Steve Ballmer: Washington, D.C.-Area Customers Hosted by the Northern Virginia Technology Council, Tech Council of Maryland, D.C. Tech Council, TechNet

MR. PORETZ: Thank you, Fernando, and good morning, everyone. Qorvis Communications is extremely pleased to be a sponsor of this benchmark and regional event, and we think it’s truly significant. And we’re also pleased to help provide you this opportunity to hear from Steve Ballmer, who is a true business visionary and a legend in technology, and someone who is making a major impact on the future of business, computing and the world economy.

At the same time, I’m pleased to help join in the welcome of Steve Ballmer to one of the world’s most important technology communities and the world’s premier example of what’s increasingly being known as the creative economy, the greater Washington region.

Steven A. Ballmer is Chief Executive Officer of Microsoft Corporation, which as I’m sure everyone knows, is the world’s leading manufacturer of software for personal and business computing.

He’s a graduate of Harvard University, and he joined Microsoft in 1980, was the first business manager hired by Bill Gates. I understand they went to college together for that period of time that Bill Gates was in college.

During the past 20 years, he has headed several Microsoft divisions, including operations, operating systems development, sales and support. In July 1998, he was promoted to President, and he was named CEO in January 2000. And at that time he assumed full management responsibility for Microsoft.

His responsibilities include enabling people and businesses throughout the world to realize their full potential, as Microsoft gets across in their message to us all the time, and in their products and service. It’s a Microsoft core vision.

Together with Bill Gates and the company’s other business and technical leaders, Steve is focused on continuing Microsoft’s innovation and leadership across the company’s seven business areas.

Steve is known to be one of the world’s brightest and most important business executives, but as the invitations to you noted, he is not a frequent speaker on the east coast, so this is a rare opportunity and one that we very much treasure. And it’s an opportunity to hear from a speaker that you’ll discover to be focused, funny, passionate, sincere and approachable.

So please join me in giving a warm welcome to Steven Ballmer, CEO of Microsoft.

(Applause.)

MR. BALLMER: Well, thanks. It is an honor and privilege to have a chance to be here today. Thanks, Doug, for that kind welcome. As you were saying, I don’t give too many speeches on the east coast. I was running through a tally in my mind and wondering if that’s true, and I decided it sort of is, although I’ll probably give a total of about 200 speeches this year, not that many of them were on the east coast.

I certainly do want to thank the NVTC, the Tech Council of Maryland and the D.C. Tech Council for hosting this event. It’s really a fantastic thing. I’m not even sure folks who live here really understand how special having the kind of support from the Tech Councils is in this area.

There are communities I go to where they have some kind of active technology community, and it really to me is a special thing to see. And then most cities around the world don’t have the equivalent of this kind of an organization. And I think you guys should recognize it is special and cherish it and support it in the right ways.

I’m going to talk a little bit today about the kind of innovations that we see coming in general, although I will push it through the lens to some degree of the government contractor, since I know that a significant part of the technology community here in the D.C. area is involved in some way, shape or form with the federal government. So I want to make sure to do that.

As Doug said in his introduction, we do talk about our mission as a company, and, frankly, I’d say our mission as an industry, as enabling people and businesses throughout the world to realize their full potential. And that sounds kind of lofty and kind of in a sense very non-technical almost.

But if you really think about what the core value is that comes from investment in information technology, it is actually that enablement of people; enabling people’s productivity, enabling people’s creativity, enabling people to work with other people to unlock productivity and creativity in ways that we never really imagined.

And I really think that needs to be the aspiration for all of us in the information technology business. If you’re a defense contractor — certainly, I spend a lot of time — I’m the executive sponsor for the U.S. Air Force. I spend a lot of time with defense agencies around the world.

The key theme that you hear coming from the military everyplace is we will be successful to the degree that we empower our people with the right information, superior information, so that they can make better decisions when they’re out in a battle situation, in a war situation, in some theater of activity. It’s about information superiority, and it’s about empowering and enabling the war-fighter.

And so if we take that as kind of a view from one sector, a sector that’s very important here, it’s very consistent with this theme of enabling people to realize their mission by providing them with the information they need to make decisions.

We don’t solve anybody’s problem. Information technology enables people and businesses and enables you, hopefully, to put together solutions that really do solve someone’s core situation.

So I want to talk a little bit about some of the things that we see going on in the defense industry. I want to talk about some of the big technology trends we see, and then hopefully be able to wrap it all together.

Over the course of the last year or so, we’ve really put together a very focused effort to have a team here in D.C. that’s thinking through, understanding the needs of people who are involved in government contracting, and really ask, what do we need to do in our product line to facilitate many of the things that are important?

But it all starts with this notion of enabling people and businesses. You say, okay, what kind of businesses? Government contractors. What kind of people? Project managers, CIOs, CEOs, CFOs, salespeople, business development people. How do we give people the tools to really do a good job of not only prospecting but proposal management, which is absolutely a mission critical exercise?

We’ve got a customer here in the D.C. area, Antion, that’s using our CRM product for their proposal management, prospect management, I think fairly excited to move to the Version 3 of our CRM product.

We talked to the CEOs and CFOs, and the issues are around growth, they’re around regulatory compliance, they’re around EVM. How do we give people the tools to manager their way through those issues? The CIOs are pretty typical of CIOs in every business. Security and efficiency of infrastructure are kind of key issues.

And project management, it may be so second nature to folks in this room, but believe me, we sell a disproportionately high percentage of all project software management software sold in this country is sold in the D.C. area. Project management is a discipline that is taken to a whole new level when it comes time to empowering folks in the government contracting business.

So we start with this fundamental model in every industry, not just in government contracting, but when we look from our customers’ perspectives into technology, we always start to say, who are the people, what are their needs, what are their interests, and how do we enable those people with technology? We don’t start with the processes. The processes are important. But you say, here are the people. Now we need to enable those people with information, analytics, process to let them go do their jobs. And we have that help us really drive our product line.

We say — it’s kind of a mantra inside our place. We talk about people driving business success. And we have these little — I’m in the building with the team that builds our Exchange product. And there are posters up all over the building. “This is Susie. She’s the prototypical mailbox administrator.” “This is Charlie. Charlie’s the prototypical e-mail user.” “This is Horatio. Horatio is the mobile e-mail user.” And these personas we really use from the outside in to drive the development of all of our products.

We believe in innovation and vision, but we also believe in having a fairly strong model of our customers and how to respond.

So you take that blueprint that I laid out for what we think is important here in government contracting, and you say, okay, what do we do in software? How do we build software that’s familiar and easy to use for those roles inside a government contractor? How do we make sure that our software is easy to connect and integrate with the other systems that you need to talk to? How do we make sure that our software is flexible and adaptable so that it can be customized and evolve to continue to meet changing needs? Those principles come in a sense from the outside in and really drive our innovations around this market and every other market.

Interoperability

The other key principle that we very much believe in is this notion of integration, and that we ought to make sure that the sum of what we provide you from Microsoft is bigger than the sum of its parts. Now some people will say, oh, does that mean we got to buy everything from Microsoft? You don’t believe in interoperability? Blah, blah, blah. No. No.

We believe in the support of open standards. We’ve done a lot of work with IBM and other competitors on XML web services standards for open interoperability. We recently moved to publish the XML file formats for our new versions Microsoft Office so that we get a level of interoperability.

But having a view that says interoperability is important is not inconsistent with making sure that the whole of what we provide you is bigger than the sum of the parts.

We think about how the platform, Windows, the management tools, the development tools, .net, integrate with the office productivity tools: Office, Outlook, Word, PowerPoint; integrate with the CRM system, with the ERP system, with the project management system.

And if we can make that whole bigger than its parts, we think that takes out cost, that takes out complexity for you as businesses implementing these solutions.

But perhaps more important, it allows us to really put the user at the center and let the user work the way they want to work with high productivity, great collaboration, great business insight, and still have the extensibility for third parties.

You see this most in what we’re trying to do with Microsoft Office. Some people say, what’s Microsoft Office? It’s a spreadsheet in a word processor, isn’t it? And I think that’s the way you get kind of narrow vision and narrow definition.

I think Microsoft Office is the definitive front end to all data that people want to use. That doesn’t mean we’ll succeed, but it’s a good, broad, big mission for innovation. So we say to ourselves, people are so comfortable, so familiar, so used to working in a tool like Excel, how do we make Excel the front end analytic tool for the project manager? Many people do their project management, their EVM analysis today in Excel. How do we tie it directly back into the line of business data, as an example?

Our new version of CRM. We’ve essentially built CRM directly into Outlook. Why is that a good idea? Most salespeople I know don’t love any CRM product. Let’s be blunt. It is a tool of oppression by the sales management against the masses of salespeople. But at least if they’re going to use the darn thing, let them use it in a place they like to work. They’re always in e-mail, e-mail with people, the technical people who have to support them internally, e-mail with the customer. Make it easy. Make it easy. Put user productivity. Put team collaboration. Let the people get insight with the tools that they’re looking for.

So this notion of Office is kind of a rich front end to these business processes we believe in and we’re implementing throughout our product line. Of course, we’re also doing this with partners. Part of the key them of this Mendicino project that we announced with SAP earlier this year is about trying to integrate Office in and then also to SAP, ERP and CRM and other data.

So putting the user first really gives you a little bit different kind of a view of the world. And we think particularly in the government contracting space. Everybody who works for you, you have to view as what we call an information worker. They all have valuable, important brains. There are industries where people will pretend that some of their workers are not information workers. I’m not going to single those out, but I actually believe we ought to treat every worker like an information, because that’s how they want to be treated.

But certainly in your businesses, any technology business, government contracting or otherwise, if you go to anybody who’s a technical person and say we’re not respecting the value of your kind of wisdom and judgment, you’ve got a big problem. I’ll make that comment to somebody who has probably more programmers working for them than anybody on the planet.

And so it is very important that we empower people with these kinds of tools so that they can feel not driven by these processes but empowered by this information and by these processes.

At the same time we’re working on the value of the infrastructure. We just released earlier this week the next version of Windows Server, our so-called Windows Server 2003 Release 2. It’s very good at breaking down some of the connectivity barriers that people have when they’re trying to work at a customer site and communicate back with severs at the head office. I think that’s a very valuable thing, particularly in this industry. We have a version of Exchange Server, and our Systems Center Management products that really form the core of what we’re trying to do here.

Security we made a job one priority for Microsoft now four years ago. I’m not going to tell you everything is perfect, but I think it is amazing to see how much improvement we have seen in the products and in what’s going on the marketplace.

Between the improvement in products, the improvement in the tools that come from third parties, and the improved discipline in IT people everywhere, the virus outbreaks have been fewer, and when they have broken out, they have been less severe than they were a few years ago.

I don’t know if this is wood, but I’m going to knock on it, because the bad guys are all still out there, and there’s nothing that, you know, sort of says that we can’t have another outbreak on any day. But as important a priority as it has become for our company, our industry and our customers, I think we’re at least well on the way to making significant improvements on the security front.

The next 12 months for us are kind of — they’re fun, or the 12 months we’re now in. We have the richest pipeline of new innovations that we’ve ever put in the marketplace, ever, in our entire history. Whether it’s the new version of Visual Studio and .NET, the new version of SQL Server, Xbox 360 — I’ll answer this question in advance. No, I don’t know how you get an Xbox 360. Wait in line at Best Buy. We continue to ship more. And then the second follow-on question is no, the Ballmer children don’t have their Xbox 360 yet. So I’m in the same boat as many of you, maybe a little worse. My kids thought that one of the payoffs of having dad travel so much is we get an early Xbox 360. Unfortunately, thanks to the wonders of Sarbanes-Oxley, management does not get a free Xbox 360 anymore.

(Laughter and Applause.)

MR. BALLMER: That wasn’t even a shot. It’s just a statement of fact.

(Laughter.)

MR. BALLMER: But we have a new version of Windows. We got a new version of Office. We’ve shipped the new version of Windows mobile software. We have a new version of our dynamic CRM product. We’ve got new versions of Solomon and Great Plains coming. A new small business accounting product for very small companies. And then a variety of new services coming from our MSN team. And I want to talk about that, because I think that’s a technology trend we’re all going to have to really understand and pay attention to.

The Live Platform

About a month or so ago now, we announced something called our Live Platform. Windows Live, Office Live, live products, live experiences. And, you know, mostly I would say we were directional. And people had, depending on the amount of attention you paid to this in the technology world, you kind of got it more or you got it less. And when our folks were talking to the NVTC about what I should talk about this morning, they said, well, at least give a little bit of future direction here. What’s important, what are the trends, what’s going on?

I think this is probably the most important trend frankly in the software business over the next two or three years. The trend from software being a product to software being a service. And I don’t mean a service in the sense of people, but a service in the sense of having a component that runs on clients, a component that can run on the server, and components that run out in the Internet cloud.

I think when we look back five, six, seven years from now, all software will evolve to be a service. Sometimes the service will be operated off of the Internet by companies like ours or others. Sometimes they will be managed by companies like you internally or on behalf of your customers. But the basic nature of software will change.

Some people will ask, does that mean all software is going to just be things that run in the cloud in an HTML client? I don’t believe in that. I do think that there’s a role and place for that. But there are going to be experiences where people are going to want intelligence on the client, they’re going to want it on the server and they’re going to want it on the service. And actually having technology that lets you deliver and build a new generation of software, software that is as rich as the client software of the past, software that is as controllable as the server software of today, and software that is as efficient to deploy and operate as the Internet services — MSN, Yahoo, Google of today, that his the future of all software.

And I think that’s actually understood in large measure by our customers. They’re all grabbing for that. When I come here and visit D.C. and talk to folks in the military, a lot of the theme is, how does the military start operating portals on behalf of — as a service — on behalf of the entire U.S. military? How will collaboration evolve as a service that can be run centrally on behalf of the military?

And it’s all getting at this notion of how does software evolve, no matter who operates it, to having these multiple components; components that actually run centrally, components that run off a sever locally, and software that actually runs down on the client and allows for rich presentation and rich analysis.

Our goal with our Windows Live effort is to provide a platform out in the cloud. Just the way Windows is a platform for the development of client applications and Windows Server for server applications, Windows Live will be two things.

Number one, it will be a set of end user experiences, just the way Windows is today. But it will also be a platform for the cloud that we will open up for third parties to use who want to build the same kinds of services or extend the services that we provide as a core part of our Windows Live solution.

I think this is an important transformation, and it’s going to affect different industries in different ways. It’ll affect different companies in different ways. But I think not only will you see this from the vendor community, I think you will see pressure to do this coming from the customers who want to essentially instance their own services inside their own clouds.

I was up in Canada yesterday and sat down with some folks from the Canadian National Defense Agency. Same theme. They’ve just set up a big shared services group inside the Canadian military, and they’re actually asking how do we run shared services of this ilk on behalf of a variety of different parts of the Canadian military, not all of which are very closely connected, but all of which want to share the same kind of secure collaboration infrastructure that gets managed centrally in the cloud, if you will, on behalf of the entire Canadian military?

So this theme is important. You’re certainly going to see it in what I would call the consumer world. If you look at what we’re doing with MSN, Windows Live, Office Live, it’s a big part of our theme. If you look at what our competitors, Yahoo and Google, are doing, usually what they tend to do is use a little less rich technologies on the client, extensions of the HTML browser, so-called Ajax technologies.

But this phenomenon is going to show up in the consumer world, it’s going to show up inside big companies, and at the end of the day, I think it’s probably going to have its most profound impact on smaller and medium size companies.

Salesforce.com will tell you that’s what they’re doing in the CRM world. We’ll tell you we’re going to, in all cases, take an approach that lets you go either way. Sometimes you’re going to want to run things yourself. Sometimes you’re going to participate in these services in the cloud. And that’s why we believe in a solution that is client, sever and service. But that’s an important addition to our overall product strategy.

As I move to take questions, I do want to make sure that you understand that the way we bring all of our technologies together for our customers is always through a network of partners. We do an enabler. We’re in the business of providing platforms and core enablers. But we have partners who will take that another step or two steps or five steps to bring it to life.

Here in this market for government contractors, we actually have a set of six partners who have come together to bring what’s really just an awesome solution for running a government contracting business together. Each one of these partners can resell and service technologies that come from the other five partners, and each one of whom would be glad to deliver to you a full solution that includes our technology stacks and everything else that you need to finish out the solution around our dynamics product line for government contracting.

It’s really kind of an innovation thing. Six companies, all selling essentially the same solution, all selling each other’s products. Because we think that when you put their technologies together with our core platform, you have what is easily the most sophisticated solution for government contractors in this area.

All of this is in the context of us being here locally. I was listening offstage, I forget who said, I’m not sure Steve would have showed up if we had just sent him a piece of mail. I’m Steve B., by the way, at Microsoft.com. If we don’t get to something that’s on your minds, please feel free to send me a piece of mail. If you’re one of the journalists, I’d appreciate it if you didn’t publish that, but it’s been done before. It just leads to a round of spam that lasts for about 48 hours, but I’d appreciate it if you didn’t print it.

But it easier, given the incredible presence that we have here in the D.C. area and the incredible commitment we’ve had to not only being a global company but really being involved here locally.

We actually have now closer to 600 people working for us in the D.C. area. We have partnerships with over 7,500 companies, local companies, companies based in this area, small, medium and large; and we’re involved in the community here, having contributed almost US$42 million in cash and software since the year 2000.

Our presence here just continues to deepen. All three of our largest customers globally are headquartered in the D.C. area. That’s not an IQ test. You can probably guess who the three are. They’re the three biggest users of technology in the world, and that’s of course the Army, the Navy and the U.S. Air Force.

And again, as I said, your Technology Council here is as active or active as anyplace else in the world. I’ll also say this is, as some of the speakers were saying before I came on board, this really is the center of high technology in the world.

It’s a different cut than you find in Silicon Valley or Austin or Boston or Seattle or Tel Aviv, but the kinds of high technology work going on in the defense business and defense contracting, the use of those technologies by the military, what they mean for the future of information technology, as I said at the beginning, are sure shapers of our strategy, and we certainly appreciate the support not only from the end customers but from all of you and the partners here in the Washington, D.C., area.

So I want to wrap on that. I want to say thanks again for the time today. I’m looking forward to the question and answer. I actually enjoy that more than the speech, although I went a little long on the speech, I hope we have plenty of good time for rich Q&A, and I hope everybody here has a great holiday season.

Thank you very much.

(Applause.)

MR. LEE: That was an incredible speech, and, Steve, I’ve got to ask you, you know, I’m in the market for a hard charging, high energy customer focus CEO, and I would love for you to consider this, with Lee Technologies.

(Laughter.)

MR. LEE: No, seriously, I think you’ve got a pretty good gig working right now. But on behalf of all the Tech Councils up here with me this morning, we really appreciate your time, your energy, your enthusiasm for the Washington, D.C., marketplace. We’re excited about it, and it’s nice to know that you’re excited about it as well.

And as a small token of our appreciation, we have it behind me.

MR. BALLMER: Superb. Thank you. This way? Okay. Super. Thank you all very, very much.

(Applause.)

MR. LEE: We have about 15 minutes for Q&A, and I’d like to invite our industry executives that are here with us this morning to ask Steve some questions. And I also want you to please remember that after the Q&A, we have a leading expert on Microsoft that’s going to spending about 30 minutes or so with us talking about some exciting new things with Microsoft.

So, let’s open it up for Q&A.

QUESTION: Good morning. I wanted to ask you about what were your thoughts on the integration of Internet telephony and IPTV without being two timing them. Thank you.

MR. BALLMER: Okay. Both phenomenon are guaranteed to happen, and the only question is, how fast, who’s going to build the technology that wins, and how is what goes on in the Internet cloud going to relate to what people want to do inside their own corporations, particularly on the last point on telephony.

These are areas where we have ourselves big investments, so we’re serious players. I was on the treadmill this morning, and I noticed on CNBC that BellSouth has just announced that they’re going to into trial on Internet television in Atlanta area with some technology that we’ll be providing them. We’re in tests already with Verizon and with SBC and a variety of other phone companies.

Why will the world go to Internet television? Answer, because essentially, so much more information opens up to you to access from your TV, and so many other services open up to you to use in conjunction with your video watching. I’ll give you my favorite example.

I went to the Detroit Country Day School outside of Detroit. And since I’ve graduated, I have to say, they’ve really gotten to have a great basketball program.

(Laughter.)

MR. BALLMER: In fact, one of the old Wizards, Chris Webber, was an attendee of my high school, and I’d like to watch — I really would watch their high school games. But if I have to go to my PC, find the Web site, look for the video — there’s always a video. You know, all coaches make sure there’s a video of every game — high school game that gets played anyplace in the world — I’m never going to watch it.

If I can go to my television set, query, say I want to see the Country Day Lutheran West game, and then just right there with my clicker, so to speak, with my remote, bring the game up and watch it on my television, I’m going to watch that video. That’s not going to happen in a world without Internet television. It takes access to more data, and it takes more kind of capability and intelligence down in the client.

The same thing is true of Internet voice. Typically when people think today about Internet voice, they think about cheap phone calls. And, hey, there’s nothing wrong with cheap phone calls. But the real value in having voice calls go over the Internet will be your ability to use more intelligence to process them.

Let me give you an example. Suppose you want to just create a rule that says if it’s this time of day, ring my cell phone. If it’s that time of day, I want people to reach me on my office phone. If it’s my wife, she can always get through. If it’s my stockbroker, don’t let him through if it’s after market hours. If it’s my son, make him hit a button to tell me whether it’s one of the urgent things or he’s asking me again whether I got the new Xbox 360 for him or not, for the 28th time today.

(Laughter.)

MR. BALLMER: And I’m making a little bit of a joke, but what you want to do is be able to describe a set of rules for how you get interrupted. We all are interrupted far more than we want to. We’re interrupted by e-mail, instant messages. We’re interrupted by voice calls.

You know, now more and more people are subscribing to RSS data feeds. So any Web site can wake us up and say, oh, did you realize that — I don’t know what the news of the day is — you know, blah, blah, blah has happened and you should get on top of it.

So we want to be able to write these rules. And voice calls are an important part of that. And so you really want to apply more intelligence against your overall voice communications.

And for that reason in addition to cost, all TV will go over the Internet. We can debate when. But all TV will transition to be over the Internet. And, frankly, all voice calls will transition to be over Internet technologies. That doesn’t mean the phone companies are going away or anything else, but people are going to want the intelligence that voice over IP allows you to apply, apply to all voice calls.

Is that helpful? Okay.

QUESTION: Good morning, Steve. I want to thank you for coming to the D.C. area this morning. My question deals with Microsoft and cyber security.

A few years ago, Microsoft was being held up as pariah not doing enough in the area of cyber security. But today, that image has been completely turned around. Microsoft is being held as a corporate model for what to do with cyber security.

Two-part question. What has Microsoft learned from that experience? And two, as a public policymaker, what can you impart as lessons for public policymakers in the area of cyber security?

MR. BALLMER: Well, you know, I think the first thing we’ve learned is, you know, anything we put our minds behind, we can get our people rallied behind. But you’ve really got to put your minds behind it. You kind of relearn that lesson every few years.

We’ve never run a company, Bill and I, that had 60,000-plus people until yesterday when we hired the sixty-thousandth-and-first person. And so you’re never quite sure if the tools are the same or they’re different than when you’ve got a hundred-person company or a thousand-person company. But you can mobilize people, but you’ve just got to be relentless.

Bill sent out a memo four years ago. This is our top priority. We had to improve our technologies, our tools. We had to make a big investment. And I know we still have a ways to go, we really do. But it’s just, I mean, sort of a question of priority and will it allow people to accomplish things.

My top concern, and I say this now in answer to your second question, my top concern is in some sense we all get lulled to sleep when there’s a big gap between bad things happening. We do have customers today that we have done what we call a security audit for and made recommendations to. And because nothing bad has happened to them for a while, they say, well, we don’t really have it in the budget right now.

It’s not even — there’s no revenue in some of this stuff from Microsoft. It’s really just an honest to goodness recommendation on what they need to change in their policies and procedures. And I understand that they’re honestly feeling they can’t do these things right now. But security is one of these things that, you know, whether you’re on the vendor side or on the user side, unless you’re staying on top of it all the time, you know, it can get away from you. And as I said in my comments, the bad guys are all still out there. They may be doing different bad things. Some of them may be dissuaded a little bit. But in a sense, I think it’s important as a policymaker to remind people they have to stay diligent and not just be affected by the last thing that happened.

I mean, a little bit this is some of the federal government’s challenge, even in the context of, you know, bigger, more important issues of U.S. homeland security, is you have to remind people that these things continue to be important even if it’s been several years since the tragedy of 9/11.

QUESTION: Good morning. You had mentioned various technology centers in the U.S., and you included one area outside the U.S., Tel Aviv. Do you care to comment about the emerging software centers in other parts of the world, including India, China and even smaller areas and how that will impact U.S. companies?

MR. BALLMER: Yeah. Let me explain why I mentioned Tel Aviv as opposed to, you know, Bangalore or Beijing, since I think those are more typically top of people’s minds today. There actually is more venture capital and entrepreneurship activity in Tel Aviv than in some of the Asian countries.

In absolute, China now graduates more computer science people than any country in the world. India is number two. The U.S. has become a distant number three, and Western Europe is lower than the United States.

So a lot of the software that gets written in the world is going to get written in Asia. And it’s going to get written in Asia because that’s where the people are with the skills. And, you know, we’d love to see more people graduating in computer science here in the United States, but the trend is not a good one.

There’s also I think in India and China a reasonable climate of entrepreneurship, despite what people think about government forms and everything else, there are a lot of entrepreneurs in India and China at this stage in the world.

But there haven’t been a lot of software entrepreneurs, in large measure because the largest market — it’s hard to sell software in India and China. And most of the people who want to sell software want to start their business someplace where somebody is going to buy something. So people tend to start those businesses by and large in the United States, which is the largest domestic market.

Now someday somebody might wake up and tell the Chinese government — somebody in China might wake up and tell the Chinese government it’s time for Chinese people to start really paying for software, because Chinese companies also want to compete in this market, but that hasn’t really happened so far.

So I think a lot of software is going to get written in the two big countries. I think that unless something changes in their market dynamics, though, a lot of the entrepreneurship for those companies will still be outside the two big markets.

QUESTION: Good morning, Steve. First off I would like to really thank you for taking the time to speak with us today. I would also love to hear your opinion on hot emerging technologies.

If you were to start up a new software or technology company today, what would that be from either software, or in our case, a professional services organization, based around new software or emerging technology?

MR. BALLMER: Well, in a sense, everything is a question of what your timeframe is. And so, you know, if you say, hey, I want to — if I wanted to start today a professional services firm — of course, you know, that’s a little like throwing a 60-mile-an-hour fastball down the middle to Barry Bonds or something — I’d say, oh, you should come talk to us. We’ve got this new product called Office “12” coming, and there are so many professional services opportunities in business intelligence and workflow, and I wouldn’t be able to restrain myself from telling you that, if that was your question.

(Laughter.)

MR. BALLMER: That was a cheap commercial, but nonetheless, I enjoyed doing it. Thank you for the opportunity. Because the payback timeframe on professional services generally tends to be quite quick.

If you say, hey, look, I’m trying to start a new product company, then I’d say you have a little different issue. Because you have to ask yourself, what’s the timeframe for payback?

Take our own case. We started our Internet television work ten years ago. And basically, we’re the only guys left standing. Everybody else who started went out of business. Because we were almost too early. Most startups probably couldn’t afford to invest in something for 10 years continuously without any business. We’re finally hitting a point where there’s real business. That’s an area where we were very early to innovate.

But, you know, the voice over IP area is red hot area. Mobile devices. If you look at the percentage of mobile devices that are going to be smart as opposed to dumb — that is, they’re able to run programs — that’s going to skyrocket here over the next three, four, five years. They might have Linux in them. They might have our Windows Mobile stuff in them. They might have J2ME, but the intelligence in devices is going to absolutely skyrocket. Incredible opportunity.

If you look at the possibilities in writing new software, Internet-oriented software, probably if it’s consumer targeted that’s advertising funded, there’s plenty of startup activity in that area.

If you want to take the longer-term horizon, then I say, look, the biggest thing that’s going to happen is the change in user interface from today’s menus and graphical interface to something that has what I might refer to as a natural user interface. It uses natural language.

We don’t use natural language with our computer today. We issue commands like File, Open, blah, blah, blah. I can’t tell my computer, get ready for my trip to D.C. I can tell my secretary that. I should be able to tell my computer that. And you can say, oh, but of course I should be able to tell my computer that.

My computer actually has all the data in it about who I’m seeing, where I’m going. It has access to the CRM software that has all of the data about those accounts. It has all of my old e-mail on it. It has access to the World Wide Web. It can go get all the Web site pages from the people I’m going to meet. It can cache them down on my hard disk.

But I don’t give that command to my computer. I give it to my secretary. And my secretary actually has to go look for a lot of things my computer knows exactly where they are, but it’s still easier for me to tell my secretary.

Why do we like search engines? Whether you like our search engine or the other guy’s search engine, why do people kinda like search engines today? It’s one of the few things in information technology where you can just sit there and type anything you want, and at least you get an answer back. Right?

(Laughter.)

MR. BALLMER: No, I’m serious. Fifty percent of all Internet searches, people don’t find what they’re looking for. So it’s not like it’s some perfect experience. If you had told me, you know, people would be happy with a 50 percent hit rate, but it’s so much better than it used to be and at least there’s gratification.

You know, you can’t type “prepare for my trip to D.C.” and have the computer do what you want it to do. But if you typed it into a search bar, at least you’d start getting links back about preparation and D.C. It wouldn’t prepare me for my trip, but you’d get something back. And I think it speaks to how much people really want to be able to speak English, so to speak, to their computer, as opposed to speaking the command sets of the computer itself.

So that would be — if you invested, though, in that hot technology, you better have more of a four, five, six-year payback period than a one or two or three-year payback period.

QUESTION: Hi, Steve. I want to thank you for recognizing that we’ve got three Tech Councils in this area, and John Lee, and John Nyland, John Sanders for having the insight and the vision to put this thing together. I wish our political leaders had the same insight because we could solve a lot of the problems in this area if they did what you all did.

To you, you’re amongst friends. Unlike when you give speeches or testify down the street, you’re among friends here. You happened to have mentioned Sarbanes-Oxley.

Well, in the rest of the world there are countries that are subsidizing their major companies, less in Europe now, but much more so in Asia, and especially the countries that we compete in and you compete in. Sarbanes-Oxley, HIPAA and then a whole realm of others, are making us substantially noncompetitive.

What would you say to your friends? And what would you say to the people down the street to help this country and our companies, all of us, you included, be more competitive globally?

MR. BALLMER: Okay. We are amongst friends, but I’m going to give you my honest answer even if it sounds kind of a little bit — what should I say — scripted. But it is actually what I believe. Let me take Sarbanes-Oxley, because I haven’t seen a lot of impact at our company from HIPAA, so I’ll just take that as an example.

The work we had to do for Sarbanes-Oxley was expensive, not super expensive on the scale of Microsoft, but it was expensive, and most of it I actually think was probably valuable for us to have done the first time. I don’t know if it will be as valuable with the annual refresh and recertification, but I don’t feel bad about it at all. And I actually don’t even feel bad about it relative to its not insignificant cost to Microsoft.

But we’re very — at this stage, despite the fact I think of us as a small company, we’re a very large company. And the feedback that I get from many mid-sized companies is quite different, because they have essentially the same fixed cost of doing Sarbanes-Oxley that we did, but of course they don’t have the revenue and scale over which to amortize it.

And so I think there needs to be careful thought. I’m not able to represent the full spectrum. I can really only represent our experiences in complying with Sarbanes-Oxley. And, you know, it was not a negative experience net for us.

But I do know, and I have heard from many companies of let me say kind of mid-sized companies or small public companies, that this is really a troublesome issue for them, and I certainly urge people with that view to make it known. But it’s not a torch that I’m well able to carry.

In my own case, I said Sarbanes-Oxley. I was kind of teasing around, but it’s the new disclosure requirements. If I get an Xbox 360 from the company, that’s income to me. And it’s income that’s got to be separately disclosed, and our audit committee just decided that all of this little stuff wasn’t worth going through the disclosure process for, so go buy ’em on your own.

(Laughter.)

MR. BALLMER: Not — you can afford it. You certainly can afford an Xbox 360. Go buy ’em on your own. And why don’t we have our Xbox 360s yet? Because basically — it’s going to sound goofy, but it meant sending somebody to Best Buy to buy on behalf of our whole executives and having our executives pay them back just so we could not have this be income that would — our audit committee would have a problem showing on our — in our financial disclosures.

MR. LEE: Okay. We have time for one more question. Yes?

QUESTION: I am working for a company which provides mobile device, text message based on the web search service. I believe it’s going to be a pretty good extension of your Live.com strategy. My question is, you know, there’s a lot of news talk about local and MSN for AOL acquisition or whatever, you know — can you make a few comments about, you know, this partnership or relationship with AOL with your Live.com.

MR. BALLMER: I can give you just the most unqualified no comment I’ve ever given about the deal. I don’t care how friendly the room is. I’m going to give you an unqualified no comment about anything with AOL.

Let me comment about online advertising, though, and its importance to Microsoft, because I think that’s probably more important to understand and then, you know, whatever we do is whatever we do.

We have today a business that’s closing in on $2 billion of ad revenue. Now $2 billion makes us, you know, about roughly 15 percent of the online ad market worldwide. So we are a significant player. We are smaller than Google and Yahoo, but we are the number three player in the online ad market, and that’s a lot of money. You know, anything north of a billion dollars certainly registers with me, with our shareholders, et cetera. But of course, we’re a $40 billion company, so it’s a much smaller percentage of our revenue than it is some other guy’s in the business.

But if you ask particularly for our consumer facing businesses what will be the most rapidly growing revenue stream at Microsoft, it’s absolutely going to be advertising. So we’re very focused in on what it means to do a better job in display advertising, what it means to do a better job in paid listings and sponsored search advertising. We’re asking how will advertising fit in the context not only of MSN, but does it fit in the context of Windows Live, does it fit in the context of Office Live? How do we let third-party developers use our engine to support their own advertising-funded sites? So online advertising is of keen interest to us, and I have absolutely nothing to say about the AOL deal.

(Laughter.)

MR. BALLMER: Or non-deal.

(Laughter.)

MR. BALLMER: Read the Journal. The Journal speaks all on this topic.

MR. LEE: Great comments. Thank you.

MR. BALLMER: Or the Post. Take your pick.

MR. LEE: Steve, thank you very much. We appreciate your time.

MR. BALLMER: Thank you, everybody.

(Applause.)

(End.)