Steve Ballmer: Microsoft Advertising Day

Remarks by Microsoft CEO Steve Ballmer
Brazil
October 12, 2008

MODERATOR: Ladies and gentlemen, Mr. Steve Ballmer. (Applause.)

STEVE BALLMER: Well, thanks. I’m very honored to have a chance to be here with you today. I thought I’d share a few thoughts, hopefully mostly things that are on your mind and that you’re very interested in, maybe a little bit of a bit of the future, and I’ll try to both answer some questions about the future and maybe I’ll try to raise some questions that I don’t try to answer but we all get a chance to speculate about. The technology stuff I always try to answer completely. The business models of the future are actually much harder to address.

So, it is a pleasure to have a chance to be with you. I just arrived an hour or two ago, and I think I’m fresh, but I’ll let you be the gauge as we get into it.

Let me start with kind of a fundamental context, which really revolves around the central notion that increasingly everything that can be digitized in the world will be. Every piece of information, every piece of content, every piece of communication, every transaction, everything that can be digitized in the world will be.

And in a sense you could say this has been the story for the last 10 or 12 years from our company and from our industry, and yet we really in some senses haven’t come very far. Even with the dot-com bubble and the dot-com bust, if you will, we still aren’t to a point today where all commerce is e-commerce. The amount of paper you see in offices, the number of paper transactions that still go on is really very, very high. People do still read magazines, they do read newspapers, they do watch television. And yet I’m really saying that I think within the next 10 years all of these things really will move to be digital.

This is a piece of paper. You might say that’s not all that earth-shattering. But within 10 years we will literally have digital screens that are this light, this flexible, that will have access to all of the world’s content and information.

So, the notion that whether it’s for what we think of today as reading a book or a newspaper or consuming video content of the world or having a videoconference or anything else, these things will all move to be digital.

The PC will play a central role. The PC, for purposes of definition, is the thing that’s got a big screen, but you still sit close enough to really control it. A TV has a bigger screen and you sit farther away from it, and you can sort of control it, maybe with your voice even by that time. And the phone is the thing that you sit really close to that’s got a littler screen and that you’re still happy and comfortable keeping in your pocket.

Technologically the difference between PCs, phones, TVs will be smaller not bigger. They’ll all be fed, if you will, with content that comes in across the Internet.

And consumers will expect one world of information, one world of communication that’s just kind of out there and available to them. They won’t say, oh my, I’m on my telephone; that means I have to reach somebody via this kind of communication or the other. They’ll expect to have one list of friends and contacts. They’ll expect to train their digital devices to recognize and understand them one time and one time alone.

One of the scenarios I like to describe for our people is sometime in the next 10 years I’ll be sitting in front of the TV screen at my house watching golf, my favorite sport, and I’ll be seeing Tiger Woods, he’ll make a putt, and I’ll say to my TV set, “Hey, Bill, did you see Tiger make that putt?” And my TV will be well trained. It will have smart software in there. It will recognize my voice, Bill, he said Bill. Hmm, when Steve says Bill, who does he usually mean? (Laughter.) Bill Gates, Bill Gates. Ah, where is Bill Gates in the world? Hmm, Bill is, of course, I don’t know, in front of his PC at his beach house watching, I don’t know, physics lectures or something. (Laughter.) Bill and I have different hobbies; we always have. Bill actually does love that Feynman physics lecture series, but anyway.

And all of a sudden Bill will get a notification, ah, it’s Steve. Of course, I’m always interruptible by Steve. And he’ll hear my voice, “Hey, Bill, did you see Tiger make that putt?” And Bill will say, “No,” but he’ll click and immediately it will take him to exactly what I was watching when I made that comment.

Bill will say, “Hmm, wish we could be as good as Tiger, Steve. What golf ball is he using these days?” And I’ll take my remote, I’ll point with the pointer at the TV screen, the ball will be recognized, somebody will do an image search with maybe Microsoft search, will do an image search for you on this golf ball across the Web, and I’ll get back a notice that says, ah, that’s the new Nike Elite. We found them for you for $2.50 a golf ball. Would you like to order a box? And, of course, I’ll say, no, two, one for my friend Bill; he also needs some.

You say, okay, is that farfetched? That’s not farfetched. We have those kinds of interactive technologies. Voice, speech, natural language is getting better. Image search and video search and image recognition technologies are getting better and better. And all of the world’s information will be in some senses electronically interacted with and electronically delivered, because, of course, that TV connection will be over some kind of IP-based technology in the future.

So, bringing the people, the technology together, PC, phone, eventually TV and Web is a sort of essential vision for our company and for our industry over this next few year period of time.

In this world we really see three things coming together almost indistinguishably: content, community, and commerce. And it turns out that you probably won’t be able to tell perfectly what is content, what is commercial material, and what is community as we move forward.

Content will certainly get richer as radio, books, Internet, TV, newspapers all go online. I challenge you: I do not believe 10 years from now people will know the difference between a magazine, a newspaper, and a TV show. I just don’t think most people will really know the difference.

I find this — you could say I live in a leading edge world, but I get interviewed by a lot of technology journalists. They used to come with their notebooks, and if they were from a newspaper they had one deadline, if they were from a magazine they had another deadline. Of course, they didn’t do TV; it just wasn’t that exciting.

Now a tech journalist comes and he’s got two recorders, a video camera, and he’s telling you — or she’s telling you, I’ve got to take the pictures, do the video, post everything, and, of course, I want to do a long form that I’ll post in two and a half days, and I want to do a short form that I have to post 15 minutes after I walk out of here.

Is that person a print journalist, magazine, newspaper, video journalist? Who knows? Those concepts are really collapsing. So, content is changing.

Community is also changing. We used to think just about things like mail and messenger. Now we have RSS feeds, blogs, wikis, social networks, ratings, reviews. Essentially we live in a world where increasingly individual end users themselves become content publishers.

What percentage of the world’s content will essentially be created by the community if you go out 10 years? I think the answer is potentially quite high. There may not be hit shows that come from the community or there may be some, but if you take all of the time people spend consuming information, a much higher percentage of it will be spent in the so-called tail content that gets created by the community.

Think about the time even today that some of us spend on Facebook. That’s all time I would have spent consuming information. There’s six Steve Ballmers, by the way, and I’ll give you extra credit if you can figure out which one is me. So, it’s not a perfect system yet. But that’s time that would have been spent in traditional content.

I have a 9-year old son who plays football, and after each Saturday’s game they take the video from the game and they post it up on the Web. And, of course, what do I sit there and do on Saturday nights? I watch it. All of that is time that might have been spent in other forms of content.

You get interactions between community and content increasingly over time. People want to vote, people want to rate, people want to comment. Almost all now online sites have a place for community to build up and comment around the content that is being created.

And then there’s commerce. Commerce also will change. Start with advertising. When I click in my little example and point at that golf ball and do an image search, that’s commerce. It’s commerce essentially woven into the content and community experience.

More and more users are telling all of us that for some reason in the online world their expectations on commerce and advertising and commercial interaction is very different than it was offline. People hate popup ads, and yet people accept popup TV commercials, many, many minutes, if you will, per hour.

My own favorite example, my favorite TV show is called Lost, and Lost is a series once a week, I watch it, 16 minutes of commercials for 44 minutes of content, and I’m perfectly happy.

I missed once about two years ago and I started watching online. Online you get two minutes of commercials for 44 minutes of content, and, of course, I’m annoyed by the two minutes of commercials online, whereas the 16 minutes of commercials never seemed to bother me in the offline format.

So, there’s a certain kind of movement as content, community, commerce and interactivity come together. There may be a new set of expectations in terms of what people are really looking for and expecting.

Even if you look at online advertising today, online advertising today really splits out into four big categories. Category number one is search — I’ll talk a little bit more about that later — but that’s about 50 percent of online advertising. And in the case of search I think it’s fair to say the ads are actually viewed as helping the content, they don’t hurt the content in the users’ minds.

There’s some big online sites that are almost like community and content sites. That’s where I would put MSN or Yahoo!, Facebook, MySpace, many of the newspapers. That’s probably another roughly 25 percent of all online advertising. And yet everybody is quick to point out that those businesses are smaller in some senses relative to viewership and minutes, they’re smaller in the online world than they ever were in the offline world, and the question is, how does that change over time?

There’s a whole bunch of advertising on very small sites, probably not enough to keep professional content producers alive, and most of that is contextual advertising through things like AdSense from Google. It’s an interesting one. I think that that will never be a big part of the content sphere.

And lastly there’s kind of everything else, and there’s a bunch of everything else out there, but that’s maybe only 10 or 15 percent.

What’s the lesson? The lesson is we all have to learn how to make commercial activities relevant in the content and community that people expect online as we go forward, relevant and valuable.

Here’s the question I’ll ask you that I don’t have an answer for, but that question is, do we expect in the future people in their daily lives will see more total advertising impressions or fewer total advertising impressions? I can actually make both cases. I can make the case that online you’ll see far more impressions, and the business will be every bit as big. I can also make the case that you’ll see fewer impressions. Each impression will have to be more relevant. It will command a higher CPM, and it will put a higher burden on both the advertiser and the content producer to make sure that those things are highly relevant.

That’s a question I promised I would ask and I won’t answer, because I think we’re building the technology to support both, and yet it will be interesting to see what all of the world’s content producers and advertisers and consumers will accept.

What that all means though I’m quite sure as we move to online is there’s a shift in marketing and the focus has to be on relevance, more and more relevant advertising, deliver the right ad to the right person. Make that ad completely a rich and immersive experience. Passive, non-relevant sort of old style display advertising is going to get tougher and tougher. Draw the consumer in. You’ve got to be able to advertise brand and build brand in this world, not just drive somebody, if you will, to finish a transaction.

Even today I think people tend to overvalue the direct response aspects of Internet advertising, particularly search. We’ve done a whole bunch of studies now with a whole bunch of advertisers, and what we find is advertisers tend to think that the last search justifies most of the marketing benefit of driving somebody to their site. So, if you have somebody who maybe sees three or four display ads, two or three TV ads, and then they finally want to navigate to your Web site and they forget the URL, so they just type your brand name in, what really did the work? What really should get the credit in your marketing mix?

Well, I would tell you it’s that whole series of activities, not just the last search that you run, but it puts even more premium then on companies like ours and others offering you great tools across your media mix to measure the ads that you place, to target them correctly, and, if you will, to value the engagement you get from various different sources.

In order for this world to really develop fully, it puts a lot of premium on the development of a new sort of piece of software that runs out on the Internet that we just generically refer to as a marketing platform. The marketing platform has to know a lot about users and what they’re interested in. Its got to have a lot of sophisticated algorithms that help map advertisers to the consumers who would be interested in what they have to say. It knows a lot about publishers and what the demographics are and interests of their user base, so it can put together messages, advertisers, users and publishers in exactly the right way with a bunch of very smart algorithms.

Its got to let you buy what you want to buy. Today, you tend to buy placement based on demographics. Tomorrow you might want to buy behavior based upon people’s interests.

For example, if the software that runs up in the Internet knows that there is a person named Michel Levy in this — well, maybe don’t even know his name. We just know that there’s a cookie that happens to be Michel Levy wandering around the Internet, and this guy Michel Levy seven times in the last two weeks has visited BMW.com, seven times this guy has visited BMW.com. Do you think you want to show him an ad for detergent or maybe you want to show him an ad for BMW, or maybe even more so somebody wants to bid to show him an ad for Mercedes before he finally completes that transaction.

And it doesn’t matter where he visits, what he does; you probably want to get the same ad in front of Michel, whether he’s watching a football match, a soap opera, reading the financial news or taking a look at, I don’t know, the community Web site that his child is involved in. He wants to probably be hit with the same message. So, really getting the software built that enables buyers and sellers of impressions to come together is very important.

There’s a whole lot of technology that it’s going to take in order for this to happen. There are the tools for advertisers and publishers. We made a major investment with our acquisition of aQuantive, tools for agencies to come together here.

For the publishers, the people who have audience and who want to describe here are our users, here’s what they’re looking at, here’s what their apparent interests are; how does a publisher describe their user base, how does an advertiser express their interest, and how does the software help make these two things and let you buy the audience you want to buy at exactly the right price becomes increasingly important. And across our product set from tools like Atlas, networks like Drive, our adCenter and the rest of our advertising technologies, and our search investment, we bring this stuff together.

Today, we think about search and display ads on the Internet, but as I’ve talked about, we see those things coming together, and so we’ve made investments, acquiring companies with technologies in mobile, video on-demand, IPTV and interactive advertising for today’s television experience, and you can see here at the bottom a number of the companies and technologies that we have built and that we’re going after.

One of the things I’m most excited about is doing interactive advertising in the interactive television experience. Today, we have almost 2 million subscribers using TV services delivered by companies like Deutsche Telekom, by AT&T, interactive TV services on which we can now do targeted interactive ad delivery just as we would on the Internet, and that will be an important part of how we move this all forward.

Why Microsoft? I think we have a lot of the right tools, some of the most important properties to really engage in this dialogue with you, and help you really achieve the objectives for your clients and your brands online.

We start with a large online audience. Nearly three-quarters of all Brazilian users, for example, use the MSN Messenger product.

We have tools that span both work and home, which I think is very important. Thirty to 40 percent of Internet consumption actually happens at work, and being able to target people in the right way, in a way that is respectful to their work environment but also delivers the right message at the right time is important.

Search is a key aspect. Search is not an area, of course, where we’re very strong today, but we’ve made a major investment. These are software-based innovations.

I don’t begin to believe that search is going to look the same 10 years from now as it looks today.

Just think about search today. The average search in English is 2.2 words — 2.2 words. Isn’t that silly? We know that search engines are so dumb that if you tell them more, they actually give you worse results. Ten years from now, we hope we’ll actually have smart semantic search engines that actually can find what you’re looking for based upon what you describe.

The user interface for search hasn’t changed in basically eight, nine years. You get 10 blue links and a few ads. You don’t really get at the action if you’re trying to, I don’t know, plan a trip to Brazil, which I did this with my wife about a year ago. We were in Bahia on vacation in April. So, what do you do? Well, you look for resorts in Brazil. From the 10 blue links to actually planning that trip there’s a big gap in what the search engines do for us.

So, the search engines need to become more task aware, they need to figure out what you’re trying to do, they need to lead you to the sites that are going to let you complete the action, often the commercial action that you’re interested in.

So, I think there’s a lot of innovation, and we’ll get a chance to prove it as the number two player in the market, trying harder, so to speak.

Then, of course, all of this takes scale. Nothing in this realm, this big marketing platform in the sky, there’s only a couple companies in the world that will build those: Microsoft, Google, perhaps still Yahoo! — we’ll have to wait and see what’s really going on in this kind of economic difficulty. I don’t know, we might expect to see a lot of players’ strategies change, because there’s nothing simple, straightforward, short term. These are big, tough problems that are going to require serious R&D investments and capital investments. Microsoft both as a software company, as an innovator in properties for software audiences from search to community to commerce, and as a provider of audience and tools for advertisers to buy and find the best place to spend your money, whether it’s on Microsoft sites or on other sites on the Internet, we’re very, very committed to being leaders in this quest.

With that, I want to end my formal remarks. I keep getting a sign that goes up with the number of minutes. The last time I looked it was at about three. So, I’m either early or not. But I want to say I thank you for your formal time. I’ll look forward to the Q&A. If there is something that is on your mind that we don’t get to today, I’m SteveB@microsoft.com. Please feel free to shoot me a piece of e-mail or, of course, anybody at our team here in Brazil. We’re all glad to help. Thanks very much. (Applause.)

MODERATOR: Thank you very much, Steve. You’ve covered nearly all of my questions, so we might just chat a little bit.

How is it for you to follow on Bill Gates’s steps this year? What’s your feelings?

STEVE BALLMER: Well, Bill and I worked together for 28 years. So, I guess I have sort of two different feelings, three. Number one, the company is in very good shape. The ultimate proof that the company is in very good shape is that Bill Gates felt comfortable leaving now. (Laughter.) No, I mean, you could laugh but you say, hey, nobody sort of abandons their child before they’re ready to go off into the world by themselves. And the fact that now was the time Bill said, hey, I can transition to not be full time at Microsoft I think says the company is healthy.

Number two, I think in a day-to-day sense there was probably more — Bill’s day-to-day impact was probably not as big as most people gave him credit for, because we have very many smart people. On the other hand, day-to-day it’s also fair for me to say that Bill is as brilliant a person as I’ve ever worked with or known in my life. So, the company will miss his contribution, but the company will, as I said, I think be fine.

For me personally it’s a big change. It’s probably a bigger change for me personally — me and Bill personally than it is for anybody else. For Bill he has to get used to not being at Microsoft every day. For me I have to get used to not having my sort of regular partner in raising this child, who I’ve been with for 28 years. I don’t have Bill day-to-day. I see him once a month for lunch, we see each other socially, we’re at various board activities, but it’s not quite the same. And while we have great folks who I love working with, I’d say I miss a little bit of that human interaction.

MODERATOR: Well, even though you have spent your time here telling everybody this brilliant presentation about Microsoft’s ad strategy, Microsoft is pretty much a software company. Do you actually get over the Vista stuff, the Vista nightmare or the Vista whatever you call it? What is the impact of that on Microsoft’s morale and how do you get over it?

STEVE BALLMER: Vista is our best selling product ever. So, if that takes too much getting over — we’re not going to have products that are much more successful than Vista has been. We sold over 180 million copies in the first 18 months, quite successful.

Now, with that said, there’s no doubt that with Vista we made some decisions to be more different from Windows XP than less different. We made those decisions to try to improve the overall security level of Windows. We succeeded. Statistically Vista is the most secure version of Windows we have ever released.

And yet certainly there was —

MODERATOR: There was a price to that.

STEVE BALLMER: — a level of discomfort. People wish — many people said, hey, look, I’m not sure the value of extra security is justified by the sort of discomfort of incompatibility.

We’re largely through that now as the drivers, the applications have really all been ported over to Vista.

With 20/20 hindsight we made a big decision. I still think we made the right decision, because I think in the long run people will care about security, but it was certainly not a simple or pain free decision.

MODERATOR: Right. And when you think of Microsoft 10 years from now, what kind of company do you see? What kind of businesses will you be most involved in?

STEVE BALLMER: Well, I’ll say the software business, but you might interpret that narrowly, and through my speech and everything else I’ll say I encourage you to interpret that quite broadly.

Let me ask what business will all the people in this room be in? I say we’ll all be in the software business to some degree. Every ad, by my prediction, every ad is going to be delivered digitally. All ads will be these sort of mini interactive digital creations that are able to be relevant and interesting and engaging to the consumer. So, we’ll all be in the software business, by my definition.

And so the question is, what’s the distinction? I think we will be earning our money writing bigger, broader, more complicated software that others use as tools. That will certainly be part of our differentiation.

And software will be valued or charged for in many ways. Today, some software you pay for directly, some software today you pay for as part of a piece of hardware when you buy a phone, for example, or a PC; the software that runs it is kind of built into its price. Tomorrow, more and more people will subscribe to software or people will pay for software as part of something else they do. When people buy advertising today on Google, you’re basically paying for software. I know you’re buying advertising, and that works very effectively, but what you’re really doing is you’re paying for a mass of software development effectively through the guise of advertising.

So, when we look at our company 10 years from now, we’ll have all of those business models.

This year we’ll sell over $3 billion of advertising. That makes us about the eighth largest seller of advertising amongst all U.S. companies. So, we’re right up there, major advertising company, at least in the U.S. That’s a very significant number. And I think in most countries where we do business we will be a major seller of advertising, even though I don’t think anybody will think of us per se as a content company.

MODERATOR: Well, if you look at Microsoft’s history, it seems to me it has been driven by a series of enemies or rivals, whatever you call them. First was Apple, then came, I don’t know, IBM, whatever, and then was Netscape and then Linux. Well, then Google or the Mac or Apple again. What is the largest rival today? Who are you fighting against?

STEVE BALLMER: Well, I would say the number one thing I think that looms for us on the competitive front is competing with people with different business models than we have, and the question for us is, do we embrace their business model or do we compete differently.

Apple has 3 percent of the world’s PC market. I never want it to reach 4. That would be a goal, you could say, from a Microsoft perspective. But I don’t want to build PCs. And there’s a certain elegance Apple gets by building the hardware and the software and everything else. And I don’t want to embrace their business model, but what it would mean is we have to work as effectively with the HPs, the Dells, the Positivos of the world to have an elegant experience that at the same time provides all of the freedom and flexibility and choice that today’s PC model provides.

So, it’s a business model competition, if you will. Apple is an emblem, but I can give you other emblems of the same competition.

We compete with software that is, quote, free. It’s developed by volunteers. That’s a different business model. We can’t offer our software for free. It doesn’t work, at least not if we want to pay for Prada to be served in our paper nice office buildings. So, in that case we say, hey, we can’t embrace that business model, but we have to make sure we can compete well with our own business model.

In the case of advertising funded software, we’ve said we have to embrace that business model. We have to be the best in the world at using software to deliver advertising, that was the center of my speech, if you will.

MODERATOR: You didn’t mention Google.

STEVE BALLMER: Well, I think most people would say, hmm, who else is good at software funded by advertising? Ah, Google. So, every one of the things I say, if you want to, you can write down, well, he was talking about Linux, he was talking about Apple, he was talking about Google, but there’s parts of Microsoft that would tell you Oracle is our biggest competitor, the guys who work on Xbox sure think that the biggest competitor is PlayStation, so on and so forth.

MODERATOR: Well, okay, but let me just insist a little bit on the subject. How are you going to tackle Search? Because in the previous presentation Bruce made a brilliant announcement of a strategy based on engagement, advertising and so on that should be better in Search and et cetera. Well, do you think you’re going to convince the market, which is today really tacked to Google’s strategy, which drives nearly 50 or 60 percent of the market?

STEVE BALLMER: I don’t think anybody — actually I’ll be honest, I don’t think anybody really cares much about Google’s strategy or Microsoft’s strategy. I think if you really ask most advertisers down deep, they’ll say, interesting what your strategy is, but who can deliver the right audience to me today in the right format for me to drive some business for my company or for my client. That’s what I think. There are some heads nodding, so at least a couple people might agree.

So, our question has got to be, how do we go get that done, and we’re going to try to educate a little bit. That’s what the engagement mapping stuff does.

But, look, we need to have a search product that has a lot of users. We know if we have a search product that has a lot of users, we’ll have a lot of advertisers. If we don’t have a search product that has a lot of users, we’re not going to have very many advertisers on it.

The one small advantage Google has, because they’re already ahead, is given that ads are part of the search product, the more ads you have the better your search results are, and that’s a problem we have to kind of solve on our own.

But I think there are three elements to how we go get a lot of users. It all starts with we’ve got to have a better offering. We can have a better offering in three ways. We have to improve our core relevance. We can’t let Google give you more — if you want to, I don’t know, look for — if you’re sitting in Sao Paolo and you want to look for vacations in Seattle, we’d better give you the most relevant —

MODERATOR: Maybe in Bahia.

STEVE BALLMER: Maybe in Bahia. Maybe in Bahia. I can tell you the best golf course myself without a search engine.

But maybe we can give you — we have to give you the best results, that’s number one. And that’s going to be hard. Google is good at it, but they’re invincible. And we have very smart guys and they have very smart guys.

The second thing is, as I said, a lot of things will change in the search experience. Google certainly doesn’t really want to change the search experience. Google has their page very tuned to make the maximum amount of money per page, click-through rates. They’re working so hard just to make sure. They don’t want to have too few ads, they don’t want to have too many ads, they don’t want the wrong ads, they don’t want to have too good links. They really want you to click on their ads in exactly the right way.

We’re far more willing to experiment with tools to help the end user, even if it doesn’t mean an early click on an ad. So, you see us in our news search, our image search taking steps to get ahead.

And then last but not least, we believe the whole user experience, as I said, needs to be morphed and changed, and the business experience. We started testing a thing in the U.S. that we call Live Cashback where we take a certain percentage of all the money that every advertiser spends with us —

MODERATOR: And give rebates.

STEVE BALLMER: — and we put it back into a fund that they can use to create loyalty program and extra points or money, if you will, for Microsoft’s best customers and our advertisers’ best customers. That makes sense for us to do because we don’t make much money. It’s harder for Google to do without taking that money essentially away from their shareholders.

So, we’re going to explore, we’re going to move forward, and I know the more users we have the more advertisers we’ll get, and we’re going to be patient.

MODERATOR: So, you’re the underdog.

STEVE BALLMER: We’re absolutely the underdog. We are David to Google’s Goliath. (Laughter.)

MODERATOR: Okay. I was doing my homework yesterday, and I have discovered some interesting numbers. We have here in Brazil 25 million Internet users, and about 16 million people who use video. It seems to me that the greatest barrier to video in Brazil over the Internet is broadband. Broadband is a huge barrier that people still have slow connections and so on. What are your plans for fostering broadband? Are you doing something here in Brazil concerning that?

STEVE BALLMER: Yeah. Let me give you a little bit uninformed but really in some ways a well informed perspective. There are two ways to get broadband in this world. One is from a fixed line provider and one is from a mobile provider. And I actually think that there is increased competition and opportunities for broadband from both sources.

I have recently spent time with the leaders of 10 of the 12 largest mobile companies in the world, and they’re all super enthusiastic about mobile broadband data, not just the phones but with cards, mobile broadband data to PCs, and I think that with the competition you’ll see from 3g networks, 4g networks, from the mobile guys, plus the work that you see out of, what do you call it, Telesp, Telemar, the fixed line operators. I actually think that the range of options and price points for broadband video in this country is going to explode over the course of the next few years, and explode at actually somewhat reasonable prices. I have sort of good confidence in that. I’ve spent a lot of time particularly with the Telefonica guys, I’ve spent a lot of time with the guys from American Movilis, I’ve spent a lot of time with the guys from a number of other companies, and I’m sure that the competition between mobile and fixed here will help a lot.

MODERATOR: Will cover the gap, yeah.

Well, you told me you were a fan of Lost, and I’m a huge fan of Jerry Seinfeld. Could you please explain to me that commercial? (Laughter.) I still couldn’t understand that. I don’t know if you guys have seen the commercial.

STEVE BALLMER: How many people have seen the Bill Gates, Jerry Seinfeld ads? Okay. How many people come from the creative side of the house versus the media and business side? Do we have any creative sides? Okay, good. Good, some, that’s excellent.

Well, let me describe in this context our discussion with our agency.

MODERATOR: Okay. (Laughter.)

STEVE BALLMER: We say, hey — well, somebody might think it’s interesting. I don’t know, we’re spending a lot of money, so it’s a good size account story.

So, we say, hey, look, we really want to get back out and tell the story, romance the story of the PC, the Windows PC, what it does, what it means, where it’s going. Here’s why we think Windows is so different, so many more choices, more applications, more this, more that, more everything. C’mon, let’s go do an ad and tell the story.

And the agency says, no. (Laughter.) Let us learn a little bit more first. Okay, all right, all right, all right.

I’m an impatient guy myself, so they did some research and then come back and said, here’s the good news and the bad news. The good news is the market agrees with you. Windows offers more options, lower price points, more this, more that, but they’re not interested in hearing it from you. They think you’re kind of a big, unapproachable company, blah, blah, blah. We have to come into their living rooms and prove that we’re their friends first. (Laughter.) Okay, all right, okay.

Now, this is not natural Steve Ballmer stuff, but some of you may resonate with this.

Then I’m out of the process, all right? Our ad people are running it. The next thing I know I get a mail that says — from Bill Gates that says, they want me to be in an ad with Jerry Seinfeld; do you approve this? (Laughter.) And I say I don’t know anything about it, but trust them, we think these guys are a really good agency.

So, we run an ad for two weeks. It was always the plan, two weeks, and it was just designed to change the conversation and change kind of — to sort of open a different kind of a dialogue with the consumer before we started hammering away with all of the rest of the story and the message about Windows.

At least by all research we succeeded. That is, the consumers saw the ads as kind of friendly, humorous, not very typical of Microsoft. The viewership of those ads are perhaps some of the best of any ads in the world. They’re still being viewed off the Internet. I mean, we have the whole batch of them, and the number of downloads off that thing is unbelievable.

I did note with interest, you don’t live in a country where we ran the ads, but we had a lot of people certainly in the advertising business who saw them. You had made a point of seeing them. You’re talking about them. I think a lot of people in the ad business would say that was successful.

Now, there’s one other guy who actually has to evaluate what it does to his image. That’s Jerry Seinfeld. (Laughter.) Well, no, no, you can’t pay Jerry Seinfeld enough money to appear in an ad, because most of his money is from reruns on old TV programs. So, he has to maintain his image carefully. And he thinks it even helped his image. (Laughter.) Well, that’s actually an interesting thing, because it’s consistent with being approachable.

So, we ran the ads for two weeks. We didn’t run them and then pull them, because people hated them. We always had a plan to run them for two weeks, which we did, and then we launched the campaign that does more of really telling the story of the PC.

MODERATOR: And what about the “I am a PC” campaign, which goes to the enemy’s territory?

STEVE BALLMER: Well, it goes to our territory, in fact.

MODERATOR: Oh, does it?

STEVE BALLMER: Oh, sure. You’ve got to remember, Windows has 97 percent, Mac has got 3. So, yes, what’s the definition of a PC? It used to be a PC was any computer. Now what’s a PC? It’s a Windows computer. So, Apple may have helped slightly on that definition, in which case I’m very happy. (Laughter.) And I think that’s a campaign that again so far the initial testing and measurement says it’s a campaign that really is resonating well with our audience.

MODERATOR: Can we just go to the Web site and send our messages?

STEVE BALLMER: You can. You can do your own. I’m a PC, and it will be the best ones will all show up on our Web site. I’m a PC. I’m going to film one. I’m a PC and I’m darn proud of it. (Laughter, applause.)

MODERATOR: Okay. Let’s just change subject a little bit. You have an investment in Facebook, which is a social network, and you also have MSN, which is a huge success in Brazil. Do you have plans to integrate both services or to bring apps into Facebook? What is your vision for that?

STEVE BALLMER: Well, we’ve done a lot of that already. I think last week or two weeks ago we launched Web search as part of Facebook. So, if you go to Facebook now and do Web search, you get to the Microsoft search engine. We’ve announced that we’re doing some work so that you get interoperability between the social graphs and friends lists, contact lists on Messenger and on Facebook. So, there’s actually quite a lot of work we’re doing on interoperability already between Facebook and MSN.

The other thing which frankly we’re doing is using some of the same back-end sales technologies to try to make it easier for an advertiser to buy audience on MSN and Facebook with one set of tools and evaluation criteria.

MODERATOR: And where is that going to be available or is it already?

STEVE BALLMER: Well, the search stuff is already integrated into Facebook. That’s live. You’ll see more search stuff integrated.

I think the Messenger stuff is still in process, but I’d need to check.

MODERATOR: There is another issue which is interesting. I have installed yesterday on my computer Silverlight that you call it. What are your plans for that? Do you intend to make it better than Flash and get in that arena as well?

STEVE BALLMER: Yeah, I would tell you that the Silverlight technology today is as good or better than Flash. I would say that today. That doesn’t mean it’s as popular yet as Flash.

But for those of you — well, that didn’t work this way. We took the Olympics, the Olympics from NBC, which they did block outside the U.S., just the way the video rights get purchased, we did do all the online video for all the events at the Olympics were all done on Silverlight. It was sort of the biggest test ever. And I think it was just a phenomenal success in terms of what you could get for HD video viewing of any Olympic event, et cetera.

So, I think we’ve got a very mature, even if we’re only in our second release, we have a very mature technology, we’ve got very good development tools, and yet we know we probably have a ways to go before we get most of the creative work that your agencies are doing moved off of Flash and onto Silverlight.

MODERATOR: When you look at different platforms like mobile, interactive TV or even Xbox, which is an ad platform as well, how do you see that integration and how large will each of these markets be? Do you see that as a single ad market? What’s your vision for that?

STEVE BALLMER: I think there will be niches, and yet I think you have to think of these things over time as a single ad market. Advertisers will not have the ability to micro-target various content types. People will look to have the ability to build content once and have it show up in more places than not. If something gets very popular, people will do special purpose content for it, but in general we need to work hard to try to get let me say maximum repurpose-ability out of any ad content that somebody develops.

So, you say Xbox, I say we’re moving it to also be Silverlight based in terms of delivery, the IPTV stuff. We’re trying to bring these concepts together, so there are fewer and fewer concepts that creatives and advertisers need to know in order to put together content that works in various places.

Now, with that said, we do in-game advertising, for example, in our auto racing games, and the ad that changes the sign of the bulletin board in New York City when you’re driving around playing our racing game, that’s a special purpose piece of content that people will have to write based upon being excited about that specific consumer experience.

MODERATOR: But do you see Microsoft as a company that will act as an agency selling the audience or as a company that will sell the software for other people to drive the audience?

STEVE BALLMER: Well, I see us building a platform that advertisers will be able to use and people who want to serve themselves can use. It’s just as probably instructive to look at Google today. Is Google an agency? Some people would say —

MODERATOR: In some ways yes.

STEVE BALLMER: — and some people would say no. For big advertisers there’s always an agency in between, and I think in our case we anticipate strong partnerships with agencies who want to use our software platform in the sky.

For small advertisers, the plumber who wants to advertise just to be available —

MODERATOR: The pizza joint.

STEVE BALLMER: The pizza joint, the plumber. My guess is that person needs to have a way to self-serve for their advertising in a way that’s very different from the folks that use larger agencies.

MODERATOR: Okay. So, let me get out of advertising because it’s kind of a boring subject to the audience as well. (Laughter.)

STEVE BALLMER: I hope not.

MODERATOR: Oh, no, no.

Tell me about Bahia and about Brazil. Do you enjoy a holiday here?

STEVE BALLMER: I did. Well, yeah, I did very, very much, in fact. I came with my wife, my three sons, and my sister, and we were four or five days — is it Praia de Forte is the resort where we spent time, and then we went to the Amazon and then to Peru to Machu Picchu.

MODERATOR: How do you see the Amazon preservation stuff? Are you involved in the environment or green issues?

STEVE BALLMER: I’m super keen on green issues. I think it’s one of these things where unless you’re an expert, you probably should be shy about having opinions. When you see people who don’t have much money who need to live off the land and know what it takes for them to live off the land, you have to say, hmm, there’s a more complex problem here than just what is right and what’s not right.

In many other parts of the world the world has been deforested, and just because now people are trying to deforest their land in a time when we understand the consequences, we have to remember that’s how many people have sort of come out of poverty is by using their land well.

So, I think there’s probably a far more complex discussion than you get in the average newspaper about how we should think about it. There are environmental issues, but there are real social issues as well, and I hope smart people primarily here in Brazil are balancing those as well.

MODERATOR: Are you an optimist about it, about the new energy, about the way the U.S. is driving that?

STEVE BALLMER: I’m super optimistic about energy and — (laughter) — well, no, but I’ve got to say it’s because of my — look, at the end of the day the world will use more electricity — or sorry, will use more energy than it uses today. We all want the world to use more energy, not that rich people shouldn’t conserve more, but the fact of the matter is about half the world’s population doesn’t consume any energy, and when we talk about helping people emerge from poverty, we’re actually talking about giving people access to energy.

So, what’s the answer? I think the answer lies in science. We need more and better science, energy science, environmental science. I actually think information technology is speeding the pace of scientific exploration and scientific development today like never before. What you can do to model a molecule, to do genomics, to do petrochemical research, it’s not like anything, even when I started at Microsoft 30 years ago; it’s so different, and it make me hopeful that we’ll have the tools to allow scientists to develop clean and proper energy, which will let all the world’s people, rich and poor, have a certain and appropriate access to energy.

MODERATOR: Okay, people right there are telling me the time is up. I’d like to thank you very, very much. It was an honor to have this chat with you. I’m really flattered. Thanks very much, Steve.

STEVE BALLMER: Thank you. Thank you all. Thank you all for your business. We appreciate it. Thanks. (Applause.)

END

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