Keynote Interview with Steve Ballmer, CEO, Microsoft Corporation

Gartner Symposium/ITxpo

Orlando, Florida

October 10, 2006

ANNOUNCER: Ladies and gentlemen, please welcome Gartner Vice President and Fellow David Smith, and Gartner Vice President and distinguished Analyst, Yvonne Genovese. (Applause.)

DAVID SMITH: Thank you, and welcome to our Mastermind Interview. I’d like to introduce the CEO of Microsoft, Steve Ballmer. (Applause.)

YVONNE GENOVESE: There he is!

DAVID SMITH: Steve.

YVONNE GENOVESE: Hi. How are you?

Steve, before we get started today, one of the things that we did yesterday is we took a moment with some of the attendees, and had them ask for questions of you. So we’re going to run that video right now.

(Video segment.)

(Laughter, applause.)

STEVE BALLMER: I thought the two questions, by the way, that book-ended things nicely were, “How do you compete with free?” and “Explain your licensing programs.” If you guys want to talk about anything else, we only have 45 minutes.

DAVID SMITH: I think we’ll get to some of those issues.

You know, we live in a very interesting industry, so many things are changing, and one of the things that we hear a lot about is the end of software as we know it. What do you think about that? Is it the end of software releases as we know it, is it the end of software as we know it, and what does it mean for Microsoft as one of the leading software companies?

STEVE BALLMER: I’d actually probably say it completely differently. I think it’s a transition in software, and so we could say it’s kind of a transition from software as we have known it to forms in which it will be even better.

In a sense at the end of the day I think – and I’m obviously very biased on this topic – I think a huge percentage of the value that gets delivered through information technology comes from the software. So you can’t say it’s the end of software. I don’t think we’re at the end of major innovations that take more than three months to go get done. I think we’re going to continue to have a research group and it’s going to work on things that will take multiple years to come to fruition.

But I do think we’re at a transition where software goes from being something that essentially is still in its pre-Internet days to being something that is what we call Live. Not just Web sites but all software over the next few years will have the kind of click to run capability that you think about on a Web site – you click it and you run it. The same thing will be true of software products. They’ll still execute down on the PC, but you’ll click them and run them, and it will work just as quick as a Web site.

DAVID SMITH: Have we seen the end of the big, huge software projects that have caused so many vendors problems? And it’s not unique to you, but do you think we’ve seen the end of them?

STEVE BALLMER: I don’t. I think that – and I’ll speak now for Microsoft. We need to have…let me call it various muscle types. We need to have fast-twitch muscle that can ship things every few months. We need to have medium-twitch muscles that can ship things every year. And we need to have slow-twitch muscles that might ship every two, three years.

So I don’t think we’re at the end of large scale, long cycle innovation, but I think the expectation is that there will be enough of these other – enough output from these other muscles.

And it is important, because when people say everything goes to short cycle innovation, that would also sort of be like saying the end of very deep innovation, which I don’t believe, or very deep integration, which I think a lot of our customers appreciate not just from us but from the SAPs and Oracles and everybody else of this world.

YVONNE GENOVESE: So you just talked a little bit about Live, and you kind of hinted that way, but is this really the end of the way that we’re going to consume software, and now we’re going to all consume it over the Internet, meaning all software? Where is it going to really hit the biggest, and where do you suspect Microsoft will go in that area?

STEVE BALLMER: Yeah, I don’t think anything stops and something else starts as quickly as the hyperbole likes to suggest. And I think most people for the foreseeable future are still going to want to run enterprise IT as enterprise IT. More and more of it will come from Internet services, but that’s not going to switch over.

So when I say software is going to have a click to run characteristic, a lot of that may be click to run characteristics that are instanced inside a corporation’s firewall. So you don’t deploy something like Office, you put it up on a server and you click to run. And certainly if you look at what we’re doing with our acquisition of this company Softricity, Windows Terminal Server, we absolutely believe in evolving, not stopping and starting again but evolving to this kind of click to run Internet style simplicity.

YVONNE GENOVESE: Will that be across all products?

STEVE BALLMER: Sure.

YVONNE GENOVESE: Business applications included?

STEVE BALLMER: It will be across all products, business applications included.

YVONNE GENOVESE: A promise? Are you going to deliver it next year?

STEVE BALLMER: No, no, no. (Laughter.) I’ve gotten out of the habit of promising delivery dates, except on one product, which I’m sure they’ll talk about later. (Laughter.)

But I do think it’s important, you know, Windows has a special position because it manages the hardware, and so it will probably have layers architecturally, a layer that is very married to the hardware and then layers which have very much this click to run feel to it.

DAVID SMITH: You’ve described Live as not software as a service but software plus services to try to take advantage of where your footprint is today. How do you demonstrate the value of that difference, and how do you convince people that that’s the way they want to go, and how do you balance that with your existing businesses?

STEVE BALLMER: The difference between saying software plus service and software as a service when we emphasize that nuance is really a question of will people want to use the local intelligence in mobile phones, in PCs, et cetera, and we think the answer to that is yes. So you may click on something that’s like a service and somehow instantly your processor locally and your hard disk locally are engaged; otherwise, we’re just going back to the world of terminal emulation, and I don’t actually think that would be an improvement in the computing environment.

And certainly even if you look at Internet services today from us, from Yahoo!, from Google, from whomever, they all basically believe in using the power of the client. “Ajax” uses the power of the client. The instant messaging clients from Microsoft, from Yahoo!, from Google use the power of the client.

So when we say software and service, that’s our way of saying service-like simplicity and management with the rich capabilities of client-side software, in addition to what’s in the cloud.

DAVID SMITH: I don’t know what that offering could be that you were talking about that we might talk about a date. What do you mean?

STEVE BALLMER: I suspect – well, there was a gentleman there who asked about Vista, and somehow I thought it might be on your mind.

DAVID SMITH: So what have you learned from the difficulties in getting [Windows] Vista out? What will you do differently so that this doesn’t happen again?

STEVE BALLMER: [Windows] Vista really is three stories in one release cycle, and the one we learned the most from is actually the one that’s farthest ago in time. When we finished Windows XP, we started on something, and I’ll call it “Longhorn” just to distinguish it from [Windows] Vista, it was the first thing we worked on. And we were really trying to re-engineer all major components of Windows and get them all to rely on each other and integrate with each other. There was too much new invention going on simultaneously with integration, and that was really beyond the state of the art for us or frankly for anybody else in terms of engineering complexity.

What we learned was we have to innovate and integrate, not try to do both necessarily all at the same time, because it just creates too much chaos in the engineering process.

After about two years, we stopped that, we said we can use those technologies but we’ve got to do some different things, and we said what is the job one priority our customers are giving us, it was security. So we did a year turnaround on Windows XP SP 2, which I think was actually very well received and very important, and then we’ve had what I would call a fairly normal Windows release since then of about two to two and a half years. And frankly that core thing that manages the hardware, I don’t think you want core changes – at least this is the feedback I get from customers is you don’t really want the core thing that manages hardware and applications changing every three months, it’s probably appropriately on a couple of years’ cycle.

So the real learning is innovate and integrate, as opposed to try to do what we used to call integrated innovation.

YVONNE GENOVESE: It seems like a good case for breaking up a big software release, but that’s just me.

The discussion we’ve been having, and even the guy that was last in the video seems to indicate that we’re going through what I’ll call a technology freedom movement where we all want technology, but we want it kind of disconnected, somewhere else, but we want all the agility and everything that’s associated with it. Is this something that Microsoft is going to be able to deliver on?

STEVE BALLMER: Oh, I think absolutely. And in some senses I’d say we’re better positioned to do that than anybody else, because we actually have both what I would call an end user or consumer kind of set of muscles, as well as an enterprise set of muscles. And in some senses if you look at the last 15 years, we grew up with our end user and desktop roots, we married that with a set of capabilities in the enterprise, and we’ve got to let both muscles work, the end user empowerment muscle that you described, as well as the enterprise muscle.

And the whole Internet phenomenon and software and service just takes that kind of sense of end user empowerment to the next level, but there’s still going to be a desire to balance that with appropriate IT management, control, compliance, security, et cetera.

DAVID SMITH: One of the results of users trying to take control is they’re starting to question the value of paying money to vendors for things, they’re used to free software from the Internet. And, in fact, with [Windows] Vista being five years after XP and a lot of folks here having signed up for SA, Software Assurance, where while there wasn’t really a promise of an upgrade in the three years, there was sort of an expectation that they had. How do you convince them to sign up for that again?

STEVE BALLMER: Well, I think that the key for us, like anything else that you do in business, is to be able to show sufficient value. And we’ve put a lot of emphasis in our Vista release in enhancing the overall value proposition around Software Assurance. So you will find it much deeper in things that don’t depend on a next release. We plan on giving you one, but you may not even plan on taking one.

So we need value that is based upon the notion of an upgrade, but we also need value that is independent of the notion of an upgrade. That’s particular to Windows. In some senses Office has its own set of issues for its Enterprise Agreement and maintenance value proposition, and the server has a different proposition altogether, because what most of our customers are telling us they want most there is that they get the rapid turnaround that they really need in terms of support fixes, et cetera.

YVONNE GENOVESE: One of the things that we’ve seen with governance or with the technology freedom is this movement towards governance. One of the things that happens with technology freedom is that the control moves from a vendor developed control to something that the users have to have more control, and they have to have tools to have more control. And that’s not a place where we’ve typically seen Microsoft provide any governance tools, and governing an environment where the software has been broken up. What are you going to do? Do you have any governance tools that you’re going to be bringing to market?

STEVE BALLMER: Well, you know, in some senses we’re probably still stronger on the end user freedom side than we are on the governance side, and you see that, if you take a look at, for example, at the new release of Office and what we’ve done to really put the end user in control and take more full advantage of the power of Office and SharePoint, there’s a ton we’ve done there.

On the flip side, if you take a look at the kind of work that we’ve done in the Information Rights Management system, if you take a look at what we’ve done in Exchange for e-mail archiving, if you take a look at what we’ve done in SharePoint for archival, backup, search, we actually do give I would say the IT community a much better toolset to let the end users run wild but still meet the kinds of compliance requirements that I think are an important part of that governance question.

YVONNE GENOVESE: Theoretically security could get worse in that kind of an environment. How do you manage that?

STEVE BALLMER: Well, what we’ve tried to do is harden the interfaces so that we have fewer points of attack, and I actually think we’ve done a pretty good job of that. In the security game unfortunately you can never say you’ve done a perfect job, but I think we’ve done a pretty good job of that. And at the same time, we are trying to let IT people from a governance perspective have more control over policy. If you want all of your e-mail messages to be rights protected or aged out or retained in a certain way, we want to make that eminently possible as a point of IT policy as opposed to the end user having to sweat those details.

DAVID SMITH: How much of this do you think can be solved with technology, since it’s mostly a people problem?

STEVE BALLMER: Well, what’s the old expression? To somebody with a hammer everything looks like a nail. To somebody who runs a software company, everything looks like a software problem, Dave.

So you could say it’s a people problem, and I’d say, yeah, OK, sure, it’s a people problem, but if the software makes it simple enough, we’ll get the users, we’ll get the administrators where we need to get them.

So I may overemphasize the power that technology can play in this thing, but that’s part of where I get my optimism about what we do.

DAVID SMITH: You say that software is the company, but your recent slogan is people at the center, people-centric solutions, People-Ready business. How much is it really people at the center, or is it IS professionals at the center?

STEVE BALLMER: With great respect for everybody in the room, it’s people at the center, because it’s people at the center for our customers. No IS professional is confused that at the end of the day unless business gets some additional value – better customer service, more growth, better information, reduced cost, and the people inside the organizations that we all serve are the people who deliver that value, the IT, the software, all enablers of these kind of innate potential and capacity in the people in our organization, whether it’s a bank teller who’s trying to sell a second product to somebody who’s in the branch, or it’s the design engineer at Ford who’s trying to come up with the idea for the next breakthrough in engineering and design, it’s people at the center.

I do like to remind everybody that IS people, IT people, are also people who want to be at the center and who want to be empowered. And in some senses you can ask for all of the breakthroughs that have happened for the broad set of end users or for the design engineer or for the supply chain should we be putting more as an industry effort and attention and IQ into improving the tools we give IS professionals, and I’m going to agree with that too because IT people, like all of us, we are people, too. (Laughter.)

DAVID SMITH: Absolutely. Most of us anyway. (Laughter, applause.)

The point is that you’re right, we’re people and we have multifaceted lives that we have to manage. And you mentioned you have consumer oriented muscles you have to flex, and enterprise oriented ones, and we agree as part of our research on consumerization of the intersection between those things. And Microsoft is pretty uniquely positioned in both of those camps, yet we don’t see you really taking tremendous advantage of that position. What are you doing there? What’s your plan to leverage that?

STEVE BALLMER: The core, the most important thing we’re doing in this dimension is really building out our Live platform. Because at the end of the day the next wave of consumerization, be it at home or be it at business, the next level of consumerization is going to come essentially from this notion of Internet-based services, Internet-based delivery. And so really getting our Live platform built out, really understanding how those technologies affect the servers that we sell people so you can instance let me call them consumer like Live services inside the enterprises represented here, that’s really kind of the job one priority.

I think of there being a variety of pillars. There’s kind of a technology infrastructure platform in the cloud. I think of there being a commerce platform in the cloud, a community and communications platform that needs to operate as a service, a search and information management service, and each one of those will have an analog that affects our server product line.

So whether you choose to consumerize out in the Internet cloud or you want to instance that inside your own organization, it’s really that work that Ray Ozzie is driving for us around the Live platform that I think is the next wave of that consumerization priority.

DAVID SMITH: You mentioned search, and I remember last year particularly you mentioned that you would like to be able to come back and tell people that you were providing more relevant search results. How would you grade yourself on that?

STEVE BALLMER: I’d give two gold stars. We’re doing a fantastic job. We have improved our relevance. With the release of our Windows Live Search site, which I encourage everybody to try, www.live.com, with the advent of that, which was roughly a month and a half or so ago, we have really improved our relevance dramatically – dramatically.

Look, there’s good competition out there, I’m not going to say anything to the contrary, but certainly you will find that we’re applying all the energy, imagination, IQ, brainpower we can, because search, as good as it is compared to where things were a few years ago, let’s face it, it’s still not easy to find the things you’re looking for, either out on the Internet at large or frankly inside the corporate environment.

And some of the things you can do with Office 2007 in the new search where you can peer into business applications data if you want to, and bring that data out, both on the Internet and on the intranet, I’d say with Windows Live Search and with the work that we’re doing in the new SharePoint, I’ll give us two gold stars, but at the end of the day I hope you give us two gold stars.

YVONNE GENOVESE: I might just take us back a little bit to talking about people at the center. One of the things that Gartner has been talking about is something that we call “process of me” where there is an opportunity for a vendor and the market to redefine process from what we’ve typically seen as traditional business processes, order to cash, where there’s a lot more human interaction that happens in a process, and there’s some chaos that also happens in a process in order to get the process to work correctly.

You seem to have all of the components, the business applications, the user productivity tools, the search you were just talking about to provide that “process of me” capability. But we haven’t seen you make any moves there: Why?

STEVE BALLMER: Well, I think if we sit here – when we sit here, since they invited me back for next year as long as I don’t blow it right now, when we sit here a year from now – yeah, OK –

YVONNE GENOVESE: This is a test.

STEVE BALLMER: This is a test. When we sit here a year from now, we’ll actually see what were we able to accomplish with some of the important innovations, and I’ll say it this way, in Office 2007. And you’ll say, Office 2007, what does that have to do with process? What we’re really trying to recognize is the fact that a lot of the value in business processes don’t come from the structured thing that’s in the application, it happens with all of the unstructured activities around that process. You want to take an invoice out of a workflow, you want to move it into Outlook, you want to have a few people comment on it, approve it, because when you say “process of me”, I think about how do I merge, how do we give tools that help merge the ad hoc things people are doing back into the structured workflows in the business applications.

And I think we make a major step forward in enabling that with the new – I’m not going to say it’s perfect, but with the way Office 2007 embraces workflow, workflow services, with the work we’re doing with SAP and with our own Dynamics products so that you can have Office front-end business processes. One of the folks asked about Duet, for example. I mean, it’s all about how do you marry, let’s call it the unstructured world of office and e-mail and annotation with the structured business process world. That’s the only way to kind of help with the chaos I think you described.

YVONNE GENOVESE: So does that mean that Office will be the leader in business applications and not Dynamics actually for you?

STEVE BALLMER: There are two aspects to business process. There is an aspect that is kind of more ad hoc, unstructured, unstructured parts of the workflow, business intelligence, finding, browsing. We’re building up an infrastructure with Office and SharePoint around that. And then there are the very formal structured business processes that go into manufacturing, general ledger, et cetera, and that is what Dynamics is all about.

And our front-end Office infrastructure is going to need to talk to SAP and other back-end structured processes, and we’re going to try to lead in the structured processes with what we’re doing around Dynamics.

YVONNE GENOVESE: One of the big things in there is taking advantage of the chaos. So you really can’t offer something that says this is the way the process is, the person process and the business process as you combine it, but you have to give the users a little bit of the freedom to design it on the fly. Is that part of the design?

STEVE BALLMER: Yeah, if you take – let me give a good example that people can at least here fairly quickly just go try out themselves. We’ll have at some point in the not too distant future a hosted CRM product out in the market. And there’s a question, how do you let everybody do their own ad hoc things around that. And we think the ability to customize it, work through that with sort of customized SharePoint sites that aggregate content, create ad hoc workflows, tie to Office so you can have a hosted SharePoint site or a local SharePoint site all talking to a fairly structured CRM style application out in the cloud.

I’ll give you kind of my mental model on this thing. I was with the top management of this company Maersk Moller, which is the largest container shipping company in the world. And they were explaining to me how ad-hoc, chaotic, unstructured and paper-based it is to load a container, to get the container through customs, and to get it on a ship. There is almost nothing that is nearly as electronic or as structured a process as they would hope for, but that’s their business, that’s where they make their money. And we were talking exactly about this issue, the kinds of capabilities to put a little bit of orchestration without sort of too formal a process around some of these structured business processes.

YVONNE GENOVESE: Absolutely. So let’s talk about Dynamics just a few minutes, because one of the things that we’ve seen is that Dynamics does have an opportunity to be that third competitor to what we’re seeing as some pretty intense competition between SAP and Oracle. But one of the things that’s a problem is it is multiple product lines that cross each other with multiple distribution channels that also cross each other. How do you solve that problem? Does Project Green ever happen?

STEVE BALLMER: Project Green, you’ve got to be kind of a little bit of an aficionado to know this word. It’s the notion that says should there be one code base on which we eventually integrate all the capabilities of some of the ERP systems that we’ve bought. We’re taking a very different approach than Oracle. I mean, at least to the public eye, Oracle is walking around shooting their legacy and telling you to move to the new things. We believe we have to give customers a path forward on the things that they’ve bought, but make no mistake about it, increasingly there will be one way to do customizations, a code base that has all of the capabilities, et cetera.

So we’re trying to have our cake and eat it, too. Oracle is trying to get rid of all the cakes but one. And SAP is trying to say let’s avoid having any new kind of cake and just keep driving down the road. (Laughter.) And, you know, I hope we picked the right approach out of those three. So far so good.

Now, we’ve been primarily targeted at the smaller enterprises and mid-market businesses, but we’re growing our business 20 plus percent a year, we’re adding new customers left and right. In the market that we’re targeting we’re absolutely building position, because we have products that are fundamentally easier to implement and easier to use. For anybody who’s a small enterprise or a mid-market company I would say we’ve got a better solution than either SAP or Oracle.

DAVID SMITH: This space is pretty fascinating in a lot of ways. One is you’ve got companies like SAP that are application companies talking about platforms, and you’ve got you, a platform company, selling your applications as applications. Why don’t you just sell them as platforms? Aren’t you doing that anyway?

STEVE BALLMER: Well, everybody essentially has to be a little schizoid. Nobody wants to buy an application that can’t be customized and extended, and nobody wants to buy a platform that is devoid of all application functionality. So it’s just sort of a question of where your parentage is, whether you tend to start with one of those stories or the other.

We’ve had a much more pure notion of the separation of platform and applications than Oracle and SAP have. I think that’s brought a lot of value in terms of third party extensibility. We’re continuing down that path, and I think it’s a long term winning path. But there’s a platform buried in every application, and as we know from Windows, there are some applications associated with every platform.

DAVID SMITH: Let’s move on to the last area that we want to really probe into, and that’s the future of the company. We had some questions on the video where people were asking, how is the company changing now with the transition plan announced with Bill Gates phasing himself out over the next couple of years, and a new chief software architect, Ray Ozzie? What are we seeing different, what are we seeing the same at Microsoft?

STEVE BALLMER: Well, I probably shouldn’t just lapse into French, but I would say, “plus ça change, plus ça reste la meme.” The more things change, the more they stay the same. As a little kid, I grew up in a French-speaking country, so I apologize for that.

But the point is still the right point; there are basic core principles that have been at the backbone of Microsoft, and I don’t think anybody ought to expect to see any change.

What do I think those are? I’ll reduce them to four. No. 1, I think we’re the only technology company that really has tried to invest in multiple what I might call separate cores. We’ve got an entertainment business and an online business and an enterprise business and a desktop business. Most of our erstwhile industry participants tend to specialize in one thing. So that notion of being expansive in our footprint and our portfolio, Bill was certainly instrumental to that, that isn’t going to change.

No. 2, we recognize that software is an innovation business; you innovate or you go away. And you can talk about big innovation, little innovation, short cycle, long cycle; we remain incredibly committed. And frankly that’s probably the biggest change for me. I’ve got to not be the visionary, but I do have to be the champion of innovation at Microsoft, internally and externally.

No. 3 is the Live platform. We talked about that. In some senses, Ray has had that from basically the start, and so that isn’t going to change.

And last but probably most importantly, Microsoft has been characterized, and we’re proud of this, by a certain kind of a tenacity and persistence and long-term approach. We hope we get everything right up front, we hope we’re first into every market, but even when we’re not right up front or we’re not first in the market, we just keep working and working and working and working, and coming and coming. The bone doesn’t fall out of our mouth easily, we just keep on it – (laughter) – whether it’s the length of time that it took us to get Windows to critical mass or, if I go back and think about when we first got into the networking business, there were a lot of years when, quote, people would say, “You’re not ready for the enterprise.” That discussion doesn’t happen very much, because we just kept after it, kept after it, kept after it. You know, search, we’re going to just keep coming and coming and coming and coming and coming and coming and coming. We are irrepressible on this stuff.

YVONNE GENOVESE: OK, we get it.

DAVID SMITH: We get it. (Laughter, applause.)

YVONNE GENOVESE: That will be on the Internet tomorrow.

STEVE BALLMER: Those are the four things that don’t change.

YVONNE GENOVESE: There’s a new video all its own.

DAVID SMITH: It will probably be on YouTube. (Laughter.)

STEVE BALLMER: My copyrighted material should not be where I don’t want it to be, Dave.

YVONNE GENOVESE: Oh, no! (Laughter, applause.)

STEVE BALLMER: It’s a good question though whether Gartner owns the copyright on that or I do, and I think you do. (Laughter.)

DAVID SMITH: I think we probably do. (Laughter.)

YVONNE GENOVESE: Oh, we’ll make use of it. (Laughter.)

DAVID SMITH: I think we will.

YVONNE GENOVESE: So given what you just said about these multiple cores, where are the top three areas of growth for Microsoft over the next five years? Where are you going to see it come from?

STEVE BALLMER: Well, this is always a little bit of an unusual question. On an absolute dollar basis it will come out of the businesses which are already quite large. Our desktop business and our server and enterprise business in absolute dollars will probably generate the most growth. On a percentage basis, on a percentage basis clearly the most growth will come out of the online and the entertainment portals.

YVONNE GENOVESE: So you just mentioned entertainment, media. How are you going to continue to compete with Google in the current market? I mean, they just bought YouTube last week. Is that going to be a problem for you?

STEVE BALLMER: Look, the number of places – people are very happy to distribute their content anywhere. And if you look at most of the content up at YouTube today, it is copyrighted material. For all of the discussion that says it’s all about home videos, it’s about, hey, I want to go watch the end of the Carly Fiorina interview on “60 Minutes.” And the people who create content professionally are going to want that distributed everywhere. They’ll want it distributed through Google, they’ll want it distributed and found through us, through Yahoo!; there’s really no percentage in somebody who’s got important material to not want to see it broadly distributed.

You know, in the entertainment space we’ve got some very good things going. Xbox is not making money yet, but it’s really in a fairly good market position. We’ve sold over 20 million Media Centers, which is a big, big deal. If you look at the way TV is going to move to the Internet, the position we have with AT&T and Deutsche Telekom, we’re clearly at the front-end of that. We just launched Zune. It’s got kind of an uphill battle, but that stick-to-it-iveness might be useful in that regard.

YVONNE GENOVESE: Going, going, going.

STEVE BALLMER: And, of course, you know, the way entertainment content gets distributed online is going to continue to change. The interactivity that people expect in the entertainment experience will change the very definition of what is entertainment content, as we’ve kind of seen in videogames. So I consider pretty wide open spaces, so to speak.

YVONNE GENOVESE: You recently said that you were spending more time with advertisers than you were with enterprises these days. What does that really mean?

STEVE BALLMER: Well, advertisers, I mean, it turns out most of the companies in the audience not only run an IT shop, you run a marketing shop. And it is a mission-critical issue at many companies that have a big marketing presence to really ask the question, how do we move from offline to online?

I guess it was yesterday in the Financial Times I read a piece that says in Europe today the amount of time people are spending online is now greater than the amount of time they spend reading newspapers and magazines. This is not lost on advertisers.

And at the end of the day many of us in the room understand that our businesses tend to focus in on growth as a top priority, and that means top line, how do you generate top line, top line revenue, et cetera.

And so I have spent a lot of time with marketing people and advertising people in the kinds of companies represented here really talking about what’s the role of search, what’s the role of brand advertising, what does that stuff look like online, what do video ads look like, how do all of these things evolve for this important new medium where people are spending time.

DAVID SMITH: We talked quite a bit there about multi-core, multi-business as your strategy, yet there are synergies that you can have between those businesses like in consumerization as an example. And we see increasingly that you’re running these businesses quite autonomously. Would we go to the next step of actually breaking the company up, or is there too much potential synergy?

STEVE BALLMER: I can’t even tell you myself exactly what revenue or what expense I would charge to each core. They are not an SEC financial reporting, SOX, Sarbanes-Oxley construct. The truth is we use the same desktop infrastructure in the enterprise and in the online business. We have to make the same kind of modifications to our server platform to reflect software and service that we do out in the cloud. We use the same graphics system in the entertainment business that we do everywhere else, and, of course, our enterprise customers, as I said, are very interested in the advertising opportunities that you see in online and entertainment.

So to pretend that these things – you know, sure, most of the people that we compete with are disaggregated, but I think part of the way we create value is by taking the unique approach in our industry of being multi-core, that that is a value creator for our customers and hopefully for our shareholders.

YVONNE GENOVESE: So along those same lines, in fact, to the Google discussion, are you willing to cannibalize Office before somebody else does? Are you willing to put it out there for free?

STEVE BALLMER: The fact of the matter is today there are free – what did the guy say, the last question?

YVONNE GENOVESE: He wants free.

STEVE BALLMER: No, he didn’t say he wanted free; how do you compete with free was his question.

YVONNE GENOVESE: I talked to him yesterday, he wants free. (Laughter, applause.)

STEVE BALLMER: It’s not what he said. If you wanted him to say it, it was your video, so let me respond to it directly. (Laughter, applause.)

We’ve been competing with free for the – nobody – I mean, look, if any of you want to send the guys who run your companies to see me, I will recommend to you that you think twice before you get into a business where you compete with free, OK? (Laughter.) It’s an unusual thing. But we’ve now been living really at least three or four years where our most significant competition has been, quote, “free”, unquote, whether it’s Linux or Open Office or the like.

And the truth of the matter is we’ve learned that customers care about total value, total benefit minus total cost. It’s not about the cost of acquisition, it’s about total cost, and it’s not just about cost, it’s also about the benefit that can be brought.

And the truth of the matter is we’re going to be competing against open-somethings for a long time. I mean, that’s not going to go away, and that means we’re going to have to push and push and push and push and push to add value.

DAVID SMITH: More video. (Laughter.)

STEVE BALLMER: I know, that took five extra seconds out of our time, I apologize, but – and we’re going to have to push some more. (Laughter.)

But coming back to the point –

YVONNE GENOVESE: Hey, it’s your video. (Laughter.)

STEVE BALLMER: – free itself is just an aspect. And the point, the fact of the matter is there are things out there free today that don’t justify, quote, being free. We have created enough of a value proposition. And every day – and that same is going to be true for us, it’s going to be true for a Yahoo!, it’s going to be true for a Google. The fact of the matter is we all will have revenue models as commercial companies around what we do, and we’ve tuned up already for that competition in some senses by competing with Open Source for the last number of years.

DAVID SMITH: We’ve seen different ecosystem kind of models evolve in the industry. In fact, you’ve been associated with the PC ecosystem, which is known for being reasonably open. And now we have the Web ecosystem, which is in some ways even more open. And you are exhibiting characteristics of that, opening up, doing more cross-platform work, but at the same time doing things very differently like with your Zune player going more towards the Apple closed ecosystem model. Is there a fundamental belief that one approach is better, or do we have to see multiple?

STEVE BALLMER: A really closed approach I think is generally not a good idea. And Apple is – and I’m not giving them a hard time, I’m just saying because they’ve been successful, but it’s largely a closed approach, nobody else can build a store, nobody else can build a player. You can build peripherals, but you’ve got to pay Apple quite a bit of money because the connectors are all patented, et cetera. On the other hand, what they’ve been able to do is achieve a good end-to-end experience for the user.

A very open experience sometimes has a lot of chaos in it, whether it’s some of the Web experiences, some of the PC experiences.

What we’ve learned through Xbox and what we are attempting with Zune is to have what I might call a more managed ecosystem where third parties play but there’s more orchestration around the way they play. And I believe that that will be a valuable construct in some places, in some businesses.

Every random person cannot write an Xbox game, we have to wave a magic wand over it, and yet we’ve been able to create interesting experiences and value around that.

So I think we will use appropriately in different businesses different of these various approaches to third party extensibility.

DAVID SMITH: Well, we’re glad to hear that you’re going to come back next year, and I don’t have to ask you that, but I do want to ask you as kind of our closing question, you know, we’ve discussed a lot today about how the industry is going to be different in five years, emphasis on software as a service, in your case Live. What would you tell us Microsoft is going to look like five years from now, and how are you going to get there?

STEVE BALLMER: Well, the No. 1 thing I hope and everybody will agree five years from now is that Microsoft is at the leading edge of defining the next generation of IT. The most important factors to getting there are number one having great people. We just came off our best talent year ever, very good retention of key talent, we brought in amazing people, people who had been SVPs at significant companies in our industry, brilliant engineers, we had our best college recruiting season of all time. And if we get that talent pool and we enable them even a little bit, we’re going to continue to be a company that’s right out there on the leading edge. That’s one.

Second, we really have to drive quickly on this software plus services and Live platform. That is a defining, shaping, transformative event. When we sit here five years from now, we will all agree Microsoft has been at the front edge of redefining software to be software and service, not on the back-end.

And there’s really only a couple guys here trying to do that at the end of the day. There’s us and there’s some guys who are not really enterprise players today like Google and Yahoo!. I mean, to be fair, we’re seeing less of that coming from the more traditional enterprise competitors that we have.

And if we do all of that, my guess is we’ll sit here and talk about the fact that we’ve had a pretty good run again, the last five years we’ve about doubled our profits, no projections, no forward-looking statements, but we’d sit here and say we had another pretty good run financially, and our customers would sit here and say they’re not free but what a wonderful value they represent. (Laughter, applause.)

DAVID SMITH: Thank you, Steve.

YVONNE GENOVESE: Thank you so much.

DAVID SMITH: Thanks very much. We’ll see you next year.

(Applause.)