buy and their Geek Squad, which is their service arm, if you will. They’ve got over 1,000 Windows Mobile Smartphones deployed to help with scheduling, routes, customer service, they can access wherever they are, any one of their agents can access technical support, information, show it to the customer, and be involved very, very real-time. It makes a big difference.

I was with the CEO of Circuit City over the course of the last few days, and you’ll hear more about some of the incredible things they’re doing with technology in stores that help people really find exactly the right electronics device at the right time, which is not really a simple problem for the consumer. Which camera is best for me, which computer is best for me, which high def TV is best for me.

Payment. Consumers will expect payment to change, whether it’s the evolution away from swiping to scanning, to eventually paying by phone, these things will be very important, and certainly when you think about near field communication, we’re very impressed with some of the things that partners of us, some people like Vivotek and IP Commerce, and others are doing.

The phenomenon we’re talking about here will not be restricted just to the biggest retailers. We think one of the areas, in fact, that will show the greatest evolution over the next few years is what will happen in the world’s smallest retailers, because some of these phenomenon have been kind of outside of the reach technologically and for investment by small retailers. And so we expect to see this continue to change dramatically through a set of hosted services, PC-based TOS, and a variety of other technologies. So even small retailers can participate in these kinds of strong, very consumer oriented, and very differentiated programs through technology.

Improving enterprise operations. This is an area that is more what I would call nuts and bolts, but still very, very important. How do we integrate systems, what’s the real role of RFID? In a sense, RFID is a technology that has really come a long way. And in a sense I think all of us can say we have yet begun to scratch the surface for how RFID will continue to transform the businesses that we’re all in. And as Moore’s Law, which is the kind of law that says technology, roughly, reduces in cost by a factor of two every 18 months, as Moore’s Law continues to apply to RFID-type technologies, we’re going to continue to see changes that will really let you know even more about the goods that really flow through the various retail operations represented in the room here today.

Support costs need to be reduced. Certainly every CIO I meet with from any retailer will say they’re under pressure from management to take cost out of IT. This comes, though, at a funny time, because I’ve never heard more of a push from retail CEOs on deriving value from information technology than I do today. And so what we’re really talking about is a situation where people are being asked to do more with less, drive costs out of the basic operations of these retail systems, free up money that then can be reapplied to new customer service scenarios, customer facing applications, analytics, decision support, et cetera.

And last, but certainly not least, in this world of Sarbanes-Oxley and everything else, is the realm of security and compliance. Security and compliance in all industries, from retail to software, to manufacturing businesses has become more important. And certainly we put a lot of effort in broadly, but also in ways that are very specific to the retail industry. We’ve done a lot of work on payment card industry compliance programs, to make sure that our technology fits in the context of the kinds of things that you’re doing that are most important to fulfill your Sarbanes-Oxley requirements around compliance, privacy, the handling of cash and money, et cetera.

Thirdly is this notion of real-time business decision-making. How do I integrate with my trading partners, either with my customers or with my suppliers? How do I make sure that they’re information is my information? How do I make sure that I can ask them to participate most intelligently in the way they supply me with goods? How do I make sure I pull information in real-time from around the organization and put it in a simple form, not where just a few gurus can get at it, but where literally every store manager, every merchant, maybe even every department head in every store can sit there and say, okay, what if I was to change this, what about that?

Our chief operating officer, Microsoft’s chief operating officer, is a fellow named Kevin Turner. Kevin was the CIO at Wal-Mart for a number of years, and I used to sell to him. That’s how he wound up coming to work at Microsoft. And the number of things that he used to push me on in his old role for business intelligence is amazing. He’d say just very commonsense things like, you know, we usually think that there’s all these things that are important about forecasting demand, but we don’t usually build weather into our models. So how are you going to let me integrate weather, because it actually turns out the weather is a much more important determiner of what merchandise we need to carry than many of these other factors that are built into our store systems, our reporting systems.

So this notion of being able to grab information, not only from your own systems and from your supplier systems, but information that also lives elsewhere in the Internet, bring it down and let people visualize on it, act on it, simulate something, and again, have that be within the realm of mere mortals, that’s the kind of technology and technological scenarios that that I think we all need to aspire to. We as a vendor need to provide tools that are that simple and easy, and you as retailers want to make sure you armed your folks with that information, and with the tools that people need to communicate and collaborate very, very easily.

We did a launch of our new collaboration software here in New York about eight months ago. Who was the number one company to step up, use those technologies, and participate? It was the folks from Ralph Lauren. And they were participating both as a manufacturer, and in some senses as a retailer of goods, because they understood that the number one thing they needed to do to drive innovation, to drive top line revenue, to drive growth, to drive productivity, was to really embrace this notion that their suppliers in China, their own retail outlets, the departments that they have in many stores represented in this room, that that had to be one seamless kind of operation, with people able to talk, find, communicate with whomever they needed, to make the right decisions at the right time.

We’ve done some work with Charming Shoppes, with Layne Bryant, to pull together information from across their stores in a way that reduces the amount of paper and lets information flow real-time from the stores to the headquarters. We’ve done a very exciting thing with SAP that actually will allow you to integrate using our new Windows Vista product that’s getting launched here in New York in a week or two, you can, with Windows Vista, with the new SAP retail price zone application, and with our mapping software, Microsoft Virtual Earth, which runs out on the Internet, you can pull all of these data sources together and really get something that lets you simulate and model what would happen in various pricing scenarios incredibly transparently and simply. This is an area where we’ll continue to see a lot of innovation, I’m sure, over the next several years, but there’s really a lot available today across our industry that can help from a technological perspective.

In the store we continue to see an amazing amount of innovation, whether it’s the kind of scenarios where literally any clerk or department manager can have a full PC device, and a big screen tablet-style device to service customers, whether it’s the changes that we talked about in payment, whether it’s the things that are going on with intelligent checkouts, store management systems, there really is a very broad range and set of purposes now that people are applying technology in stores. And certainly one of the things our industry needs to do is to say, how can we use this fact that intelligence and communications are almost free to create new opportunities for you in-store.

When that lady in the video walks into your store and she’s got an electronic device, are you going to do something for her? If she’s got a little shopping list, will you be able to layout a route map for her? Will you be able to promote and advertise to her, or to him, her in the video? All of those scenarios are front and center for us in terms of what technology must permit in the future in-store.

I’d like to now show you a little bit of a video that we’ve made with one of our best customers, a company called Fnac. Fnac is a retailer of books, CDs, PC sound systems in France. They have a total of over 100 stores, and they really wanted to differentiate their customer experience using innovation. They have very much a multi-channel approach, and why don’t we take a little bit of a look at a video on how Fnac is leveraging innovation to transform its business. Roll the video please.

(Video segment.)

STEVE BALLMER: Great. I hope that gives you a little bit of sense at least on how one retailer is thinking a little bit about revamping their customer experience.

I want to touch on just a few things that we are announcing in conjunction with a set of partners here at NRF. We’ll be announcing today with Hewlett-Packard and with First Data an end-to-end, PC-based point-of-sale system, with integrated payment for very small retailers. There’s over 2 million small retailers that still don’t have checkout using PC-based POS. With our Dynamics POS product services from First Data, and hardware from Hewlett-Packard, in a way that integrates nicely with a Web storefront, and with PC-based accounting, payment processing from First Data, all in one, end-to-end finance package, we’ll be announcing and showing that here at the show. We have more large retailers here in the audience, but I think the benefits that are coming for small retailers, as I said, are very important for everybody to understand.

We continue to expect to see, though, a lot of innovation in larger enterprises, for Microsoft this is a big year. We have more new product launches in this 12 months, a set of products both for retail customers and a set of product, frankly, for improving the productivity of an enterprise in general. We just launched a set of these products with our new version of Windows called [Windows] Vista, a new version of Microsoft Office. I’m not going to dwell on those, but our folks will certainly come around and talk to you on how you can apply some of these new technologies to the kinds of scenarios that I was talking about, both in-store and in terms of overall customer contact.

There is one specific thing that we are announcing here at the show for enterprise customers, which has really come out of a push from retailers around the world and that’s a collaboration with Teradata. For a number of years I have heard from particularly our largest retailers about the importance of unlocking information which is managed, and stores, and analyzed, typically in Teradata systems. The problem is that information is generally only available through the IT department or through specialized analysts.

Through this cooperation we’re building a bridge essentially between Microsoft SQL Server, our SharePoint product, our new business intelligence product PerformancePoint, but perhaps most importantly we’re building a bridge from [Microsoft] Excel to Teradata. So you can get access to information as an enterprise that you want to store in Teradata, but let your users get at it through the tool they’re most familiar with in terms of managing and analyzing numbers, which is Microsoft Excel. We’ll deliver that here in the first quarter of 2007, and together with Teradata we’ll be presenting this around the industry. And I think it’s a very important innovation.

Our company is very committed to retail. In addition to the centers that we have at our headquarters in Redmond and Toronto and Latin America, in Europe and Japan and Australia, and in India, where we really have dedicated and focused retail expertise, we’re also building in our R&D organization very specialized products for the retail industry. Our so-called WE POS, which is the Windows Embedded Point of Sales System, has been very successful. We’ve got new products for both retail management and point of sale for smaller retailers. And our commerce server product powers the backbone of many of the dot com presences of the biggest retailers in the world.

We’re very involved in industry standard organizations, like ARTS and others, and are very, very focused in on important trends in technology like RFID and XML, here in the retail industry. We have a very active customer advisory board, and certainly, as you want to consider how you help shape the way technology serves your industry, we encourage you very much to participate in those activities.

In addition to our own activities we’ve got a set of partners, over 300 of whom are very focused in on retail. We believe, as these partners believe, that over the next five to 15 years our platforms will become very much the standards inside the retail industry, and collectively we are committed to innovate for our mutual success.

If I was to sum up I’d leave you with these thoughts. The consumer is changing, retail is changing, the innovation that is required, both inside a retailer and from the technology industry to allow you to better operate and better serve those customers is happening, it’s amazing, it’s important, and I think when we look back three, four, five years from now you’ll say, oh my goodness, things have really moved very rapidly in the way we serve our customers, and technology has fundamentally impacted that.

With that, I want to wrap up, I want to say, again, thank you very much for your time. It’s a real pleasure to have a chance to be here with you today, and if I didn’t overstay my welcome, I’ll look forward to a few questions from the audience. If we don’t get to your question, I’m [email protected]. That’s my new customer service technique. Feel free to send me a piece of mail. Thank you very much. (Applause.)

QUESTION: Thanks, Steve. I’m Mary Heinsley from the National Retail Federation, and we do have a few questions. What does Microsoft’s infrastructure offer for my companies that other competitors don’t?

STEVE BALLMER: I’d start with two things. The future of technology really is on PC technology infrastructure, and whether it’s building blocks for your applications, whether it’s lowest total cost of ownership, Microsoft is clearly the leader in providing low-cost, high-capability, PC technology-based infrastructure, number one. Number two, our tools and technologies are the best in the world at allowing, and the most popular in the world, at allowing your employees to access information. People grow up knowing products like Outlook and Excel, they are the natural place for employees to want to get access to line of business information.

Last, but certainly not least, if you take a look at what it will mean in the future  what it means today and what it will mean in the future for you to interact with your customers, the heart and soul of that interaction is likely to be a Microsoft operating system, running a Microsoft Internet browser.

QUESTION: I saw security on your slide, what is Microsoft really doing in security as it relates to my stores?

STEVE BALLMER: OK. Five years ago Bill Gates sent out a memo to our people. We made security our job-one priority. Security is not glamorous, and in some senses it’s tough. A good day in security is nothing happened today, right. That’s the best you can hope for in the security world. Yet, we understood that both for businesses and for consumers to trust more and more of what they do to technology people had to have a higher confidence level.

We have revamped our product line tremendously, and I’m not going to go through every detail in the interest of time, but suffice it to say that whether it’s viruses, whether it’s phishing, credit card and identity theft, whether it’s privacy violations of other kinds, you’ve seen tremendous changes, even more when we ship our Vista release of Windows, and you’ll continue to see us invest in that area.

QUESTION: You spoke about the First Data, HP and Microsoft partnership, what else can small retailers do to close the technology gap?

STEVE BALLMER: I think the key thing here is really a responsibility not only for our company, but really for our entire industry. We need to make sure the small retailers can relatively economically, and without any IT staff, or without a very big IT staff, come online and have a sophisticated presence. We certainly take that responsibility very seriously. The thing I would say to the small retailer is, some of the stuff is now available, and get on with it. I find a lot of small, small retailers are a little bit gun-shy about really embracing technology even as much as they realistically should today.

QUESTION: With free, open-source alternatives now available, why go with Microsoft?

STEVE BALLMER: If anybody thinks open-source alternatives are free, I guess as they say, you can see me after class. Nothing in the technology industry is free, you just have to learn where to look for the price tag. Particularly with retailers, who I know are very, very good at looking for cost, I will tell you that in any comparison that you would do of Windows with Linux, which is an open-source alternative, we will prove to you that when it comes to total cost of ownership our stuff is more economical, whether it’s the other patent-licensing costs that you might have to pay to use open-source software, which is kind of a big unknown right now, whether it’s the cost of deployment and implementation, I’d be delighted, again after class, to talk to you about many of the implementations that have gone very well for our stuff in the retail environment, and I think there have been kind of greater challenges with people who have picked the other path.

QUESTION: What are you doing to ensure scalability, reliability and manageability for large 24/7 retailers?

STEVE BALLMER: Certainly, the need for 24 by 7 kind of what we call four nines of operation is not just  it’s very true in the retail industry, but it’s also true quite broadly. If you look at the biggest Web sites in the world, they too have to operate 24 by 7, with very high reliability, very high scalability. And you see our technologies being used now in many, many of these environments. It’s not to say there’s not room for improvement. I think we, and others in our industry, all have room for improvement, but I’d be delighted to point to many cases now where the mission critical applications of big retailers and others run entirely on Microsoft infrastructure.

QUESTION: How does your acquisition of ProClarity fit with your Teradata business intelligence collaboration effort?

STEVE BALLMER: Yes, we bought a company named ProClarity that has a lot of technology to kind of build greater visualization of information, makes that available inside our Office and SQL Server product lines. The collaboration we announced today at the show with Teradata essentially allows that capability to front end information, large retail data stores that you probably collect and put today in a Teradata backend.

QUESTION Thank you so much. We appreciate you being here.

STEVE BALLMER: Appreciate it. Thanks very much. Enjoy the show.