STEVE BALLMER: Scott, I noticed has an interest not only in general management but finance. A small piece of advice: Without the certificate I’d get the check before you left. (Laughter.) I think that’s one of the first principles of finance, but I’m not sure. (Laughter, applause.)

Seriously, it’s an honor and privilege for me to have a chance to be here with you today. When Sue first talked to me about this opportunity, it seemed a great way to do three things: number one, to have a chance to speak at a session that sounded absolutely fantastic, and I’ll get to that; number two, to have a chance to visit with a number of our great customers here in the Detroit area; and number three, I’m staying down the street from my cousin tonight, so I’m going to walk down and see her, too, so on all three grounds I’d say thank you, it’s a pleasure to have this opportunity.

I told the folks at dinner that I was probably going to be about 40 or 50 percent on track with my speech today and about 40 or 50 percent off track with my speech today, meaning I know you’ve been kind of wallowing, many of you, all day long in what it means to be customer centric and customer focused and brand loyalty, and I will touch on all those topics I do promise. I may weave and bound a little bit away from that and hopefully in some ways that maybe shed some context back on the core topics.

I called my talk tonight “customer-focused innovation” because I believe strongly at least for our company and anybody in our industry, and maybe in a sense for any company and any industry, I won’t be so bold, I’ll let the folks who study companies and many industries make those kinds of pronouncements, but I actually believe that most companies have to hit a balance between being innovative, trying things that they’re not sure their customers are going to have any interest in whatsoever, and listening to their customers, paying attention to their customers and responding to their customers.

And so in a sense I think it’s dangerous to talk about innovation sometimes without customer focus and I think it’s also difficult sometimes to talk about being customer focused and forget the fact that I think most of our customers and certainly our customers expect us to do more than just listen to them.

There have been times in the technology industry, it’s like a big yo-yo, everything is sort of current at a different time. Back in the ’80s the vision, everybody wanted to know who are the visionaries and if you weren’t a visionary you were nothing and people didn’t want to talk to people who weren’t. Now, a lot of these visionaries had visions that never mattered or visions that never got popular or visions that never got finished, but they were visionaries; that was the ’80s.

Around in the ’90s sometime Lou Gerstner takes over IBM and he says the last thing IBM needs — and I think he was wrong about this, too, but the pendulum started swinging, was any of that vision thing; he wasn’t going to have a vision, he didn’t think the vision thing was all that important, he was going to worry about focusing on his customers and responding.

And in a sense both of those poles are actually I think inappropriate. At least in our industry it’s quite clear that companies go out of business unless they try things that their customers don’t know they need today, they try to lead their customers with new concepts and new ideas. You are out of business in our industry if you don’t try, and particularly in the software business. Software is a particularly funny product. Software doesn’t get used up, software doesn’t wear out. One time I gave a speech similar to this and I said software doesn’t break and everybody laughs too quickly at that, but software doesn’t wear out anyway. If it’s broken it comes that way. (Laughter.) I’ll get more on that later since we’re talking about customer focused innovation tonight.

But because the product doesn’t wear out, doesn’t get consumed, in some senses, unless you can listen and get ideas from your customers, but unless you’re trying to point direction to new things, you get obsoleted and there are more companies that have gone out of business that were significant players certainly in the software business than there are significant players today, and it’s because of that phenomenon.

At the same time, people who try new things and then don’t really listen hard, listen, listen, listen, listen, listen, listen, and get the customer feedback and get the customer input and factor it in and refine the vision based upon that input, they also tend to fail.

There’s a thing in our industry people have said about us, which depending on how you take it is either the ultimate compliment or the ultimate kind of “diss”, as my 12-year old would like to say, and that is frankly sometimes it takes Microsoft two or three times to get things right.

Now, what is that? Is that a compliment or is that a diss? It’s nice to get things right the first time but one of the things I’m most proud about in our company and in our culture is we keep at it. If we get it wrong, we listen, we go back, we get the feedback, we work on it, we work on it, we keep coming, we keep coming. And the biggest, most valuable asset we ever have built, our Windows product, we announced it in 1983, we shipped it in 1985 — it was supposed to ship earlier but it didn’t — (laughter) — it failed, we shipped it again in 1987, it failed, we shipped it again in 1990, it got off to amazing success and now this year there will be something like 180 million copies of that product produced. Only 150 million will get paid for, that’s a software industry problem — (laughter). I’m using all my best laugh lines early. (Laughter.) No.

But I’m very proud actually of the fact that the persistence and the vision back then was that changing from the old style screens to a new style way of presenting information was a smart thing. The fact was the hardware wasn’t up to the task, our software needed refinement, lots of elements needed to come together but we kept at it, we kept at it, we kept at it and we kept refining it based on customer input.

And the best work anybody does, at least in our industry, maybe in some others, has to, in my opinion, have that attribute. It’s got to have that attribute of innovation with responsiveness. And I think of those in some senses the two big muscles of Microsoft if we’re going to succeed as a company.

We put a memo out to our employees about two years ago to try to talk about the core values and tenets we called them of our company. Values are things that people need to show. People have to have integrity, et cetera, et cetera. But tenets are what are the core operating principles of the business and two of them basically focused in on responsiveness and customer focus, two of them basically focused in on innovation and two of them basically focused in on global diverse approach, excellence, other things that are important.

But I think it is important as I tick off, and I have some things I want to say about customer focused innovation, but keeping that balance in mind at all times and having that as kind of a linchpin of the discussion I think is quite significant.

We start out, and I think any journey in any company starts out with some notion of what the mission of the place is. Every company has got one, every division of every company probably has a mission, most mission statements get written, thrown quickly into the garbage; at least that was my general view for years. We had a mission at Microsoft and our people kind of liked it for years: a computer on every desk and in every home. And that was kind of a technology centered mission but quickly computer got to mean tool of empowerment.

About six, seven years ago our people said, look, we’ve got a problem. We do more than make computers for every house and every desk; what really are we all about?

And we really stopped and thought about it, what is the core value, if we look back ten years from now, what’s the core value through our innovation, through our customer responsiveness, whatever, whatever muscles we used, what’s the core value we’re supposed to leave behind for our customers. And for your shareholders it’s kind of obvious, you’re supposed to leave behind a company that generates a lot of cash and hopefully has a good stock price. That’s actually the easiest thing to understand. But what are you leaving behind for your customers?

And we picked this: Enabling people and businesses throughout the world to realize their full potential; very mushy, very soft, maybe even pretentious, but I actually think it’s a pretty good mission not just for Microsoft but maybe for everybody in the IT business. IT is a little like education, IT is a grand enabler; it lets people be creative and productive individually, in teams, in businesses, in schools, in hospitals in ways they never thought they could do. And in some senses any notion of how you’re going to serve your customers has to start with some fundamental premise about what the value is that at least I say that you deliver.

This thing got so powerful we actually went out and did an ad campaign. Our most — well, at least the ad campaign we’ve spent the most money on in my entire time in Microsoft is a campaign that focuses all on communicating to our customers that we see this as the fundamental value our company is trying to provide so that if our customers remember nothing else about us, besides all the things they can read which are bad in the newspapers, if they don’t remember anything about us that we talk about ourselves, besides our products, they remember that what we’re trying to do is give them tools to enhance their own potential, tools that let them accomplish things they couldn’t accomplish before. And we’ve run this ad campaign that says “Your Potential, Our Passion” that’s sort of a little bit aspirational about what technology permits.

So if you really want, my opinion again, have this notion of some customer focused view of the world, you’ve got to start with some fundamental premise about what you’re trying to do. That’s ours. Mushy as it might be, it has been galvanizing for our people. And I think no matter what you do, you’ve got to ask what is the thing that’s galvanizing for the people who work for you in terms of the fundamental premise you’re putting in front of your customers.

We have a very odd customer base, very odd, and I’m not going to — I may not even talk about all the crazy kinds of diversity we have in our customers. Most of the times when people tell you about their customers, you’ll have discussions like do you sell to businesses or do you sell to consumers. In our case, yes, both. Do you sell a lot inside the U.S. or outside the U.S.? Both. Do you sell a lot through dealers or do you sell primarily direct? Both. Do you sell primarily to end customers? Yeah, we sell to them but we also sell to IT people who make decisions on behalf of the people who actually use our products and oh, yes, in fact, we also have to sell to guys like Dell and other people who build computers and they have a distinct set of needs, and we have to sell to people like Daso Systems that make Katea, because even though they don’t pay us any money, if they don’t design applications that work with Windows we’re out of business. And, yeah, we’ve got to wind up selling to people like telcos because telcos are involved distributing phones and set-top boxes to their customers. You can get a very diverse set of customers. And I would hesitate to say that if you just looked at the Windows product, the diversity of customers that we’re trying to serve may be as broad as anybody is trying to serve with any product in the world. I can’t think of one that has as much diversity.

We’ve got about 600 million users let alone that’s not customers who have gone into — because essentially everybody is glomming something onto Windows, hardware guys, but just the number of people who wind up using it, about 600 million users, schools, hospitals, rural, urban, broadband, narrowband, rich, poor, about 600 million users.

I talked about the fact the product doesn’t wear out. It has a very intimate use model. I think cars are very similar to software actually in this regard or at least PCs. Think about the number of products where people really get emotionally engaged with the product, because people get mad at their cars. They get happy, too but they get mad. People get mad with their computers. They get happy, too, but they do get mad. No, I mean, think about it, you don’t get mad at a can of Coca Cola. (Laughter.) I worked on Duncan Hines brownie mix, nobody was ever mad about Duncan Hines; oh, it wasn’t chocolaty enough. No, you’re just unhappy. (Laughter.) So it’s a whole different kind of use model. And so in a sense the intimacy that your product has with the customers has to help shape and drive where you come from.

And so in a sense as we approach this mission that I talked about with these twin muscles, we’ve really got to think about the diversity of the customer base and we have to think about very much the number of customers.

I was talking to a guy from the Free Press earlier and he wanted to know what’s in the next version of Windows. And I almost don’t ever know how to answer the question because if he’s really writing for the average Free Press user, all he really wants to know is what are end users going to see, but almost all the guys who write for publications like the Free Press are also technical guys so they’re sort of interested in what’s Dell going to think about it or what’s HP going to think about it or what’s AOL or Adobe going to think about it and so this diversity of customers, and I think it’s an important thing for again everybody to remember. I think most people’s influence chains are much broader than they think. Certainly think back to when I was at Proctor & Gamble it was really more than just the retailers and, as we said, women 18 to 49 in three-plus households. There were other influencers, there were different constituencies and you have to think, at least we have to very much think through the breadth of that audience.

In that context, the start for us is innovation. We’ll spend over $6 billion this year. We’ll file for 3,000 patents this year. We’ll try things that we know absolutely respond to things customers have complained about. We’re working on things that customers might wholly reject.

The analogy I think of is newspapers. How many people actually like it when a newspaper or magazine does its redesign? I hate it. Every time they change the Wall Street Journal it’s like, “Oh my God, I’ve got to relearn how to read the thing.” I taught myself where everything was, I do the same thing with Web sites, everything, you get used to it. Why would anybody want to change? But there’s an element of necessity, in my opinion, to that process.

But then you’ve got to have the muscles tuned on responsiveness. You’ve got to be able to hear what your customers are saying, you’ve got to be willing to listen to what your customers are saying. If you have 600 million customers, then you’d better think you’ve got a problem of understanding what 600 million customers think. You can’t say my job is to talk to ten people and decide what we’re going to do next; that doesn’t work.

People say you’re supposed to be intimate. I’ll bet somebody, at least one person on one panel sometime today said you should be intimate with your customers. We’ve got 600 million of them and we need to be intimate. It’s not enough to say you’ve got 600 — I mean, sure, we could say it’s easy to have an intimate relationship with — it’s not easy, by the way, but at least you know what to do — (laughter) — I’m not trying to be — I’m trying to have a little fun, I hope Sue doesn’t take that the wrong way, otherwise I won’t be invited back, but at least you can understand how to invest in a relationship with a large company. It’s understandable because there’s a fixed number of them. But every user wants to have at least some level of touch.

We’ve made this for six years our number one priority. We laid onto it security because security is our customer’s number one priority so in a sense it rose above the basic initiative about three years ago. But getting broadly in touch with and satisfying and responding to customers, and it’s taken us years and we still haven’t thought everything through. But you’ve got to say how can you be intimate with your customers if you have a lot of them, if you’re in the consumer business in a broad way, in addition to everything else.

There’s the expression which I’ve grown to love even more and more where people say to a man with a hammer everything looks like a nail; have you heard that expression? To a guy who employs programmers everything looks like a software problem. So customer intimacy is a software problem. That’s how we took this on. Now, it may not be between us and Daimler Chrysler but customer intimacy with 600 million people is a technology problem because the only way you can have any kind of intimacy is by having some notion of an automated but personal kind of interaction. It will be imperfect but you’ve got to work on it that way because there’s simply no other way to do it.

In the heyday when we had the most people ever in our history answering telephone calls, I think we could answer 20,000 calls a day. That is a negligible fraction of the people who want to reach us. Today 25 million people a day visit Microsoft.com, our Web site, 250 million people a month. Sixty-five million people get regular updates flowing down to their computers coming off of Microsoft.com, technology creating a more intimate relationship.

You need to be able to personalize Microsoft.com for things that you’re interested in. You need to be able to tell us what you’re thinking. I’m going to ask a question that I know the answer to but I’ll ask it anyway: How many people in this room, show of hands, have ever gotten a message on your computer that says something to the effect, “An error has occurred, do you wish to report this to Microsoft, yes or no?” (Laughter.) Statistically I knew the answer to that question.

Now, I could sit here and say that’s a shame, we should never do that, or I could say, look, there is a level of inevitability but the most important thing is that we know. We know now when we make an update that we can fix 80 percent of the reasons that people’s hands go up. We know, I can say statistically today where in Windows we have problems that we need to get after, the highest, the most important ones, the ones that really bug you. And everything that we do is a chance to enhance the relationship and if there is an improvement there is a chance to flow it down to you before you know you need it and we’re using the same technology to get more intimate with our customers in a wide variety of ways.

Let’s say you’re unhappy, you can’t find out how to do something. Well, if we were registering that on our Web site we could be changing the documentation online every day, every day, every day, every day. Some day maybe we’re even going to change the menus for you every day so you can find easily the stuff that you’re looking for. It’s an important part of the concept.

Now you can subscribe, you say, look, I want you, Microsoft, to keep my computer up to date with patches and fixes. The relationship gets more intimate when you can close the loop with your customers, close the loop.

Some of our customers are actually willing to install special software so we can monitor and see absolutely everything they do on their computer with their permission, privacy, I mean, all done the right way, but it adds even more value in terms of really understanding, tracking, et cetera.

So there’s a range of things, and I think people in the dot-com bubble got all carried away and then people sort of shut down in terms of thinking through how important the Internet could be not just for software type companies but for any kind of company in terms of building an intimate relationship with a broader set of people.

And I’m starting to see a renewal of interest. I visited the people at Nestle. It turns out that about 3 million people in the United States use 80 percent of the Tollhouse cookie morsels for chocolate chip cookies. It’s about 3 million ladies, by and large they would say, who buy 80 percent of the morsels. And they say, look, we’ve got to have an intimate relationship with 3 million people. We don’t need to be on TV talking to everybody, and the best way to have an intimate relationship with 3 million people today absolutely is the Internet. So what are we going to do to attract those people, to have them come visit us, to look at recipes, to hear more, to have any kind of a dialogue? But it’s that kind of improvements that I think people can make using the Internet for these things.

I said earlier we embrace this notion of security as your number one priority, whether you are an end user, whether you are a software developer, whether you are a businessperson or an IT person, the number one thing on people’s minds today and it’s in a sense for people who like to just go do new things you’ve got to say darn, because a good day on security nothing happens, the best news, no bad news today.

Remember Y2K? No, Y2K and the Internet bubble sort of created a whole backlash against IT. Y2K people invested a bunch in and then January 1st, 2000 they say, “Now, why did we do that? Nothing happened, nothing bad happened.” And then the Internet got a little overheated.

Security is a little like that and so in a sense it doesn’t bring the same kind of gratification and not just to Microsoft, it doesn’t bring the same kind of gratification to anybody who deals with it that changing business process, adding business value brings. But everybody knows the thing that you’re most in trouble with, with your company, with your family, me with my wife and my kids is if the computer simply doesn’t work. If somebody stole my information, if our credit card is gone, if the information, if we’ve shut down the manufacturing plant at Daimler Chrysler, that’s the stuff that is life threatening as opposed to value on the other side.

So while we’re trying to work the upside, we said, look, the one thing that could actually stop our industry progress is security broadly, security, to some people it’s privacy that’s the big issue, to some people it’s spam that’s the big issue.

How many press people do we have in the audience? Can I ask one small favor? Please don’t print my e-mail address. I made a speech in Singapore two weeks ago. I gave my e-mail. I was talking about spam and I do believe I am one of the most spammed, Bill Gates being I think maybe other than George Bush the most spammed human being on the planet. (Laughter.) Well, that makes sense. I mean, if you were going to try to make somebody’s life miserable, send them spam. A) He’s amongst the most famous, B) he’s amongst the richest and C) our e-mail address scheme is actually not that hard; if you threw pings in you can actually figure out what our — I’m SteveB, by the way, @microsoft.com if you have further questions. (Laughter.) They all wrote it down.

I actually was answering a question about spam, I said this and it wound up on MSNBC.com in which we’re a 50 percent owner, as well as CNN.com, and then I really did get a lot of interesting mail for a while.

But spam for some people is the most intrusive, invasive thing that they deal with, even more than viruses. If you’re a parent at home, people violating the sanctity of what your children are seeing, there are some bad things out there, and so for us this again becomes a customer focused innovation.

We don’t attack this problem just through legal actions and legal matters, although that’s part of it; we say what are the technology approaches that are going to take spam down. Today, we know the people who use the best technology get a lot less spam than people who use the less good technology but how do we take it to the next level. We know the people who take most care against security have a lot fewer issues than people who are relatively undisciplined. How do we help our customers get there? That’s customer focused innovation. It’s the responsiveness in exactly the right way.

And it’s fun; when you really engage in something that you can think of as customer focused, it’s really a lot of fun. I mean, to me I know a lot of the most important work I do is to get our engineers right, correctly focused on their balance between innovation and responsiveness but for me a fun day is out talking to customers about how they can use our products in ways that amaze them and delight them.

I’ll just pick on one here, Community National Bank. Community National Bank implemented a CRM solution based on technologies from us, well integrated with e-mail and messaging so they can get popup alerts as opportunities arise to sell things. It was customized by one of our partners. I’ve never met them. Our people tell me the story, the story is a great story and there are so many great stories. And I think everybody’s got to get a charge; if you want to be a customer centric company you kind of have to at least get a charge out of it when you get a story about how somebody really got value from or loves your product.

You know, in our case people will say I could not run my business unless we had the advantages of Windows and PC technology. It’s a real kick in the pants. People say why do people come to work at Microsoft, and there was always a theory that it was because people made a lot of money, and that might be true to some extent, but I think the number one reason, by far, people have always come to Microsoft is for the opportunity to somehow participate in changing the world.

When we were recruiting people when I started in 1980, 1981, 1982, the pitch to them when we went out and saw college kids, if you like to write software we can get millions of people to use it. So if you want people to use your code — that was the pitch — you want people to use your code, come here.

And so the basic sort of underlying premise between why people came and why Bill Gates and Paul Allen started the company always had a mix of the technical and the customer and it always had this mix of innovation and responsiveness, and really sort of getting that balance right is an important thing.

I want to say just one other word before I wrap up and that’s on competition, because this sounds all sort of all, what shall I say, completely laudable and fine, but the only way you actually get the satisfactions, you’ve got to have customers to start; that means you’ve got to compete, you’ve got to win, you’ve got to really go out there and win. If you’re not winning you don’t get any customers.

And so in a sense one of the hardest things everybody has got to learn is how to compete hard in a way that your customers like and respect. Customers want everybody to compete hard, they really do, because customers benefit with lower prices, more innovation, better responsiveness, better support. We’ve learned that there are different ways to compete. People say what did you learn through all of the many hard years you had with this DOJ lawsuit. The number one thing we learned is there are multiple ways to compete, there are ways to interact with your competition that are better and are worse. In our case we actually have to view our competitors as our customers in many cases, in a “coopetition” kind of arrangement.

It is important that you, if you have products like ours that have been deemed by a court to be monopolistic, it’s important that you create a framework of openness that you live by and comply with religiously.

So I’d say we used to have sort of all of the young, aggressive kind of testosterone feel of the company we were when most of us were, at least in leadership were 23, 24, 25-years old and that meant competition tended to have a lot of hyperbole and a lot of rhetoric. Today I don’t have any less enthusiasm to compete and win business than I’ve ever had in my life, but I do avoid the rhetoric. I’ll jump up and down, I’ll run around, I’ll be as enthusiastic as it takes to get people fired up, but I’ll actually leave the rhetoric to the Oracles, the Larry Ellisons of the world. (Laughter.) At this stage it’s not what our customers actually — that was halfway down that path of bad rhetoric, by the way — (laughter.) I’ll just tell you I skirted the line there and came right back in. (Laughter.) You only change 10 percent in life; it doesn’t matter how hard you work at it, you never change 100 percent.

But you’ve got to want to compete. Customer focused loyalty is about learning how to compete really hard in a way that your customers really respect.

We’re competing with a new funny — I can’t even call it a company, a phenomenon called Linux that comes from a group of unpaid volunteers, and now we just go to the facts. We don’t sit there and try to have some emotional rhetoric-based argument. We’ll say, look, here are the facts from third parties, this is what 7-11 thinks, this is what this customer thinks, this is what Computer Buyers Warehouse here in Michigan thinks; they’ve looked at these things, they’ve thought about these things.

And it is an important part and I emphasize it because I think we have more experience on a lot of this than a lot of people, just given what we’ve been through, so I thought I’d make the point before I move to wrap.

I am a little over so I’ll merely point out we’ve got a lot of partners doing a lot of business and we’ve tried to be good members of the community here in Michigan, we’ve made donations of over $40 million in cash and software to a variety of institutions to try to help bridge the digital divide here in Michigan and that too is part of building appropriate customer loyalty.

Customers sort of want to see that you put your money where your mouth is in a variety of ways. If I get up there and say we’re trying to enable people and businesses throughout the world to realize their full potential, everybody knows there is a thing called the digital divide, whether it’s rich people, poor people, white people or people of color, people in the United States, people outside the United States, for-profit and not-for-profit organizations, there’s another digital divide that we see, people who have broadband, people who don’t, and we’ve tried to be very active, particularly in education, community centers. Eleanor is in the audience here from Focus Hope, a great institution that I think is exactly sort of spot on where there’s training and bridging of the digital divide going on every day at Focus Hope in terms of bridging some of that kind of gap.

So it’s all part of the customer focus, innovation customer focused loyalty. I don’t know whether I gave you anything that was interesting to you tonight, I’m not sure at this stage, but I had fun doing it. I’ll look forward to your questions and comments and thank you very much. (Applause.)