Steve Ballmer: Massachusetts Software Council

STEVE BALLMER: I’m on the verge of getting my annual review from our board of directors, and I’m not sure, but I think I might keep my job for another year.

I want to thank Jim for the introduction, and I want to thank the Massachusetts Software Council for the opportunity to be here with you today. What I want to talk to you today primarily falls into two categories. Number one, I want to talk about the opportunities that I see in the industry, because I’m as excited about what’s going on as I’ve ever been. And, number two, I want to talk a little bit about why we think Microsoft can be a good source of some of that opportunity, a good partner in some of that opportunity for the kinds of companies that are represented here in the room today.

We talk about our mission as a company, and I would really say our mission as an industry, even more importantly, is enabling people and businesses throughout the world to realize their full potential. I remember when we first presented this to our employees, they said, you know, what’s that? Missions are usually kind of tangible, our old mission, put a computer on every desk and in every home. Everybody kind of grasped that. It was I won’t say it was straightforward, but it was kind of measurable. People really, really kind of liked it for years, and they thought we outgrew it, and we came up with this thing. And they said, boy, that sounds kind of airy-fairy, kind of white, kind of hard to get your arms around.

But if you really think about it, there are only two industries in the world that can pretend to that mission, this industry and Jack’s industry, education. What we’re about in some sense is like the education business is about; our industry is about providing people the tools that allow them to create, to explore, to learn, to express themselves, to communicate, to collaborate, to analyze, to operate. But only tools that let people realize their own potential. That’s what we do, that’s what the companies in this room do. At the end of the day, we’re all enablers.

In our case, in Microsoft’s case, we’re a little bit more on the enabling end, we’re very horizontal, very tools oriented in most of what we do. Many companies in this room bring that alive with more specific solutions. I was talking to Leon about Centrist and the kinds of work that they’re doing for real-time online training, and particularly in some kinds of vertical industries. But it’s always an enabler, an enabler, an enabler, an enabler. And if somebody thinks this mission is fulfilled, then you might not think there’s much good opportunity left in the software business. I think if you roam the world, and you talk to people about the kinds of things that they want to do, communicating, assessing information, the number of unmet needs that people can in a sense express, is huge.

So, when people said, and people were going through a real round of this right after the Internet bubble popped, people were saying, tech is dead, it’s seen its best days, blah, blah, blah. That’s ridiculous, in my opinion, absolutely ridiculous. I tell people, and I believe it today, and I’ve believed it every year for the last four or five years, the next 10 years will bring more positive change driven by the kinds of work people in this room do than the last 10 years did. Which is really, if you stop and think about it, it’s a pretty over the top statement.

Ten years ago, 10 years ago, most people in this room still may not have most people in the world, didn’t know what the Internet was. Ten years ago, people still didn’t have PCs at home, and 10 years ago most people didn’t own cell phones. That’s the last 10 years.

Okay, so what’s 10 years from now going to look like if you’re so confident about all that? And I said, I’m not exactly sure. If you had asked me what it would look like today 10 years ago, I would have been wrong in every detail. Even Bill Gates, who’s more paid to do that sort of stuff than I am, would have been wrong in every detail, but right on the basics. The right stuff to invest in, and the world will be shaped by important technical changes that are happening, speech, natural language, new forms of information, organizations will be important, multimedia will be increasingly important. There are technologies that we can bet on. There are laws, the laws that Jack highlighted that we can bet on holding for the next 10 years. Precisely what the world will look like, we’re all going to have to make bets every day on that. And companies, new companies, will be created, new opportunities will exist. But I’m certainly as fired up as I’ve been at any time in the 24 years or so that I’ve been at Microsoft about the potential, really, for all of us in this room.

You all know Massachusetts has been a real center for software innovation. But it’s important for me to, nonetheless, highlight that here as a visitor, the kinds of work, the companies that have been started, the university work that’s happened here, whether it’s the kind of stuff that’s happened at MIT and Harvard, the kind of work, really seminal work, coming out of BBN, the many companies that have been started here, this is a real center for technology.

I think that sometimes if you read the reports, people go through down cycles and say, well, right now there seem to be more hot companies in Silicon Valley than there are in Massachusetts, but the basic core resource that is here is one I’ll say, as a company based in Seattle, we envy. I love the University of Washington, it’s a great school, it is one great school, one great school. You travel miles before you find the next truly great school. And the educational talent and the resources that are here are unparalleled, including in Silicon Valley. So as we look out and say, where will this mission of helping the world realize its potential through software happen, we expect it to happen here in large measure, through the entrepreneurship, and the work of the educators and researchers, here at institutions in Massachusetts. So when the invitation was extended to come speak, we were absolutely, absolutely delighted.

I think that the core of moving our industry forward, certainly the way we see it for our company, and if I was going to give one bit of free advice today — which, as they say, is worth what you pay for it — the keys in our industry are two-fold. One, you have to be committed to innovation. You have to be committed to trying new things, you have to be committed to what we call integrated innovation. There are very few new concepts that all of our customers can process. They love innovations that somehow build on concepts that they already know and understand. It takes a really unique idea to break out of that box. Customers do like it, and appreciate it when innovation builds.

There will be some innovation that’s completely off in a new direction, and doesn’t tie to anything that’s come before. But, innovation is a lynchpin. We’ll file, ourselves, for about 3,000 new patents in the next 12 months alone — just as a sense of how committed we are to investing and pursuing dedicated research, new scenarios and new technology.

The thing I think people miss, sometimes, in our business is you have to be equally committed to really listening and responding to customers. In our business, all of our business, it’s easy to get imbued with the vision: I’ve got a vision for what can be great, and I’ve passion about it, and that’s great. But, then people have to be able to turn on the listening systems; what do the customers like, what do they not like, what do I need to do, how do I fix it, how do I improve? Because, in point of fact, the products that have made the greatest difference weren’t ones that just had a great vision. They had a great vision, and then people tenaciously listened to the feedback that came from customers about those.

No more can you have a company that only listens to customers, I don’t think that’s possible in our industry either. Customers expect leadership out of all of us, they expect us to point the way to new scenarios. But it’s this mix of innovation and responsiveness. I want to mention just one little thing that we’ve done, which all of you are very familiar with, I’m afraid, but it’s probably the biggest innovation in our software engineering process in the last 10 years.

Just a small show of hands, how many people in the room have ever gotten a message from your computer that says, an error has occurred, do you want to send to Microsoft, yes or no? Small show of hands? Statistically, I know the answer to the question.

I can sit up here and say I’m embarrassed about that, and in a sense that’s true. But I can also tell you that every day now we have technology that helps us statistically understand what kinds of experiences customers are having with our products. We’re not guessing, we’re not fixing one bug that one person out of 20 million gets. We’re able to statistically understand the issues, the problems. And we’re taking that same approach and using it to extend out our ability to tune our software in new ways, which is the same software in Japan. In Japan you enter characters basically with the English alphabet, and there’s a conversation process that goes onto Kanji. We hadn’t made significant improvements in the quality of that translation in about seven years. We instrumented with this technology, we’ve now made another quantum breakthrough in terms of our percent accuracy in recognition.

So listening systems, as well as innovation systems, I think, have to be at the core of what we all do. We as a company are investing in a broad range of new scenarios and new ideas. Many of you will also invest in some of these scenarios, some of you will compete with us, some of you will collaborate with us. Many of you will invest in other areas that don’t show up on this piece of it’s not a piece of paper on this PowerPoint slide. But, we think PC growth will continue to be robust on the size that it already is. The PC market is over 170 million units a year. It’s quite phenomenal, and still growing, particularly quickly in lesser developed markets.

We think there’s new scenarios for what we call the Information Worker, people who want to use information every day in their lives. If I look out here in the crowd, with the exception of my friend Mr. (Frankstein ?) here, I don’t see many laptops being used. I see people with paper, and pencils, and notes. I’m not giving anybody a hard time, but it points to the fact that we haven’t really captured the key information worker scenarios. Why isn’t this meeting being recorded electronically. Why isn’t it available on the wireless network in this room? Why aren’t your notes synchronized with video, in the PowerPoint presentation? It’s just a question of software, how do we make it easier to find, manage, retrieve, share, information? There’s a boatload of opportunity.

The complexity for the software developer, and the IT professional. This is an area here there’s still so much to do. I had dinner with a group of CIOs here in Boston last night, and I was talking to them, and they were giving me a hard time about this and that, and the better the customer gets, the more of a hard time I think I get. But they were reporting out that in their data centers they use a lot of our stuff, but they also use other people’s utilities to manage our stuff, secure our stuff. They do advanced development projects using .NET and the Microsoft technology. Why? Because there’s still so much opportunity, even if a company like ours is making big investments in those tools, there’s so much opportunity to reduce cost and complexity for the technical community. Small and medium businesses, the least well served part of the market.

The consumer market. Dan Bricklin was talking to me beforehand, and I asked, what are you up to? He said, I’m writing, I’m doing this, but I spend a lot of time managing PCs for my mother, my mother in law, blah, blah, blah, blah, blah. I think we should electronically try to manage those computers. I don’t think that should be a fulltime job for a great guy like Dan. But it sounded like he’s spending a lot of time on it. Who will be the IT department for the rest of us, so to speak?

Non-PC devices are going to be more intelligent, software will run in TVs, in phones. There’s a huge opportunity for all of us in the room. Business solutions, verticals, I had dinner last night with two folks who are CIOs in the healthcare industry here in Boston. They were CIOs for integrated health delivery networks. The healthcare industry is going to continue, for better or for worse in some senses, to explode. It is one of the least computerized businesses in the world. It is one of the businesses that will create more opportunity for folks in this room, if we’re clever, if we show innovation.

Entertainment, advertising, information, the whole ad business will be revolutionized by software in the next 10 years or so. That was probably not clear to me six or seven years ago. I see George Bell in the audience. George actually started to try to teach this to me a few years back, and now the Google guys, they’re trying to teach it to everybody in a little bit different form, but delivering the right ad, to the right person, at the right time will completely change the advertising and media industries. Software is the key, communication, how we communicate, real time, video, all of this stuff will continue to evolve.

And I’ve only hit, in my opinion, on a small sprinkling of the opportunities that are out there. These are just some in which our company has some kind of an involvement. So I see a world of incredible possibility and opportunity. Certainly, for us as a company, one of the keys is making sure that we work with the broadest set of partners, software developers to build out that infrastructure. Yes, we’re going to continue to do new things. Yes, we’re going to try to continue to grow. But, one of the things I think we’ve always recognized, that’s been super important is, the key to having a successful industry, and for us to have a successful business, is to literally have tens, and hundreds of thousands of people building applications that satisfy the needs of specific customers in a variety of ways. It’s not just a product like Microsoft Office, or AOL or Google. The world lives, in some senses, on the fact that there’s a rich set of software possibilities, and it’s companies in this room that have to make that richness come to play.

We’re driving forward with some new initiatives to try to give developers new capabilities to take advantage of. Our “Longhorn” release of Windows is our next release. We did two things last week. One, we announced a ship date, that was considered a breakthrough. And number two, we mentioned that we jiggled the specs around a little bit, in order to announce the ship date. I think it will be as exciting a release as any release of Windows that we’ve made, certainly since Windows 95, a very rich new platform in there for software developers, and with more things to come over the future releases of “Longhorn.” So, we’re quite excited about that for folks who think about particularly rich client applications, and the possibilities that they bring.

Development platform, we’ve made our bet around our .NET technology base. We’ve had very good reception to that from developers, and now increasingly from analysts who cover the enterprise. Forrester finds now that a majority of enterprise developers are using .NET. Gartner has graduated .NET into what they call their magic quadrant for application development, and enterprise application service.

Our developers have moved off of our legacy programming model, Win32, to .NET. We have other big players in the industry, like Oracle and SAP and Cisco, playing with us. It’s not a risky bet now. When Deb [Besemer, President & CEO, Brassring] got started, and bet really on .NET as a foundation for their work, I think that was a probably a risky bet at the time. But, we have many, many, many case studies of companies like those in the room who bet on .NET and found that that has been a very successful way to go.

I do think that one of the key issues all of you will confront, as we have confronted, is interoperability. As much as we’ll tell you do everything on Windows, build everything on .NET, God bless it, it’s a great way to go. You’re going to find plenty of systems that your products, your applications need to talk to that are based on old versions of Windows, on UNIX, on Linux, on who knows what. And the truth of the matter is, one of the biggest breakthroughs for this 10-year period of time is XML Web services. Everybody said that, and it kind of faded a little bit. But, the notion that our industry has embraced, an architected approach to interoperability, is really it’s more than an amazing thing. The biggest advances, the biggest innovations in our industry come when people can build on the work of others. What’s the best software? The software you don’t need to write again, because you can build on software that somebody else wrote. And to have key industry players like us and IBM and Oracle, and everybody really agreed on an architected approach to interoperability, that will probably make a great difference in terms of the output of our industry collectively over the next 10 years than any phenomenon since well, for years. Let’s just say it that way.

So I think it’s really important for people to continue to keep that notion in their heads.

Before I turn to my last topic I want to say, there’s one issue that could stand in all of our ways, and that’s the issue of security. To the degree that people can’t rely, or don’t feel like they can rely on the systems that we, and you, and others put in place, that they’re not reliable, they’re not secure, that they can be hacked, that is a major impediment. So we really as a company have made security our job-one priority. I’d say it is at least twice as much discussed in conversations we have with our customers, consumers, small business and large enterprises than any other topic. And there is a real reluctance that we see, a growing reluctance that we see, for people betting on IT systems, because of security concerns.

It was a big decision for us to make this not just important, but job one. We derailed our Windows development plan, and issued our Windows XP Service Pack 2 release. Why? Because security was job one. We reprioritized our development process. Why? Because security was job one. We’ve taken our research department and reallocated a lot of our best research talent into thinking through how to model new forms of attack that will come from hackers, tools that can help us write more secure code, because security is job one. And security is a little bit like Y2K at the end of the day. It’s a little thankless.

The best anybody ever said about Y2K was, we didn’t have a problem. The best anybody is ever going to say about security is, we didn’t have a problem. But, it is, nonetheless, I think a big issue. I want you to know, as you look potentially to build on our software, how important a priority we’ve given it, and I think it’s important to highlight how important a priority, I think, you all need to give it, whether you’re doing platform infrastructure, or applications, this will become a growing issue for people.

Deb [Besemer] and I were talking about some of the concerns of her customers, as an ASP provider of services, customers want to know that the information they trust to anybody will be secure, will be private, and it’s up to all of us to really focus in on those issues.

How many people, a small show of hands, how many people have downloaded either at work or at home, Service Pack 2 of Windows XP? I’m one of those people. I really encourage you to do it. I really encourage you to do it. You’ll get it, you’ll say, not that much changed. It is really quite amazing. I’m not discouraging, if you still want an antivirus package, et cetera, et cetera, et cetera, but for safe browsing of the Internet, if you have children, as I do, we seem to get malware on our computer all the time, some improvements on that dimension. It’s not perfect, but some improvements. I really encourage you to go ahead and do that download, and take the appropriate precautions at home and at work on the security front.

I want to turn to one last topic before I open up for questions, which I would probably be wrong not to bring up as CEO of Microsoft, but probably it’s not appropriate for me not to bring up for this group, each and every person in the room whose company builds software is confronted with choices. Where do we write our software? On what platform do we base our work? What’s the smart choice for us? Why? Why not? And sometimes I feel a little sheepish just getting up here and giving a competitive spiel. But in front of this group, this is one of the mission-critical decisions that every software company makes, where will my developers be more productive? Where do I get the best interoperability? Where will cost of ownership and security be best for my customers? Where do I make the most money? Which of these platforms will be most popular and get most additional support from other applications? Which of these platforms will bring with them the greatest amount of intellectual property with, including intellectual property with me as the entrepreneur who has started and is building this company?

I obviously feel quite strongly on all of these dimensions that the best choice is Windows for a variety of reasons. For developer productivity, if you take a look at what you can do with VisualStudio.NET and Windows, it is truly amazing both on the server, where I think we see more competition with Linux, and frankly the client, we see some competition, but the Linux story, let’s say, is really not very strong at all.

Total cost of ownership; we’ve done a variety of studies, as have independent firms, comparing the total cost of ownership for somebody who brings in Windows systems versus Linux systems. And in a way, you could say, oh, we’re very expensive, it costs $500 for Windows Server, and a Linux server is “free.” It doesn’t take much, frankly, in terms of ongoing operating costs for the Linux systems to cost more, Gartner, Forrester, we’ve worked with research firms who will verify those cost of ownership claims.

Interoperability, I think we’re really leading on interoperability at this stage with the work we’re doing around XML in the Web Services Interoperability Forum with IBM and others. But, in a sense, interoperability it should be hard for anybody to differentiate on interoperability because it’s a two-way street. But we’re absolutely committed to being best in class in interoperating with other systems.

The two I’ll maybe just spend a little bit more time on today are security and on some of the intellectual property issues. Windows is the most popular system in the world. Windows is the most attacked system in the world. That’s a true statement. Some people say, well, what we need here is something other than a monoculture. The truth is, if you had two popular systems, you’d have two popular systems that would get hacked. Unless there’s thousands of popular systems, which sort of means they’re not very popular, whatever it popular, we’re going to have to deal as an industry and as providers with the issues of security.

We’ve made this our number one priority, and at least we can stand behind our stuff. We build the code that’s in Windows. If it is not secure, we know who has to fix it. We know where the issues start and stop. We are not a distributed group of developers who respond, maybe in some cases very well, but in some cases will respond in their own sweet time.

If you look at the number of security vulnerabilities, particularly with the improvements we’ve made in our development process, I don’t know who is going to talk to you about the Linux development process because it’s all over the map. They’ve come down dramatically. If you look at the number of days of risk after a vulnerability is reported before there is some kind of remediation in the market, we’re outperforming our competitors.

That doesn’t mean we’re doing an acceptable job, by the way. We’re just doing a better job than the other guys, and if this is a big question and concern amongst your customers, it’s probably worth your noting. The numbers on the right on security flaws come from Forrester. Go to their Web site, that’s where those dates come from. The numbers on the left come from Internet Security Systems, go to their Web site, that’s where those numbers come form.

I want to briefly mention intellectual property, not to make this into some kind of big deal, but I do want to emphasize that with all of the dialogue about SCO and Linux and blah, blah, blah, people can get confused about where things are from an intellectual property perspective. When you buy a Microsoft product, we indemnify you from all intellectual property risk, whether it’s a patent claim, a copyright claim, legal fees, damages. We say we stand behind our stuff, that’s our commitment to you. Sometimes that’s a very expensive commitment, if we actually lose the Eolas lawsuit, that will be a $550 million claim for patent violations in the browser. I don’t think we’ll lose that one but, nonetheless, we’re vigorously litigating that. But it’s our risk, it’s not your risk. We stand behind our software.

If you take a look at where things are in the Linux world, nobody stands behind patent violations for open-source software today, not Novell, not HP, not Red Hat or the other distributors, not IBM. From a copyright perspective, Novell has said they will defend against copyright violations, and they cap all legal damages. HP limits its copyright protection to the SCO claim, same with its indemnification amount. Red Hat offers nothing on copyright, and bounded legal indemnification as it relates to dollar amount. IBM is relatively silent, frankly, on what they’re doing on the whole thing.

Why highlight this for you? Let’s say you’re building a business today, and you know you want to build your business around Windows or Linux, you have to decide what intellectual property risk you want to build, what additional cost might you be pushing to your customers in the future that is unanticipated because nobody stands behind the stuff. We’ve got very smart partners, companies that I think are very smart, who build devices that have Linux embedded, but they haven’t really asked the fundamental question of what IP risk are they taking as the provider of these devices with Linux embedded.

And I’m not just trying to view fear, uncertainty, and doubt. Everybody can go study these issues, but particularly the entrepreneurs starting businesses, like folks in this room, they’re worth some study in a way that’s probably more important than it would be for a CIO of a large enterprise, because your product in some sense always comes in combination with some underlying piece of system software.

So, I think we’re in a very good, big, vibrant world. A lot of opportunities, a lot of things our company is trying to do to support you, attract you to our platform. You do have alternatives, and we understand that, and we’re going to work hard from a technology standpoint, and from the support standpoint to help you get there. We’ve put in dedicated resources at our technology centers in Boston to support startups, to support independent software vendors. As Jim said, I am SteveB@Microsoft.com, and if you can’t find an answer to your question anywhere else, I’ll view that as a failure of our system, fling me a piece of mail, or if there’s something else you want to talk about. I used to be a 24-hour respondent, I can’t say that’s true anymore. But e-mail is still the best way to get me, and I’d like to hear your questions, your comments, your thoughts, your feedback.

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