Microsoft and Cisco: Collaborating for the Future of Technology

Steve Ballmer, CEO, Microsoft Corporation
John Chambers, Chairman and CEO, Cisco Systems
Bob Muglia, Senior Vice President, Server and Tools Business, Microsoft Corporation
Charlie Giancarlo, Executive Vice President and Chief Development Officer, Cisco Systems
Charlie Rose, Moderator
New York, Aug. 20, 2007

ANNOUNCER: Ladies and gentlemen, please welcome executive producer and host of the Charlie Rose Show, Mr. Charlie Rose. (Applause.)

CHARLIE ROSE: Thank you. Thank you. Can you hear me? All right.

When I got this call not a week or two ago, said, would you like to do this, it was irresistible to me, because I’ve known these guys for a while. But also I’ve been focusing on a lot of other things, and it gave me a chance to get up to date on what was going on in technology.

And what we’re going to do this morning is have a conversation with them for about 45 minutes, Q&A here, and then I think there’s some kind of demo, and then right after that I’m going to jump into the audience and give you guys a chance to talk to both of them about anything, as long as you want to — I think they’ve scheduled it for 45 minutes or so — and have a real dialogue. So, I’ll come out there so you don’t have to get up and go walk to some microphone. I’ll have a microphone, and we’ll talk.

It was irresistible for me to come here simply because I watched a perfect example of why. It was yesterday, I was watching George Stephanopoulos, and he would say to Senator Clinton, “Senator Biden said that Senator Obama is not ready to be president; what do you think, Senator Clinton, about Senator Biden’s remarks?”

So, I thought, this is irresistible. We’ve got two of the titans in terms of technology, and all the kinds of things that have been said, and I’ve got them together I think for the first time that they’ve been in a public forum. So that was an opportunity for me in a sense to raise some questions that as I’ve been reading I always wanted to ask one or the other or both, but to have them both here.

This is — we will see what they have to say about how they see the future, how they see it for their two companies, how they see competition, and also how they see they might be working together.

It is really an opportunity for me to look. Some of this may appear on our television show or not. We’re in hiatus now, so I don’t know if it will be able to do anything along that line. But I really do want to talk about the future. You guys know a lot more about that than I do. So, I think the second half would be as good, if not better, than the first, and an opportunity for you really to talk about the subjects that interest you, and the questions that interest you, and get a direct and candid response from both of them.

So, please join me in welcoming first of all the CEO of Cisco, John Chambers; and the CEO of Microsoft, Steve Ballmer. (Applause.)

Let me ask the question that many of us in this room might be wondering is, why are you guys here now today? What’s this about?

JOHN CHAMBERS: Well, I think it’s about a form of partnering and competing that’s very important to the future of the industry. We’re at the forefront of what I’d call market transitions – ranging from data, voice, video coming together – which is a nice way of saying any device, any content, in whatever format we want; combined with collaboration, Web 2.0 that can transform countries or companies.

So, you have two of the industry leaders in our respective fields saying here’s where we see the vision of the industry going; and secondly, this is candidly being driven by our customers. They’ve said we need to understand better what you’re going to do, where you’re going to interoperate, where you’re going to compete.

CHARLIE ROSE: I want to talk about that later. Did you initiate this or did he initiate this?

STEVE BALLMER: I’ve got to say John initiated this round of this discussion, but John called and said, ‘Hey, look, we’re supposed to be good at this; and by the way, have you noticed our customers are talking a lot about the need for our cooperation?’ And I said, ‘Yes, we have.’ So, we spent a lot of time over, what, about the last six, seven months really trying to make some advances, and building off actually some pretty good momentum that we had between our R&D teams coming into it.

CHARLIE ROSE: So, there’s going to be no merger announcement? (Laughter.)

STEVE BALLMER: That you can count on. Today, as I come up here, you can count on for sure. John agreed. I can’t be his boss, and I’m not going to work for John, today.

CHARLIE ROSE: We could have two co-CEOs, couldn’t we?

STEVE BALLMER: There you go. That always works so well. (Laughter.)

JOHN CHAMBERS: Yeah, it does. Great track record.

CHARLIE ROSE: Exactly. There’s rarely ever been one.

Here’s what I would like to happen, talk of some kind about this. Tell me how you see the future. I mean, we have seen the rise of Google, we have seen the rise of Web 2.0, we have seen the rise of social networking; all kinds of things have happened that are part of the conversation. Where do you see it all going, and where do you see Microsoft fitting in, and then where do you see Cisco fitting in, in terms of what you have to do to maintain your marketplace, and grow? Let’s start with you.

STEVE BALLMER: I think that there’s a big transformation going on in our industry, which is relevant to this partnership, and then there’s the transformation that’s happening sort of more broadly in the customers. I’ve talked a lot about how software is evolving to be software plus service, which means in some senses the very definition of what’s software. What’s getting delivered over the network, what’s network infrastructure – it’s more vague than it has been in the past as let me say our fundamental commodity evolves. That’s sort of the underpinning, that’s the plumbing, that’s the infrastructure, it’s the platform.

On top of that, though, there’s also the evolution in the applications people want to do. John was talking about what we sometimes refer to as quad play: voice, video, data, mobility, this notion of convergence. It is fundamental, and people say, are we early stage or are we late stage? Some people want to act like we’re down the path. Sure, we’re a little down the path, until you try to do something like have a videoconference, or you go to a hospital where a doctor is using online x-ray data for the first time, and you’ll find out things aren’t quite as simple and advanced as we think. So, I think we’re actually on the verge, as John has talked about, the vision we both share, of a big market transition on that front.

We talk about collaboration, and kind of e-commerce and Web 2.0. Well, that’s all great until you meet a customer — I was with one of the large container shipping companies, and they still pass completely by paper all the documentation that’s required to get a cargo container onto a ship. There’s not one piece of automation in that process today; it is entirely paper-based.

You know, you confront things like that, and you say we’ve got market transition going on, both in our fundamental commodity and in customer scenarios, and it all gets down to the way software, hardware, network all come together to deliver these things, and it’s important that we push the pace quickly, and that’s why I think the partnership and innovation with shared vision with Cisco is a real opportunity.

CHARLIE ROSE: I want to talk about that partnership, as well as the competition. There have been stories in the press about you guys getting in each other’s turf and a competition developing. Is this emphasis that you’re making on partnership, because customers are really saying you’ve got to get your act together, because we don’t want to pay for duplication, we don’t want to pay for a whole lot of other things, rather than getting the kind of service we want, or is it because you don’t like all the press that might be there about the competition between the two of you, and what that might mean?

JOHN CHAMBERS: Well, Charlie, I think you set it up well by your introductory comments. Steve and I have got an awful lot of things we have to do in terms of our companies’ future and direction. You invest the amount of time that we have over the last seven months, and candidly the last three years, it has to be really important to both organizations.

Secondly, you’re seeing in this environment we talk about collaboration, but it is no longer moving at the pace it used to. You have to move remarkably quickly across all your constituencies at the same time. How do you communicate to your own employees, how do you communicate to your shareholders, how do you communicate to your customers, how do you communicate to the press?

And there is the most rapid change I’ve ever seen in this industry, probably the most excited I’ve been in 10 years in terms of the next wave of technology and what it really means: finally easy to use, and not keying in with your thumbs, how quickly you can do things. It literally is communicating in a natural way on everything from transforming a country’s future to healthcare to education, and it’s going to touch every aspect of our lives.

So, what you’re seeing is market transitions occurring at a faster pace than before, you’re seeing companies that used to only see each other on the fringe suddenly say, how does this work together, and it’s being driven by the customers saying, “Both of you are too important not to tell us where you’re going to work together, but also tell us where you’re going to compete so we can understand it.” That’s what’s driving the market.

CHARLIE ROSE: Give me an example of what you’re talking about in terms of a customer who is saying, “OK, Cisco and Microsoft have a partnership here; how is it going to work to benefit me?”

JOHN CHAMBERS: Well, if you look at one of the things that could slow down this industry quicker than anything else, it’s problems with security, either your data getting out or people, once you become completely dependent upon your system suddenly not operating well. And within the federal government as an example we’ve worked together very, very closely to say how do you solve this problem or how do you work together to alleviate the majority of the threat of the problem in something called SISA. And it really begins to think about security issues, shared information within an architecture approach.

And so it’s more and more one company can not solve it by themselves. We can’t solve the security issues of our customers, nor can Microsoft, but together we touch a large part of their exposure.

The ability I think to bring together what the customers want and to solve a common set of problems is what drives this; but also, companies don’t want issues of competition to cause them not to be able to interoperate effectively in their own environments. So, you don’t want to catch the customer in the middle, Charlie.

CHARLIE ROSE: I want to come back to the point which I asked Steve, and then ask you: Where do you see Cisco in five years? What kind of company is it going to be?

JOHN CHAMBERS: Well, if we’re right on this being the second phase of the Internet, there’s a lot of growth opportunity in front of us. We will move from just being a plumber — and make no mistake about it, I was proud to be a plumber, you make a lot of money there — but you’re really talking about how do you solve customer solutions, and how do you work together in a more open environment, and one that is a lot easier to use the technology.

So, it’s going to transform work between how the network and software and hardware works. I think the skill that we’ve seen, the magnitude of change will make the last several decades look fairly small in terms of the opportunity.

CHARLIE ROSE: I want to come back to customers, but what’s driving the change today?

JOHN CHAMBERS: It is really the ability to use technology easily, and for that technology to change our lives from how we watch our TV programs at home or watch our Duke basketball at home when we want, how we want, and with whom we want. Even the misguided fans who watch North Carolina basketball, perhaps we can help them a little bit over time.

CHARLIE ROSE: Or Florida. (Laughter.)

JOHN CHAMBERS: Boy, they were good last year, weren’t they?

But it also goes back to in business you can certainly see the CEOs sense a change here. Suddenly, all of a sudden they’re looking back to IT and saying, you can enable my strategy. And there was a period of time there over the last five years where I think they viewed IT perhaps as an expense item as opposed to a productivity tool. I think you’re suddenly seeing this next wave of productivity start to occur.

CHARLIE ROSE: But what kind of Cisco wants to be?

JOHN CHAMBERS: We want to be a company that helps brings that to life in our customer environments. It doesn’t matter if you’re a government leader in Turkey or in Germany, doesn’t matter if you’re Proctor & Gamble or Wal-Mart. Can we really be a partner with our customers to really say how we uniquely, along with our partners, can solve their business needs, and really make it easy to use, not something just done by the techies or the IT department?

CHARLIE ROSE: Add to what he said so that I can understand it, where — because customers are demanding that you guys partner together in a way that benefits them.

STEVE BALLMER: Let me take an example from where we compete, because our customers love the fact we compete. I’m not shy about it, and we don’t want to sort of take away from that. Customers think it’s fantastic, ’Boy, isn’t it great, we can get voice over IP infrastructure from Cisco or Microsoft, applications? Yeah, that’s great. We have more guys to innovate, more guys to sort of come in and bid on price and this and that, and that’s all fantastic.’

But what they’re saying is, ’If I choose to use some of your stuff, Microsoft, and some of Cisco’s stuff, I don’t want to be penalized for that. I want that to work in a way that I would expect it to work.’ And they’re saying, ’So, give me the choice and give me the choice. Don’t give me the all or nothing choice; give me kind of the set of choices that I want.’

In the case John cited of security, it’s not an either/or. Typically people will wind up with a bunch of John’s networking infrastructure, routers. If you ask what are the two most attacked things on the Internet, it’s probably Microsoft Windows and a Cisco router, because they’re the backbone of a lot of what goes on, on the Internet. And there’s no competition there, but even when there is competition, which they think is great, they’re saying give us the choice through your interoperability, through your R&D work, through your mature — mature — through your sophisticated interaction. Don’t have your people come in and tell me random things about the other guy; tell me why your stuff is better than John’s, and John’s people can tell you the same. But when I make my decision, I want to make sure the stuff works together brilliantly, and I expect your engineers and your field people to do that.

I think that’s the thing we both recognize whether we’re competing or not we’ve got to get that level of sophistication and interoperability or those customers aren’t going to be very, very happy.

CHARLIE ROSE: OK. But are you saying that you have no problem with any direction of Cisco’s business in terms of whether it’s unified communications or whatever it might be, or where you’re going that might have John say, I wish you weren’t here? Are you totally happy with competition with Cisco, and their not getting into anything that you wish they weren’t?

STEVE BALLMER: That’s not a choice I get to make, nor would it be a choice I expect John to get to make. Sure, John can be a competitor, and John’s a good competitor. I do know that about Cisco. And they will be a better competitor than many that we’ll face. That’s not my choice. My choice is a choice to say, look, despite the fact that we’re going to compete in some areas, are we going to make things work the way customers want to, where we compete and where we don’t compete? And I know the customers are clear on what they want, and the question is, how sophisticated can we be.

I mean, people love the ’it’s black or it’s white, we’re competitors or we’re partners‘ and the truth of the matter is in a way that is more complex and more sophisticated certainly than anything else perhaps we’ve tried to do, we’re going to have elements of all interactions, and they’re going to change. John is going to wake up one morning and say he wants to do something that overlaps with us, and that’s his prerogative, and it’s our prerogative, and the question is, how do we in an appropriate and sophisticated enough fashion talk to each other not to change each other’s plans, but to give the customer what they want in terms of ongoing —

CHARLIE ROSE: OK, but you know what I’m saying.

JOHN CHAMBERS: Charlie, let me stay with that for a second and take off with it. What Steve and I believe is a common vision of the industry. We really see the next wave of the Internet or whatever you want to see, we see a common global economy, and we see opportunities there that are being customer driven. Both of us are sales guys at heart. So, when a customer says, this is what I want you to do, there’s a tendency for both of us to say, let’s find a way to do it.

Secondly, the market has more opportunities than any of us can go after. As you look at these opportunities, if you listen to the customers, they’ll tell you where those transitions are going to occur. And it’s about to become much easier to use technology and communicating in video and voice, rather than just keying it in through a keyboard, which opens up a whole new set of applications that go with it.

Will there be areas where we compete? Yes, there will. Will there be areas that Steve will move into that perhaps we were partnering on initially? Yes, there will. And all I ask is just tell me when that occurs.

CHARLIE ROSE: But where are they likely to be is what I want to know.

JOHN CHAMBERS: Well, let me say a word about where you’re going to see more opportunity for growth. We see the architecture of the market. They call IOM I think it is in terms of infrastructure. We call it something called SONA. They’re remarkably similar in the market. We look at mobility and mobile devices and what wireless really means, remarkably similar in the market. We look at our SMB opportunities and where the market is going; we define them similarly. We look at where consumer entertainment is going to go.

So, there are many areas that if we work together, we could be very successful in. But even where we’re going to compete, what the customers want is, ’Tell me you’re going to interoperate. Don’t make me throw away one relationship because of the other, and don’t make me use this in a noncompetitive environment that doesn’t add value to me as the customer.’ The days of you being either friend or foe are over. The industry is moving too rapidly for the large players.

STEVE BALLMER: If I was to characterize where we’ll see each other more competitively than we have in the past, kind of John said he’s — I’ve been also a plumber and happy to be a plumber, but we’ve also had applications. I think in the communications applications area there will be some areas where we compete, as there are today, and that’s OK. We’re working together on what the future of the datacenter looks like. But as the datacenter gets redefined, which it will over the next few years, how you put together computation, storage, networking is going to change, and it could bring new opportunity, could bring new competition, probably brings some of both.

JOHN CHAMBERS: You know, no companies have done this well. There have been a lot of marketing announcements —

CHARLIE ROSE: Cooperation.

JOHN CHAMBERS: Cooperation. And it’s a nice way of saying you tolerate each other in front of customers because your customers tell you, you have to. That’s not worth the resources both of us are putting into this, and it also speaks to catching market transitions in a way the customer benefits.

There is an article in USA Today that basically said for the majority of CEOs the top thing they were focused on this year is how do you do what your customers want, and I think that’s the kind of view Steve and I both share. And when you want to do what your customers want and you view the industry remarkably similar to where you’re going to go, and you’re two aggressive companies, there are going to be opportunities to really work together but there are going to be opportunities where you are going to compete. And you’ve got to tell your customers what the interoperability is going to be when you do compete.

STEVE BALLMER: We have a list of 10 areas, concretely, where we have asked our teams to go do stuff together, absolutely go do things together. Some of it is sales and marketing, most of it I think has an R&D component that underlies it. John talked about the way networks and computing get managed in corporate networks; we’ve got a program. Security, how companies manage security for their corporate networks; we have a program. The future of the way management works in the datacenter: It’s the two of us, EMC and others trying to define new standards, because people want to manage storage, networking, software and hardware all together; we have a program. In the consumer world how are we really going to get high-speed video flowing seamlessly and in an end user friendly way around the average home? With the Linksys group and some of the other groups at Cisco we have a concrete program. If you go to the small and medium business market there’s a program, because things are just too complicated for small and medium businesses in general. In unified communications we know we’re competing, but there’s a set of things our customers want us to make work together; we’ve got a program.

CHARLIE ROSE: Is unified communications the principal area of competition in the future because of what it — it is such a new area of change, and both of you want to be there and want to be dominant in that place?

STEVE BALLMER: I think that’s right.

JOHN CHAMBERS: I never used the word ‘dominant,’ just as Steve’s friend and advisor, but both of us see this as a huge opportunity, and candidly both of us moved in about the same time. That’s where our customers are saying just don’t do this in a way that’s non-constructive for us.

CHARLIE ROSE: So, that’s a specific area that’s going to cause you guys to perk up and say, wait a minute, we’ve got to make sure that —

STEVE BALLMER: No, I don’t think it caused us to say let’s go do this. The customers — I think it may have triggered the customer input, which says, look, glad for the competition, but tell me how you’re going to relate to Cisco. Is it going to be pure competition, will it be acrimonious? Will you continue to work together in the ways we expect or not? So, it prompted the customer questions that came on my radar screen.

CHARLIE ROSE: Unified communications and all that they were worried about on that subject.

STEVE BALLMER: Yeah. The other one that I think we don’t even know — I mean, just to be honest, we don’t know how much competition. We know we’re going to have cooperation as everything that’s going around bringing TV over the Internet or over IP networks into the home. We’ve worked together a lot in this area with Linksys, with Scientific Atlanta, with the let me call it Cisco classics to really get this stuff to work at customers like AT&T, at Deutsche Telekom. And yet customers are asking, there is some overlap. We don’t know; we’re just letting our teams pursue their independent directions but communicate so we can tell the customers clearly is there competition, isn’t there, where are we going, what’s happening, how will we work together, let’s make sure the customer gets what they want.

CHARLIE ROSE: Now we’re getting to the nub of the issue here. How do you do that? I mean, are you worried about them knowing more about what your plans are as you try to offer cooperation, which might be competition in that one particular area? You’re competing, you want to be number one, you both want to be number one. How do you balance the idea, we’ve got to do something that’s good for the customer, but at the same time we don’t want the other guy to know what we’re doing?

JOHN CHAMBERS: Well, three ways, Charlie. First is I’ve never focused on competition. I’ve always focused on getting market transitions right, and that’s what we do at Cisco. You use competition as a scorecard: did you do it right or did you not.

The second thing is when market transitions occur, they wait for no one. If the majority of the areas we’re working on we’re competitive, you wouldn’t see us up here today. Our views of how the industry is going to evolve are remarkably similar. Our views on architecture are similar, as Steve articulated very well.

When you listen to customers, we can actually help them achieve their goals by working in certain areas extremely tight in terms of partnership. And all they’re saying is that if I’m going to have you in my environment, whether I’m a small company, in the home or in a big company, where you do compete that’s fine. As Steve said, we welcome it, and we know you’re going to do more of that in the future, which we will. But make them interoperate; don’t put us in a no-win scenario in terms of its capability of the direction.

So, it’s about a trend, Charlie. With or without Microsoft or Cisco, it’s going to happen.

Secondly, you either lead in trends or you get left behind regardless of your size, and this trend is happening at tremendous speed.

CHARLIE ROSE: And there’s nothing you can do about it but engage.

JOHN CHAMBERS: I think you either lead them or you follow and you don’t follow for very long when you get into this.

CHARLIE ROSE: This for both of you: How do you feel about Google’s growing role in the Internet infrastructure and wireless communication? Just tell me how you see it.

STEVE BALLMER: Well, we’re up here with John talking about competition and cooperation.


STEVE BALLMER: We’re not up here with those guys talking about that theme.

CHARLIE ROSE: When I saw the two other seats, I thought, well —

STEVE BALLMER: Yeah, we can find somebody else. (Laughter.)

So, I speak from the standpoint of somebody who’s fairly purely a competitor. Hey, Google has done some things very well in the area of search and advertising, and believe me, we’re pushing, pushing, building a little market share, really pushing into that area. Google has got ambitions in areas that overlap with us. Google has ambitions in a lot of areas, and so does Microsoft, frankly, and we’re going to see them in more places.

Are they going to choose to become a telecommunications company? I don’t know. You watched this auction; could be. We’re not choosing to be a telecommunications company. We are going to compete with Google, but we’re going to do that in a way that is I’d say largely in partnership and cooperation with the guys who put in the literally hundreds of billions of capital infrastructure that’s required to make these next generation networks work, which is the telecom industry.

CHARLIE ROSE: The same question.

JOHN CHAMBERS: I love anybody that loads the network, so let me be very upfront. Anything that loads networks with video benefits Cisco.

Google is neither a friend or a foe. They’re somebody in the industry that we watch and admire in terms of their execution.

There are certain competitors, so that I can answer it for Steve as well, Steve is going to work with some of my competitors; that’s the way of life. I’m going to work with some of his competitors; that’s the way of life. Google does not fit in that category for me.

CHARLIE ROSE: But I mean you don’t — do you see what’s happening in terms of where software is being developed today coming off the Internet as the wave of the future?

JOHN CHAMBERS: I’d word it a little bit differently, Charlie. I think the next wave of productivity will be around collaboration. That will be software, it will be infrastructure, it will be process change, and it will enable a new wave of innovation. And if you take all the complexity out of Web 2.0, all Web 2.0 is, is a set of tools that allow collaboration. We’ll each probably position them in a way that benefits our position in the market. But it is going to usher in a wave of transformation that I think will make the first wave of the Internet look small. We’ll see if that’s right or wrong.

Steve and I view this opportunity —

CHARLIE ROSE: Do you agree with that?

STEVE BALLMER: I’d actually even be a little bit stronger in the way that’s helpful for John, which is the evolution that’s happening in software to be more of a service delivered over the Internet loads networks, and in a sense John doesn’t have to embrace the trend, but the trend is probably good for John’s business.

CHARLIE ROSE: OK, but is the trend good for your business?

STEVE BALLMER: The trend is like other big trends: It’s inevitable. Things that are –

CHARLIE ROSE: But that doesn’t answer the question. It’s inevitable, but is it good for you —


CHARLIE ROSE: — and do you have to change your business model, and is that why you’re talking about now software plus service plus —

STEVE BALLMER: Sure, it changes our business model, it changes our technology model, and it’s fantastic for us if we do it well. And so we’d better go do it well.

Why do I say it’s fantastic for us? Anything that we can do that lets us deliver more value more continuously to our customers gives us an opportunity, not a birthright but an opportunity to make more money, make more opportunity, do better customer satisfaction.

So, we have a big new opportunity, and the question is, are we going to seize it with all the gusto, and I think we will, and that’s going to be a great source of opportunity, but not without risk and not without change.

CHARLIE ROSE: OK. Changing the business model, how do you change the business model?

STEVE BALLMER: The business model change I think people do tend to overstate, and let me explain that. Most of our larger customers today are already essentially on a subscription model with us. This would be a different form of a subscription model, and we’d be able to add more value, but it’s more continuous than discontinuous.

Most of our very small customers are sporadic buyers of software anyway. They’ve never been regularly in the market. So, the move to have things be easier to get, more downloadable over the Internet, maybe more often paid for by advertising as opposed to subscription or transaction revenue is mostly an opportunity, because that part of the market has been less active in our space buying software than perhaps I would have liked anyway.

CHARLIE ROSE: Do you tell your employees at Microsoft, we have to avoid what happened to IBM, and allow Microsoft to become what it is, and is that a danger for you?

STEVE BALLMER: I tell people at Microsoft we have to embrace this big market transition and all over big market transitions, whether it’s at the applications level or it’s at the infrastructure level, and the companies that don’t embrace market transitions don’t do very well. I will admit I do take advantage of examples from past transitions to quote to our employees, yes I do.

CHARLIE ROSE: Yes you do.

Let me stay with advertising and where that’s going for a second in terms as you talk about the evolution and where you might work together or not. You have been buying companies in the advertising arena.

STEVE BALLMER: Absolutely.

CHARLIE ROSE: Why didn’t you buy Yahoo!?

STEVE BALLMER: Why don’t we buy Yahoo! I guess you’d say. (Laughter.)

CHARLIE ROSE: And are you going to do it today, Steve, would be my second question.

STEVE BALLMER: Look, Yahoo! is an independent company. It’s got a vision, it’s got kind of a direction that it’s going, and it’s a fine independent company. A very expensive acquisition for anybody to do, whether it was Microsoft or somebody else.

CHARLIE ROSE: You can afford it, I promise.

STEVE BALLMER: We can. We have an independent view. We’re making progress on our independent view of the world. I talked to Jerry; I hope they think they’re headed down a very good path.


STEVE BALLMER: Jerry Yang. We have a very good relationship with them. I’d call that kind of a sophisticated kind of cooperation competition that we have with Yahoo!, like we’re trying to put in place here with Cisco. We’ll continue to find ways to partner with those guys where it makes sense.

JOHN CHAMBERS: Now, let me jump in here —

CHARLIE ROSE: OK, but before — OK, go ahead, and then I’ll come back.

JOHN CHAMBERS: Because if you really look at the future of innovation, and I was with IBM, so I watched what they went through, I was with Wang Laboratories, and it used to be about innovation you did all yourself. Then innovation became what can you do yourself, but if you can’t get to market quickly, you’d better learn how to acquire.

Steve and I share a common view on acquisitions, we both prefer smaller ones, but acquisition is another way to innovate.

I think the third phase of innovation will be about collaboration. Collaboration will often be big companies working together because of the presence they have in the market where their customers expect them to work together, but also if you can learn how to move into new markets rapidly, then that’s leadership.

So, think of innovation not in the old world, do it all yourself, or not in a variation of occasionally acquire, you’ve got to make them work, but collaboration. Collaboration may be the toughest of the three. Both of our customers have learned how to innovate pretty good internally. Both of us have gotten a lot better on acquisitions. Collaboration will be the next frontier in innovation. I don’t want to underestimate that.

CHARLIE ROSE: I’m not going to forget about Yahoo!, but I want to come back — (laughter) —

STEVE BALLMER: I thought I was off the ropes.

CHARLIE ROSE: No, it’s not. It didn’t pull your way.


CHARLIE ROSE: Why is collaboration the toughest? What is it about collaboration that makes it hard?

JOHN CHAMBERS: It’s hard enough to get your company itself to —

CHARLIE ROSE: To do it —

JOHN CHAMBERS: — to work across silos. Understand the next frontier on —

CHARLIE ROSE: Silos within your own company?

JOHN CHAMBERS: Yes. The next frontier within business is working across silos collaboratively.

CHARLIE ROSE: So why is it hard?

JOHN CHAMBERS: Well, at least in your own company, in theory, make no mistake about it, Cisco has traditionally been the command and control. When I say, “Turn right,” we turn right within reason. To do that across another company of similar size, similar culture, similar strength, it’s hard to do that. And to get your teams focused on where you’re going to work together and also being realistic that you are going to compete both now and in the future, that’s a hard combination to put together.

The rewards for the customers are pretty dramatic if that works and, candidly, the rewards for the companies are pretty good, actually.

CHARLIE ROSE: And what’s the risk? The risk of doing it badly and not working, what else?

JOHN CHAMBERS: The risks are all down side if you don’t do it.

CHARLIE ROSE: That’s right, OK. In other words, if you don’t do it, then you risk losing the customer, making the customer unhappy and all that. Let me just come back to Yahoo because — are you in negotiations with Yahoo? Are there conversations and talks taking place about a merger?

STEVE BALLMER: If we were, I wouldn’t tell you; and if we weren’t, I wouldn’t tell you. (Laughter.) Which means: I won’t say a darn thing. Because if you start saying a darn thing in the middle of any negotiation, then you have to start saying something in the middle of all negotiations. So I think I’ll just take the most respectful “no comment” I ever could have given you.

CHARLIE ROSE: OK. Is the most important thing that you have learned — tell me what the most important thing you’ve learned about this business you’ve spent a lifetime in since Bill came and got you and you went to work for Microsoft in the early part. In the last year or two, what’s the most important lesson you have learned about where things are going?

STEVE BALLMER: Well, I think if you go back to the point John made at the beginning, it is right. The pace of change in our industry is not only not decelerating, it is accelerating. And the challenges of keeping pace with that are different for a company of our size and footprint today than our size and footprint five, 10, 15, 20 years ago. You know, we are a very large company. If we want to continue to grow, we’ve got to embrace change. We can’t be afraid of it. And, yet, there’s risk always associated with change and we’ve got to seize new market opportunities.

We can’t just say, “Our bread and butter is X, let’s stick to X.” We have to seize those new opportunities when we have innovative ideas, go out, innovate, and create value. And doing that when you’ve got 80,000 people, you know, there are unique challenges of size. People say, “Are you less nimble? Are you less agile?” I tell you, we’re more agile today, I can tell you that 100 percent, than we were when I joined Microsoft in 1980 and we were 30 people. We’re more agile today, I’m 100 percent sure of that because we’ve got better people, we’ve got more independent paths of action than we ever had before. The thing that’s hard isn’t to be agile; the thing that’s harder today is to get alignment. You were talking to John about alignment across company boundaries, heck, I’ve got a challenge just to keep things aligned inside our company boundaries because everybody’s off being agile, if you will.

CHARLIE ROSE: “Alignment” means what?

STEVE BALLMER: When you really do want two things to work together, because your customers are going to insist.

CHARLIE ROSE: Right. Right.

STEVE BALLMER: You can say, “Is it hard to do with John?” and I’ll say, “Yeah, it’s hard, and John and I are going to focus on it.” But we have the same challenge internally. We have plenty of cases where people say, “We want product ‘Foo ‘and product ‘Bar’ to work together and they don’t, come on Microsoft, let’s get to gettin’ on this.” And we’ve got to continue to work on that and keep the agility high, and that’s a challenge.

CHARLIE ROSE: I want to — I’m going to button this up, and then we’ll have some more questions. But there’s just no — nobody doubts anymore that the center of gravity in computing is shifting to the Internet.

JOHN CHAMBERS: Agreed. Agreed.

CHARLIE ROSE: No question.

JOHN CHAMBERS: But, Charlie, what you’re saying, and Steve and I are articulating in different ways is you either catch market transitions or you get left behind. Those are occurring rapidly. We’re all a product of where we came from in the past. I came out of IBM and Wang Laboratories. IBM, it took them two decades to recover from missing opportunities where they stayed in their traditional market too long. Wang, after 30 years of being very successful, only missed one transition and never recovered.

So watching for market transitions and very aggressively leading them, I think, is part of a team and a culture that is very important to the future. And if there’s one transition that is in the first inning of the new ballgame, it’s collaboration on Web 2.0.

CHARLIE ROSE: This collaboration has been going on for how long between the two of you?

JOHN CHAMBERS: 10 years. But in terms of really picking up speed, it started about —

CHARLIE ROSE: Two or three years ago?

JOHN CHAMBERS: — about three years ago. And then it’s been in this calendar year. Now, what’s been interesting, this is where you learn about each other. You learn about each other under stress, and I’m looking at a couple of faces out there. There’s nothing like saying, “This is what we’re going to do by this date.” And you see whether or not your engineering teams can really work together. You see whether or not your PR teams can really work together. You see about your communications. And that gives you a good indication of whether your cultures are going to be able to work together. So far, it’s been good. Steve and I are both going to probably have to smack some people upside the head occasionally when they get out of line, and we will, but —

CHARLIE ROSE: Do you believe that Cisco and Microsoft have the same culture?

JOHN CHAMBERS: No. But we have the same focus on catching transitions and an ability to execute and commit to that.

STEVE BALLMER: But to your point, we’re not trying to merge. If we’re trying to merge, you’ve got to ask us, “How will your cultures — “

STEVE BALLMER: We’re not trying to have a cultural fit, we’re trying to serve our customers. And that doesn’t require a cultural fit, it requires shared interest and a commitment to customers’ shared interests. And be realistic, it’s going to be very difficult. No one’s done this well, in my opinion.

CHARLIE ROSE: Therefore, it raises this question: So how do you track progress?

JOHN CHAMBERS: You track it on probably seven key initiatives with 10, I guess, total areas that we’re working on. You’re realistic on what your goals are, did you get the expectations, most important, from your customers? And we’ll be meeting with probably two dozen customers later today saying, “Here’s where we see the relationship go.” You will see in a demonstration — the reason, Charlie, I think you’ll like the demonstration, you’ll see how much it is a requirement from a customer’s point of view that our products interoperate. The ability to share access becomes very key. And then you measure it like you would any other program as an executive. You really say, “Is it in total achieving the goals our customers wanted? Are we getting the market transitions right? Are we learning how to really compete, which we will and will continue to, in an effective way that doesn’t put the customer in a no-win situation as a result of it?”

STEVE BALLMER: The thing that happened the last seven months that I think is super important that teams were doing some good work is we said, “OK, that’s great, but now describe the real customer scenarios that come out of this work.” And as soon as you describe the real customer scenarios, holding ourselves accountable for it is a lot simpler. Did we make things easier for small and medium businesses? Well, answer, did they buy anything? We have a way of tracking and measuring that that we put in place. Do we get the level of interoperability we want around security? There are concrete examples and ways in which customers will grade us on that. And on every one of the initiatives, John’s right, there are seven big ones and ten sub things. You know, we have a way to ask ourselves, and John and I have committed to very regular review.

For me, I’ll give you my — the ultimate commodity I get to allocate is my time. And if you ask, you know, do we have partners that I meet with extremely regularly? We have partners I meet with extremely regularly, HP, Intel, Dell, they certainly fall in that category. John and I have always had a good relationship, John and I have now committed to that kind of regular interaction. We have now committed to regularly meeting to track progress on the initiatives in place, to stir the pot, get our teams —

CHARLIE ROSE: Yeah, but I mean, the other two guys — I mean, they are a very different entity than the other guys you mentioned.

STEVE BALLMER: They are because we’re trying to both —

CHARLIE ROSE: Dell makes computers, HP makes computers —

STEVE BALLMER: Well, we’re trying —

CHARLIE ROSE: Software and computers.

STEVE BALLMER: We’re trying to compete and cooperate, that makes it harder. And I agree with John, it is harder, it is harder. With Intel, we’re trying to design a lot of the future of computing infrastructure.

CHARLIE ROSE: Ah! But that’s interesting because, in the beginning, Intel — I mean, that was a partnership, but you guys clearly understood what each other were doing. They were putting the Microsoft and you’re providing the software and that was —

STEVE BALLMER: No. No, that’s — what goes into software or what goes into chips has been an ongoing touchpoint, friction point between fiery product engineers at Microsoft and Intel for at least my 27 years at Microsoft. And, look, we’ve had some of the same things here. One of the areas of interoperability is in security. The proud Cisco engineers standing up for NAC, and the proud Microsoft engineers standing up for our stuff.

We say, darn it, get the stuff to work together. That came more top-down in the engineering organization than it did bottoms-up. But this kind of relationship, it’s not dissimilar to a lot of what we do ourselves. But we’ve got more of an element of competition, and that’s why, I think, this requires a very sophisticated level of management.

JOHN CHAMBERS: But if you watch what both companies have done well that many of our peers did not, we don’t think this next quarter or this next year. We think about where’s the market going to be two, three, five years out. And anything that you really do that’s going to make a dramatic difference for your customers, and a dramatic difference in the industry has to be a long-term plight.

So I think what we’re outlining today is the first steps that you’re seeing, this could develop into that. Time will tell, based on our execution, if it does. And it could be a role model for how this industry really both competes in the future —

CHARLIE ROSE: I mean, I think that’s almost — what’s significant about what you guys are talking about, it seems to me, you know, is the fact that you are very different companies. I mean, it is not the natural relationship that you would have with Dell or HP. I mean, this is different. Just take Web conferencing. They’re big in Web conferencing, you want to be big in Web conferencing, yes?

STEVE BALLMER: We are also —


STEVE BALLMER: — bit in Web conferencing, honestly. (Laughter.) No, you picked the one where we probably have close to share —

STEVE BALLMER: — that’s probably the more —


STEVE BALLMER: But, no, that’s why — and the fact of the matter is, even sitting together, you can probably get John to talk about the merits of his stuff and me to talk the merits of our stuff. But the point is: To be able to do that respectfully — and we’ve talked about respectful competition.


STEVE BALLMER: And that’s a difference. You know, our industry is unique. It’s unique in the level of cooperation that really, eventually, has to happen for the industry to thrive.


STEVE BALLMER: But to actually have competitors have what I would call positive, non-acrimonious relationships and non-hands-off — there are plenty of competitors you can just not talk to, or things get acrimonious, and certainly they have in the history of this industry. That’s not where we want to go with Cisco, and it’s not where Cisco wants to go with us. And, you know, right now, it’s not a huge percentage of John’s business that overlaps us, and it’s not a huge percentage of our business that overlaps John. And I don’t anticipate, even if you go out four or five years, a huge percentage of our business will overlap.

CHARLIE ROSE: OK, but just tell me how — what are customers — in this particular area, though, even though it’s not a huge percentage of your business, what are customers saying to you in this particular area?

JOHN CHAMBERS: Well, you know, Charlie, what —

CHARLIE ROSE: Your competitors —

JOHN CHAMBERS: What was most interesting is — what customers are saying where we compete — customers just want roadmaps of where companies are going to go. And they want roadmaps whether you’re a small to medium business or a very large enterprise for areas where you’re going to go, they want to understand where the other large players like Microsoft are going to go.

They want to know when you’re going to work together, they want to know when you haven’t decided what you’re going to do, and they want to know when you’re going to compete, just don’t put them in a no-win. Show what interoperability is going to be, and really make it happen within that area. And I think it goes back to a basic premise, and it goes back to Steve and I probably both coming out of sales. If the customers want you to do something, you do it right, you’re going to grow faster than if you try to say, “Let me put you in the middle and let me not do what you’re asking us to do.” So if I ever make a mistake, it will be because I did what customers wanted us to do. And what we’re also learning, this market is going to wait for no one, so we’re going to lead in this scenario. And we’re excited about what we can do together with Microsoft.

CHARLIE ROSE: As your companies — and I’ll close with this and we’ll get Charlie and Bob out here — as you look at the future, five years from now, the percentage of your business that comes from Windows Vista and Office will be — how will it be different between 2007 and 2012, five years from now? Will it be dramatically less?



STEVE BALLMER: It’ll be — it’ll be noticeably less. Yeah, I mean, look, I’ve already said to our shareholders the bulk of our actual dollar growth over the next few years will come out of — at least a large percentage — will come out of Windows and Office, of our dollar growth.

CHARLIE ROSE: Right, dollar growth.

STEVE BALLMER: But we have businesses that will grow much faster than Windows and Office, so it will be, correspondingly, a lower percentage of our total. We have to have huge growth in advertising. We have to have huge growth in servers and enterprise computing, huge growth in mobile phones, huge growth in a variety of areas — in Xbox, in Xbox attach and everything that we’re doing there.

So we have to have a lot of areas with very large growth, and then still strong growth out of products like Vista and Office. Now, what does that mean in terms of our relationship? It means that some of the areas where we’re going to grow the fastest, advertising probably has little relationship to Cisco.


STEVE BALLMER: But things like our Windows Mobile product line, I think a great relationship with Cisco is going to accelerate that number dramatically, if we do the right job.

CHARLIE ROSE: And you’ll measure that over the next —

STEVE BALLMER: Next year, two years, three years.

CHARLIE ROSE: And the same question to you with respect to routers and splitters in terms of its percentage of contribution to your bottom line today, percentage of revenue or profit versus now and five years ago, because you’re expanding into these other areas that we’ve been talking about.

JOHN CHAMBERS: Well, Charlie, our issue is not one of growth. That’s the first time I’ve been able to say that in a decade. Our issue is where do we put our time and direction? In routers, clearly, people associate that with Cisco. Our new advanced technologies are bigger than the routers are today. You look at where the market’s going, our developing countries will account for 30 to 50 percent of our total growth in the future.

So if you really think about the future, it’s about new product areas we’ll move into, it’s about emerging markets or countries within that, and it’s ability to — is the collaboration in Web 2.0 wave as big as I think it will be? I think it will transform business, the way we work, the way we play, and ways that people are just beginning to imagine. If we’re right, it gets pretty exciting. If we’re right on that, I’ve got to find a way to work with Microsoft in a very constructive way.

CHARLIE ROSE: Thank you for this part of this conversation. Thank you.

JOHN CHAMBERS: Thank you, Charlie.

CHARLIE ROSE: We’re going to see a demonstration, then, and come to this audience for their questions about this and anything else they have. We’re in New York City, back in a moment.

Should I introduce Charlie Giancarlo and Bob Muglia now? Come on out Charlie. Here’s Charlie Giancarlo, you know him from Cisco, and Bob Muglia from — (Applause.)


JOHN CHAMBERS: You know, Charlie, what’s going to be fun is to watch to see if these two guys can take what Steve and I just said and make it obvious why this —

CHARLIE ROSE: Right. Right.

BOB MUGLIA: Why don’t we set it up, if that’s all right. Thanks, Charlie.

CHARLIE GIANCARLO: So, as both John and Steve mentioned, Bob and I took over executive sponsorship for the relationship about three years ago. The relationship had been going on for over 10 years, and there had been a number of different areas that we had been engaging in over 10 years. But, as we said, a little over three years ago, Bob and I took over and we hit it off right away, actually, a very good relationship in that sense.

BOB MUGLIA: Yeah, I think both Charlie and I come from an engineering background, so we were very comfortable working at a fairly deep technical level with our teams. And our initial focus was really on the security area of trying to make sure that the NAC and NAP, the Network Access Protection, Network Access Control, that those technologies from both companies work effectively together. That was really our first —

CHARLIE GIANCARLO: That was the emergency of the day.

BOB MUGLIA: Yes, that’s right, at the time.

CHARLIE GIANCARLO: Yeah, and emergencies, you know, do tend to take precedence. But then once we had started that activity as part of our ongoing activities, we actually started to expand into a number of different areas. And I think here we are, we’re — today, as we mentioned, we’re working on 10 different technology areas that roughly correspond to these seven different environments, and started off with security. But then, of course, once we got Steve and John together this year, it mushroomed into almost — well they gave us the goal of a dozen, I guess we’re two —

JOHN CHAMBERS: — value we added, I think is what you were about to say, Charlie.

BOB MUGLIA: The thing is, we sort of started our focus, really, on trying to get the engineers to work effectively together. And as John and Steve talked about, there’s some challenges associated with that. But, by and large, we’ve been able to get a lot of cooperation across a lot of different groups. But now we’re looking at really thinking about how we can bring a common message to customers so we can speak to customers in a way such that they can understand how our products work really well together. And an example of that is Microsoft has a program called Infrastructure Optimization Model, or IOM, and Cisco has a program called SONA, Service-Oriented Network Architecture. And we looked at that, we decided they’re really very, very similar, but, of course, we talked about it in completely different ways.

CHARLIE GIANCARLO: Similar in a complementary fashion. In other words, IOM speaks largely — and you would expect this — to the environment that Microsoft creates in an account, SONA speaks largely to the environment that Cisco creates in that account, and the two match very well together. However, we weren’t coordinated in terms of the way we were describing it to customers, and so they were very confused.

BOB MUGLIA: So, it’s a great example of how Cisco and Microsoft can work together to describe things in a way that customers can really digest and understand, and bring into their environment in a much, much more effective way than if we were two companies both cooperating but not really partnering together.

CHARLIE GIANCARLO: That’s right. So, what we thought we’d do is show you just a relatively short demo of a number of things that we are already then — these are things that are already in the market today that we are already doing together, and, of course, there’s a lot more that we’re working on that are not announced by either company.

So I thought it was apropos, then, to go to — start off with the thing that brought us together in the first place, which is the security demo.

What we have here is a PC, not yet plugged into the network. And I’m going to plug it in, and then this will be an example of the Cisco NAC, rather, and the Microsoft NAP application working together. And as you can see, there’s been a popup that says the computer doesn’t meet the requirements of the network. So this is the NAP client operating on the Cisco NAC framework, which is inside the network. And now you see that it just came up again and it says the computer now meets the requirements of the network, and the reason for that is that as part of the network access process, there was a check of the policies of the network against what was actually on the PC, and it automatically turned on the firewall. The firewall was off before and now the firewall is on, and then it comes up and tells you exactly what happened and why.

BOB MUGLIA: And remember the context of this is customers were having problems with viruses being brought into their environment by laptops that connect, and this ensures that all the right virus checking and software and the right set of administrative policies are all in place.

One of the important things here over the last few years that we’ve done is when Cisco originally announced NAC and we originally announced NAP, we were both going to the industry with different approaches to solving what is effectively one problem. So, when you talk to ISVs that are, say, in the anti-malware space, Cisco had one message of what to do, we had another.

But we’ve now come together, set some industry standards around health models, and really have created one architecture for ISVs and the industry to build on to have a cohesive experience for customers.

CHARLIE GIANCARLO: Yeah. I think it reflects the fact — and Bob and I recognized this very early on. You know, we approached both problems and the world from very different perspectives that are largely complementary. And when you put them together, generally, we’d come up with better solutions.

BOB MUGLIA: Yeah, I would go up to the whiteboard and I would draw a client and a server and then a cloud in the middle.


BOB MUGLIA: And I would say, “Well, it just goes through the network.” And Charlie would say, “No, that’s where all the action happens is in the middle there.”

CHARLIE GIANCARLO: Yeah, that’s right. And, generally, the problem is we tend to use all the same words and confuse the heck out of everybody.


CHARLIE GIANCARLO: OK. The next thing we’re going to go into is we’re going to launch a browser. And now we both work for a Conglomerated World Industries. And what we’re going to show here is an example of our location management, mobility sets of interactions. So what we’re going to do is we’re going to search the world zone for an individual. And we can do this now by a set of mash-ups where we can not just search for an individual by name, but by job function.

So we’re going to search for a manufacturing engineer. And when we do this, you’ll see that what comes up is a list of people inside the organization. Now, what’s interesting about this is they come up by the interaction with Exchange with all of their information, and Active Directory as well. So this is integration with Microsoft Exchange and Active Directory. And then with a very interesting mash-up with Microsoft Virtual Earth, we can also see where these people are located. You can see all those red little dots.

Now, if I’m to click on — let’s say we’re in New York and we’d like to —

BOB MUGLIA: Those dots are really coming from — since this is wireless —

CHARLIE GIANCARLO: Oh, Bob, that’s exactly right. So what this is about is these manufacturing experts are walking around with some type of mobile device. Could be their PC with a wi-fi client, or it could be a cell phone with a wi-fi client. And the information about where they are is being sent to this application based on location information, which could also be wired. They could also be on Ethernet — location information that’s sent back to this application through the Cisco network.

So we’re going to click on New York. And we can see that in New York we have a fellow that’s located here. And if we want to actually connect with him, we click on “Connect.” And then we can say “Call.” Now, this is the Microsoft Office Communicator, right? And we’ll say, Ken Newman. (Phone rings.) And it starts ringing right away.

So this is an example of integration of the Microsoft Office Communicator through integrated presence federation with a Cisco environment and with CIP call trunking to a Cisco communications manager environment.

BOB MUGLIA: And it’s a really good example of an area where we are competing in unified communications. Although we have products and Cisco has products that overlap, those products have to work together in a relatively seamless fashion for customers so customers can mix and match. In this case, the Microsoft Office Communicator connected to the backend infrastructure through Cisco.

CHARLIE GIANCARLO: Right. So this is a great example of where customers may want desktop applications from one vendor, but an infrastructure from another vendor. We’ve got another great example —

BOB MUGLIA: Yeah, another example that — a pretty interesting one — is with the mobile phone. And this is a Samsung device running Windows Mobile 6, and it has an application running on it, Cisco’s Unified Mobile Communicator. And what I’m going to do is send this to the back so you can see it a little bit easier on the screen.

And the first thing I’m going to do is, using Cisco’s applications, to go ahead and do a directory lookup.

CHARLIE GIANCARLO: OK, as you’re doing that, we’re going to show the screen as well, the PC screen, where you’ll see that I can see that Bob is online and available, that’s the green little checkmark means he’s available.

BOB MUGLIA: Right. And now all of the names here are coming out of Active Directory, so that’s the form of integration that Cisco and Microsoft have worked on together. And its presence, from Cisco in this case, and Active Directory integration from Microsoft.

CHARLIE GIANCARLO: That’s right. And you can see this is the Cisco Unified Personal Communicator application on the desktop. So before we saw the Microsoft Office Communicator, this is the Cisco Communicator.

BOB MUGLIA: OK, so let me go back here.

CHARLIE GIANCARLO: This is good stuff. (Laughter.)

BOB MUGLIA: As you might notice, the status is available for me on this. My status is available, and I’ve got the little green dot there to show that. So now what I’d like to do is I’m going to go back up and I’m going to go — using just the standard Outlook capabilities of Windows Mobile, I’m going to go schedule a meeting for myself. So I’m going to go into the schedule. And now I go new appointment, and I type in the name of an appointment. OK, now what — now as I did this, it’s important to pause for just a second to watch what happens because I’m about to schedule the new appointment. As you can see, I’m currently available.

CHARLIE GIANCARLO: Right. So if you look on the PC, Bob just turned blue, which I’ve seen this a lot with Bob in meetings together, but —

BOB MUGLIA: So what’s happened here is —


BOB MUGLIA: That’s happened a few times when the engineers are not working the way we’d like them to work together, which happens now and again. But what’s happening here is the point where we scheduled a meeting through Outlook, we’ve also coordinated that with Cisco’s presence infrastructure that changed the state of the person.

CHARLIE GIANCARLO: Right. Perfect. Great.

BOB MUGLIA: So these are some examples inside the business environment. And, obviously, a very large part of what we do working together is in the business environment. But we also wanted to go and take a look at what — how we can work together in the home, because there’s a lot of really interesting things that are happening there.

And one of the places we’ve been working on is the integration of Windows Media Server — Windows Media Center together with Cisco’s Linksys boxes that have an extender. So you can have a PC in another room, say in the den, and then be able to watch video in your family room.

And one of the bit challenges of this is most homes have difficult networking environments. And wireless and high-fidelity video don’t really work particularly well together. But with this new generation of systems, the combination of Windows Media together with Cisco’s Linksys devices, we’re able to really bring that together.

So, you know, this is just working across the network. A couple of simple things I’ll just show today is I can browse in, look at pictures across the network. This is a vacation example.

CHARLIE GIANCARLO: So this is a Linksys box without a PC being — talking to a PC, and showing the PC experience without a PC next to this TV at all.

BOB MUGLIA: That’s right.

CHARLIE GIANCARLO: It’s just the Linksys box.

BOB MUGLIA: Just the Linksys box, which is more appropriate for many family room environments. And these generation of Linksys boxes will be coming out later this year.

CHARLIE GIANCARLO: That’s right. Actually, this is the second generation, right?


CHARLIE GIANCARLO: The first generation we put out a couple years ago.

BOB MUGLIA: Right, but this one will support high-def, as an example, which the first one did not.


BOB MUGLIA: So, anyway, I can just go and look at music and browse different albums. I don’t know if I want to listen to AC/DC right now or watch television. So there’s just a lot of examples of how we can work together both in the business environment and at home to bring people to a much more seamless experience.

And as John and Steve said, this is really what customers, both consumers and enterprises are really telling us to do.



CHARLIE ROSE: Thank you very much. Thanks, Charlie. Thank you, Bob. Let me do this. (Applause.) I have two things here. Anybody want to start this with questions out here for them? If you can just stand up and grab your — and I’ve got this mic, and I’ll get to you. There you go. Identify yourself and then —

NICK HOOVER: Nick Hoover with Information Week. Just a question. You guys have very different visions of where computing is centered. You have a network-centered computing world and an application-centered computing world. Do you agree with that statement? And do those two visions — are those two visions complementary? And, if so, how?

CHARLIE ROSE: Steve, go ahead, and then John.

STEVE BALLMER: I would say we have a fairly common vision of the things customers want to do with computing. And we have a quite different view, tactically, from time to time of how to implement that where we naturally implement it, sort of as Bob would say, we start with clients and servers and operating systems and software, and Cisco starts with the cloud and the network and the networking infrastructure.

I’d say the vision we share of what customers want to do is the same, the way we tend to implement is different, and customers want both implementations to work very well, and to work very well together.

So, I don’t expect us to agree on every last detail; that’s not the vital part of this partnership. The vital part of this partnership is from client through cloud to server to Internet storage device or computation device, those things have to work well no matter where we are centered, or Cisco is centered.


CHARLIE ROSE: OK, right here, and then I’ll come over to the right. Stand up and identify yourself, if you will.

QUESTION: Bloomberg Radio.

Steve, the president of Microsoft’s Business Division Jeff Raikes has predicted that 100 million people will be making phone calls within Office programs. If it’s Microsoft software enabling that, what role do you see for Cisco in that ecosystem, and what does the cooperation between Microsoft and Cisco mean for your partnership with Nortel?

STEVE BALLMER: Well, let me make a comment, and then I would love to have John also comment. We want people to make lots of  do lots of voice communications from within our software. I hope most of it runs through our backend infrastructure. But I suspect some of it will also run through Cisco backend infrastructure. And I’m not talking about just the networking gear. We showed interoperability with the present system, with the switching capabilities, et cetera. We will have that level of interoperability. But, make no mistake about it, when people want to put in kind of their backend unified communications infrastructure, or their front end applications, because we showed you the Cisco applications, we’re going to compete on that. That’s OK. It’s going to be a good, lively, vibrant competition, and yet the points of interoperability, there was amazing interoperability in those demos. Those things will also happen.

With Nortel, Nortel and we are really working on the same thing. With Cisco, we are working on things that compete and interoperate, which is a different notion. I’m going to go see a customer later today where I know John is working with one of my competitors on stuff that works the same, but they’re competing, and they’re free to do that as well, and I think that’s part of this sophisticated, both partnership and competition.

So, we have no changes in our relations with others, but we’re very excited about what we can do to drive opportunity together with Cisco.


JOHN CHAMBERS: I think there are two key takeaways here. First is, I would encourage you not to get on the transactional level. If there’s one takeaway that you saw us both try to communicate and deliver on, it’s going to be video over the Internet, data over the Internet, voice over the Internet, any device, fixed or mobile, to any content. That’s going to load networks. It’s going to generate a whole new wave of applications to go with it. Within that, there are going to be many of the areas that we will work together on, some that have been yet to be defined where we work together and compete, and some where we will compete. But for the user, whether you are the user at home trying to make this complicated scenario work in your house, which is a nightmare today; or you’re the corporate enterprise customer, you’re saying, Microsoft and Cisco, if you want to be strategic to us, you must interoperate. And the market is going to be very big. We will both make a lot of money here. But it goes back to companies who don’t listen to their customer requirements and compete in an old-world fashion are going to have trouble in the future.

STEVE BALLMER: But guys like Jeff Raikes and his counterpart at Cisco, will they come out and tell you boldly what they’re going to do to win? You bet. And I’ll support them, and John will support them, but we’ll also tell you how we’re going to make the stuff work together.

JOHN CHAMBERS: And don’t want to surprise you, there will be areas where we may partner and then later compete, and that’s just part of the relationship. That’s what competition is about.

CHARLIE ROSE: OK, right here, and then back here, then I’ll go over there.

QUESTION: (Off mike)  I would like to ask you a more generic question about the procedure of your business. I would like to know what is your opinion about the impact of the current financial crisis on the economy, and on specifically the technology industry, because economists previously thought that the growth would be driven by corporate demand, especially in the technology business, so the current liquidity of currency crisis do you think will provoke a recession, and a crisis also in the technology business?


JOHN CHAMBERS: Let me break the question into a couple of pieces. This is the strongest global economy I’ve seen in my lifetime, and the good news is, it’s not depending on a specific industry or a specific country or a particular country. Are both of us dependent upon capital spending, and economic factors? Absolutely. But if you watch what is occurring in the industry, core industry, at least what our customers are telling us, are very strong on a global basis, and our most recent quarter articulated that very effectively. And when you talk to customers, basic industry is very positive. In terms of the financial derivatives, which have clearly caused the problem here, all of us hope that it will not spill over in a bigger way to slowing economies. I’m not an economist, so there are people that can articulate that better. But if I purely watch our momentum through the end of July, it was the strongest quarter we’ve had in a very long time, and it was the best balanced quarter across geographies, and across product sets.

And this really speaks to the opportunity that’s in front of us. Our problem is not one normally one of growth, it’s prioritization and execution. Will we be affected by economies or key industries, the answer would be, of course. I tend to be more optimistic, perhaps, than other people are in the market, time will tell if that’s accurate, and we will adjust appropriately. But at the present time, the momentum through the last quarter, and I’m not going to ever comment during the quarter about the current quarter, felt very good on a global basis. We see the same challenges that I think other people in this room see.


STEVE BALLMER: I agree with him, and I thought that was well said. Not much to add.

CHARLIE ROSE: OK, right here. Could you stand up and identify yourself, please?

QUESTION: (Off mike)  you talked a lot about collaborating, and it all sounds great, you know, working for the customer. But how do you realistically work on a technology basis together, and talk about interoperability and future stuff when you’re also competing. So I would imagine you guys don’t want to give away too many of your secrets to one another, so how do you manage that?


CHARLIE GIANCARLO: Well, I think, first of all, you need to be clear about where you’re competing, and where you’re not really competing, and 80-90 percent of our business, we’re not competing. We’re just in very complementary industries that need to work together well in order to make our customers successful. And we have every interest to do that, because we sell more when our customers know they’re going to be successful with us. In the areas where we are competing, you know, I would imagine that if we didn’t need to interoperate, we probably wouldn’t. It’s really because customers are demanding that we do, and especially in the communications field, you have to interoperate. Imagine if you had a cell phone from one vendor and you couldn’t call your friend because they had a cell phone from another vendor. I mean, communications is all about interoperability, and collaboration is about communications. So in these technologies 

QUESTION: (Off mike)  in unified communications, for example, you guys are competing very closely. You’re offering customers essentially the same products.

CHARLIE GIANCARLO: Yes, in some cases the same products.

QUESTION: And you demonstrated here that they could use one or the other, so how do you realistically 

CHARLIE GIANCARLO: Let’s not confuse the technical interoperability based upon standards that either exist, or the ones that we’re creating from what we do in accounts when we go into accounts. So when the sales teams go into accounts, they compete. But the customers want to mix and match these different products, because they buy these products in the unified communications space, it is not just one thing. It’s many products. And they do want  unfortunately, they want to mix and match. And because of that, we have to interoperate, because if you think about it, you’re asking what’s in your selfish interests to do this, and it’s very simple. Customer won’t buy from either one of us unless we interoperate.

BOB MUGLIA: And the teams really get that message in the sense that while they know we’re really out competing in the marketplace every day, our engineering organizations are working closely together. Ironically, one of the areas where we have had some of the longest communications in working together, and some of the best work together is actually in the unified communications space. There’s a lot of different efforts that the teams are working on, and the senior management in both teams actually get along and work very well together, and they set a precedent for their engineering staff to also do so.

STEVE BALLMER: We don’t expect each other to spill the secret sauce. It’s not like sort of we come to the meeting and say, well, today’s the day John is going to tell us everything they’re going to do, and so we can jujitsu them. That isn’t going to happen, and it’s not going to happen the other way around. That’s not what this is about. It’s about saying, here’s where we’re going. Here are the kinds of things we’re hearing from customers that we’ve got to get right.

Yes, we sort of write down, what are the principles that we’re going to use to govern this relationship. Number one, consultation with customers, doing regular customer sessions together, getting feedback together, that’s number one. Number two, we’re not going to, in any sense, restrict the way we compete, but we’re going to be able to talk intelligently about where we cooperate and compete. Number three, we’re going to work together to make things interoperable. And those are fundamental tenets of what we’re trying to get done here. So we’re not trying to be naive, it’s sort of what’s new? Answer, there’s a list of things we really have to get done, there’s a kind of sophistication we have to have in the relationship.

There really is a strong shared vision, and I’m excited about the new areas in which we’re competing with Cisco. I’m excited about those on behalf of Microsoft, and I’ll tell you, actually, if we interoperate, that whole part of the market for unified communications is going to grow faster. It’s going to grow faster for us. It’s going to grow faster for John. Of course, I want my fair share, John wants his fair share, there’s a bunch of other competitors. They’re also free to compete. They’re going to do a good job, get their fair share. But we’ve got to accelerate the pace here, and I think we have a unique opportunity as industry leaders to do this in an important and sophisticated way together.

JOHN CHAMBERS: So key takeaways that are different. You see two CEOs, you make no mistake about it, can be command and control when appropriate, who believe this if the right thing to do. You see two engineering leads who work remarkably well together, and yet are candid that they have members of their organization who are going to create some challenges for us, and that’s OK, and we’ll bring them into line periodically. But Steve’s key takeaway is, if you do what’s right for the customer, the industry is going to grow faster, you may not have as big a market share, I may not have as big a market share, but we’re going to have a bigger pie to draw upon, and candidly our top line and bottom line will benefit from it.

So it goes not to an overall way of competing where you don’t talk, and you put the customer into no win. It says, where is the industry going, agree with the roadmaps where you can work together, agree where you compete, you’re going to interoperate. You don’t in any way restrict each other’s ability to compete. And, by the way, we will periodically step on each other, and that won’t change. But this could be the role model for the future. And it has two companies that are committed and realistic on the challenges to trying to make it happen.

CHARLIE ROSE: OK, right here.

QUESTION: I’m Michael Hickins, eWeek. You spoke earlier about Cisco being a good competitor, but in years past you’ve been accused of being a bad competitor in that space by the EU, by Korea. What have you learned that makes you a good competitor? Do you think you’re a good competitor? And how do you feel, John, about working with Microsoft in that context?

STEVE BALLMER: Actually, I’m sure John’s a good competitor in all senses, but the sense I meant it was, when John competes, he tends to do very well. That’s what I mean, and I think when people say we’re a good competitor, you went on to legal and regulatory types of matters. I just think we tend to drive hard, we have good innovation, good pricing, the kinds of value equation the customers really like. And I respect that in Cisco.

QUESTION: (Off mike.)

STEVE BALLMER: No, they’re really not linked is my point. There are a set of regulatory  and I think  I’ll say, I’m probably the most up to speed on this issue, you know, everybody is supposed to work really hard to be a good competitor, to innovate, to drive low prices, to create value for customers, et cetera. And at some point, if you do very well, then you run into another set of issues. We are a very good competitor to this day. We have always been a very good competitor. We’re not talking particularly about markets in which either one of us  they’re nascent markets, neither one of us have huge market shares today. Most of the market share is still with legacy technology, legacy video conferencing system, legacy voice systems. You know, most of that is in the past, and most of what we’re talking about is the opportunity to get IP networks to carry all kinds of traffic, cooperatively, competitively, to do that at home in the way that Bob showed that, to do that in hospitals, to do that in businesses, where sometimes there’s overlap.

So I look at these guys and say, yes, they’re a good competitor. When we’re going head to head, I know they’re going to put a good value proposition out there, and so am I. And I know their sales guys are going to be relentless about telling their customers about that in a good way, and I think they know so are we. The thing we also know, though, in this case as good competitors is, if somebody asks me, does your stuff interoperate with the present system from Cisco, we’ll say, yes, we interoperate, and we’ll handle that if you want that kind of mixed world, but let me tell you why it would be good to get an all-Microsoft world. And I’m sure the Cisco folks will do exactly the same thing.

JOHN CHAMBERS: So to break the question, again, into a couple of pieces, I believe you catch industry market transitions right or you get left behind. Partnering is very difficult compared to acquisitions. I would argue, 90 percent of acquisitions in high tech fail, and yet Cisco, and I would argue Microsoft, as well, has been very effective about moving into new markets through acquisitions. If you didn’t have the courage to do something that others have not done before, and to realize there will be hard bumps along the way, you don’t lead in this industry.

So the second part of the question, if our vision of the industry was different, if our engineering leads could not get along, if Steve wasn’t customer-driven, and had the same philosophy I do, if your customers want you to do it, you’ve got to find a way to do it, that should be rule number one, then I would be more concerned. Do I have tremendous healthy respect for the power of Microsoft? Yes, but I also trust the man.

I believe that if you don’t take good business risks when market transitions occur, you let down your shareholders, you let down your customers, you let down your employees, and you slow an industry growth. So I’m not going to do this in the old world fashion. Do I underestimate how difficult this will be? I don’t think so. I think it’s going to be very difficult, but the rewards for our customers, and for our companies ought to be dramatic if done right.

CHARLIE ROSE: Three more here. Yes, ma’am. Here, here, there.

QUESTION: I have a follow up to the economics question. I was wondering if you see any signs of spill over in the financial services, or retail areas and what kind of level of risk do you think there might be there and, John, what you were saying about the new wave of productivity. Is there a bump potentially in the road to collaboration and to sort of spending on the new technologies to get that new wave of productivity?

STEVE BALLMER: I’ll just add slightly. So far I don’t think  budgets don’t get cut as quickly as markets swing. So if we’re going to see a change, it’ snot going to happen sort of two days after the most recent interest rate move. Our customers are longer-term thinking than that. But, if, in fact, we wind up in an environment in which credit is more scarce on a long-term basis than it has been, undoubtedly capital investment, and as John said, we’re both dependent on capital investment not only in the business environment, the telecom environment, we’re dependent on that, we’re dependent on people allocating money that they might borrow at home to finance the kinds of big screen TVs that make Linksys systems and Windows Media Center look good. So we are, of course, exposed to that, but so far I would say we’re living through the volatility on a day-to-day basis no change.

At the end of the day, it would be a little tougher environment. In some senses, it will be a little easier environment, too. The importance of being able to show productivity gains in business would only go up in that kind of environment, and the kind of productivity gains that you can get through the seven initiatives that we are talking about I think are quite dramatic, whether it’s at home or in the business environment. So in a sense, in the long-run that’s probably not a bad thing for us either.

My personal opinion, I can’t control the world financial markets. I can’t predict the world’s financial markets, and at the end of the day making the innovation happen better than the guys I compete with is sort of the most controllable aspect of my life, so I tend to focus in on that most carefully.

JOHN CHAMBERS: From a productivity standpoint, most of the top accountants in the world, including you can talk about it now, because Dr. Greenspan is no longer with the Fed, would tell you they believe productivity will run in the 1-2 percent range in terms of growth. In the mid-’90s we called the shot pretty accurately, both with Dr. Greenspan when he was at the Fed, but also with Laura Tyson, President Clinton’s economic advisor, saying that we thought productivity would grow between three and very probably five percent over the next five to seven years. And we saw this first phase of the Internet and a lot of what our teams have talked about driving that.

We believe that the productivity, as you’ve seen mathematically, has slowed over the last several years. Part of that is capital spending investment, but a large part is there has not been a new wave of innovation. What we’ve talked about, and kind of beat around today a little bit maybe we need to articulate more directly, we think the second phase of innovation is in front of us. It is easy to use data, voice, video, devices that do collaboration, Web 2.0 technologies.

We are saying that you’ll see  if we’re right, Cisco, in the next three to five years, and feel free to comment, we think you’ll see a gradual increase in productivity that will occur from this, but you’re at the very early innings of the second phase of the Internet, and the growth potential that goes with it, and it will be a gradual pace. We don’t make any decisions on a quarterly or yearly basis to speak of. We make almost all of our decisions on a three to five year basis, and we don’t over-react, or under-react to short-term gyrations in the market. Actually, I like it when my competitors do, that makes it a lot easier to execute, because if you’re running your company on a monthly or quarterly, or yearly basis you’re probably not going to get the transitions right.

QUESTION: Steve Hamm from BusinessWeek.

Steve, at the top you mentioned just very briefly that you’re working with Cisco and also with EMC on the vision of the data center for the future. And you guys have also talked about how responding to your customers is really important; why don’t you also have Sun, and IBM, and HP, and Dell, involved in that vision of the data center of the future? It seems like that would really be the thing that would bring interoperability to the place where the customers would like it to be.

STEVE BALLMER: We actually do have, I think, a number of those guys actually involved in the same initiative. I’ll let Bob comment more specifically around the so-called SML, or Services Modeling Language.

BOB MUGLIA: Right. I mean, if you look at the focus that we have on manageability, and the work that we’re doing in the virtualization space, we’re actually working with all those companies on a daily basis, and we’re innovating both in terms of our products and our platform, but also in terms of how standards can evolve, because one of the really key things here is to simplify the configuration and the management of all of the different heterogeneous systems in the data center environment, and that means it can’t be one vendor. It can’t even be one class of vendor. That’s why Cisco, Microsoft, and EMC make a lot of sense, because we can focus on our strong expertise in host systems at Microsoft, networking, and then storage from EMC, but also bringing into account what HP is doing, what IBM is doing, et cetera. So, yes, we’re all working together on this.

CHARLIE ROSE: Yes, here, please.

QUESTION: (Off mike.)

BOB MUGLIA: I’ll give a shot at it. I actually think you’ll see a wide variety of these. It may sound  it may sound wimpy just not to place a bet on one, but what you find out is depending on the nature of the geography, the install base of the existing carrier, and so forth, cable may make the most sense, DSL may make the most sense, new fiber build out may make the most sense, or if there’s no infrastructure at all wireless, some kind of 4G wireless technology, whether that’s WiMAX or some of the others, may make the most sense.

I actually think if you look on a worldwide basis you’ll actually see quite a wide variety of these different access technologies utilized to get broadband to the home, or to the business. I do think that in the less developed parts of the world we’re going to see a lot of broadband wireless out there that will make high speed internet available to a very large majority of the world’s population.

STEVE BALLMER: Ironically, it’s more non-technical factors, pricing, capital, investment, and legacy than it is technical factors, I think, that will determine this. If you come into our house and you say you’re going to rip up the walls, the CEO of our house, my wife, will say, no you’re not. And somebody else’s house, they may have a different set of considerations. And you get that not only at the home level, you get it at the corporate level, the government, the local, state, and regional level, and certainly I think all of these things will proliferate depending upon kind of what the price and the kind of legacy environments look like.

QUESTION: (Off mike.)

JOHN CHAMBERS: So in the sequence you asked the questions, it’s too early to tell how Web X will work out for us as an acquisition, but it has the potential to work out on the same magnitude as Scientific Atlanta, and Crescendo, and some of the very aggressive moves we’ve made in the past. You won’t know for sure probably for 12 to 24 months.

To the second part of the question, it speaks to an area where there may be some overlap, but also a chance for us to share. And this is where there’s not a simple definition of when you compete and when you partner. Then Web X may be a prime example that we may compete in certain categories with Microsoft, and others we may enable the application within it. But, I think it does speak to the overriding premise that both of us understand, we’ve got to move in ways that make sense for Cisco. Does that mean that occasionally perhaps we’re further into an area than Microsoft would ideally like, of course. Will that change our decision to go into that, of course not. Will Microsoft do the same thing in reverse of course. And will it change their decision to go into those, of course not. They’re going to be aggressive within it.

STEVE BALLMER: I have great respect for John and for Cisco as a company, but in anything that they do that we do, I’ve got more respect for us. And I’ll bet you’d get exactly the same answer out of John. So if they want to compete with us I say, bring it on, and I’m sure they say the same thing about us, and that’s OK. That’s the thing we have learned to say to each other, that’s OK. So whether it’s the competition that we’ll have in kind of collaboration and service meeting offerings, whether it’s the competition  sorry. Whether it’s the competition that we will have in voice over IP infrastructure, it’s OK.

They’ll try to build some skills, and I’m sure that we’ll point out that they’re new building some skills, we’ll try to build some new skills, I’ll bet their people will point out that we’re early stage, in building some skills on our side, too. But, at the end of the day customers are going to look at the products and say what excites them. Sometimes it’s going to come all from us, sometimes it’s going to come all from Cisco, and sometimes it’s going to involve content from both, and we’ve just got to let this stuff happen as quickly as we can, and get as much of that opportunity as we can at Microsoft, and John will say the same, I’m sure.

JOHN CHAMBERS: But, that might be really the bottom line of this whole announcement we made today. This is a market that is into a new wave of opportunity, that if companies do not learn how to move aggressively, and take advantage of that, you’re going to get left behind. That if you purely view your large peers in the industry as friend or foe, you’re probably not going to have any alliances. Yet, if all you do is tolerate each other and because you compete in certain areas your engineers dislike each other so much, and your sales force dislikes each other so much you just put up a nice facade and marketing position for customers, that’s going to hurt your relationship with the customers, it’s going to hurt your growth, it’s going to hurt the direction of the industry.

So we’re going to see if we can do this different than it’s been done before. We do not underestimate the challenges, but as you can see on the most important things, view of how the industry evolves, commitment at the top, and the willingness of engineers to work together and to compete together across the board, Charlie, I think is very unique.

STEVE BALLMER: The only thing I’d add is the one thing I don’t think we want to allow to happen, engineers egos can be confused for competition. Where we want to compete, we will compete. Where our engineers are just trying to say, my creation looks better than your creation, and has nothing to do with real competition, and we had a little bit of that, I’d say, with NAP-NAC, as a good example, we don’t want to let engineering ego get in the way of important interoperability.

CHARLIE ROSE: OK. On that note, because everybody has their own schedule, I want to thank Bob Muglia, John Chambers, Steve Ballmer, and Charlie Giancarlo, and thank you for participating in this. There’s a lot more to be said, and there’s also a clock, but thank you very much. (Applause.)