SCOTT STANFIELD: I’m Scott Stanfield, CEO of Vertigo. I bet our business years ago on .NET. It turns out that was a pretty good idea, because with .NET we now have the ultimate skeleton key. It opens doors into technologies as diverse as SharePoint, Windows Live, Mobile, Surface PC, Silverlight. So in this next year, Vertigo is really going to be focused on software plus services. We’re planning to use the new service offerings in the cloud platform from Microsoft to reach new customers and find new business models. I would like to hear more about Microsoft’s vision for software plus services and I’m sure you do, too. So, with that, let’s bring out Steve Ballmer.

ANNOUNCER: Ladies and gentlemen, please welcome Microsoft’s Chief Executive Officer Steve Ballmer. (Applause.)

STEVE BALLMER: Wow. I am excited to be here. I guess I don’t need this one, too. I’m ready to get on stage, and all of a sudden they say, your mike doesn’t work. I said, my mike doesn’t work, but my voice always works.

I’m delighted to have this opportunity to be with you today. I was watching that last video, partner power, partner power, partner power. It got me even kind of more jazzed up, as I was waiting to come on out and talk to you. And I’ve got to tell you, and I’ve said it to this group before, I’ll say it again, this Worldwide Partner Conference, and being with you, it energizes me, it switches me on, it gets me laser focused. It’s kind of one of the high points of my year. You say, tell me a little more about that.

This is how bad it is, at least at our house. Two weeks ago I’m with my family at the US Olympics Track Trials, watching all these folks who have trained, and worked, and prepared, and gotten ready, and I don’t know whether you’ve ever been to a track meet, but they go kind of slow, except when they’re going very fast. And all of a sudden I find my mind wandering to work, and it wandered to this partner conference.

And I’m thinking, oh my god, I have to be as prepared to come in here and talk about the things that are going on in the industry, and what’s on your mind, and how you drive your businesses forward, and the range of technologies as any of these athletes have tried to prepare to get ready for the Olympics, because the folks in this room in a very good, and very important, and very positive way, you challenge me, and you challenge us. You challenge us with respect and affection. We’re in it together, and yet at the same time you’re always pushing us to do better, to bring our A-game, to really have the technologies, the business plans, the partner programs that are going to allow you and us to succeed.

So I am energized to be here, and I want to start by saying, thank you. Thank you for pushing us, thank you for supporting us, thank you for giving us energy, and thank you for driving the success of Microsoft Corporation. All of our success builds and depends on the activities, and efforts of our partners, and I wanted to start by saying thanks, and to all of you in the room, congratulations, we appreciate it. (Applause.)

It’s been a heck of a year, a very good year for you and for us. And if you just take a look at some of the stats from this year it’s amazing. Over 140 million Windows Vista licenses installed since the launch a little over a year ago. Over 100 million SharePoint users, one of the most remarkable successes we’ve ever had, and all really fueled by partner power. We’ve had the single greatest year, in terms of the growth in unit volumes of Office licenses in the history of Microsoft, for that I say, thanks very, very much, 4.7 million seats of Lotus Notes have been Exchanged. (Applause.)

Our server business, remember 5, 10, 15 years ago when people said you and we would never be ready for the enterprise? Over $10 billion this year in server revenue, thank you, thank you, thank you. People ask: “Are you guys really going to get it together, high volume, the kind of positions we like out of Microsoft with your Dynamics product line?” We now have over 750,000 users of our CRM (Customer Relationship Management) product, despite, let’s say, not being the first to come to market. And we’re rapidly closing in on the unit volume leader at Salesforce.com, but with the kind of flexibility of on-premise, and in the cloud, and hosted that we know customers want. And for that I say, again, to all of you involved, thanks very much.

Last, but certainly not least, I want to say thanks to everybody who helped make the launch of three of our most important products, Windows Server 2008, SQL 2008, and Visual Studio 2008 such a big success this year. We’re very appreciative. These products are packed with incredible new technologies. You’re hearing a lot about them, but we’re off to a very good start, management, virtualization, Power Shell, new development, BI (Business Intelligence), transaction processing, and the range of opportunities that these products open up for all of us is fantastic. So with a look back I’d just say again, congrats, and thanks, and now let’s turn our thoughts forward to the future.

We describe our vision at Microsoft as creating experiences that combine the magic of software, with the power of Internet services across the world of devices, software, services, many devices, magic. Software, the core underlying magic is rich interesting software, and the thing we’ve dedicated ourselves to as a company is being the best company whose core competence is software development. We’ll put it out in the Internet, we’ll put it in devices, we’ll put it in PCs, we’ll put it in the cloud, but the magic of software, the magic of software.

We grew up with a business, and a business model, and technologies really focused on a computer on every desk and in every home. And our desktop business is really the backbone on which we, all of us in this room, have built. Our enterprise business, we started investing in 20 years ago, and today as I said, it has really exploded for you and for us, and we just keep building out the footprint, business intelligence, unified communications, virtualization, security, management, we just keep pushing into new areas of enterprise software.

The Internet, we started investing 10 years ago, and it requires, just as the enterprise did, not only new technologies, but new business models around advertising and some of the new approaches that are important on the Internet. And today we’re a very successful number three in the Internet business, but with very big designs on being number one over time. And we continue to invest in the consumer Internet, with a lot of vigor and enthusiasm, and probably more press attention than I really like.

Last, but certainly not least, there’s a new form of software, software that really is integrally integrated with devices. The PC is kind of a special, and magical device, but as we look at phones, and TVs, it’s kind of an integrated hardware, software business model. This year we’ll sell almost 20 million Windows Mobile devices, and almost two million Media Room set top box installations. And yet, the opportunity to drive those things remains incredible, because TVs and phones will literally number in the billions of units per year as we move forward.

Software Plus Services is the umbrella name that we apply to this phenomenon, the change that I talked about at WPC before, in which the world moves to integrating business-wise, and technologically the best of the personal computer with the best of the enterprise, with the best of the Internet, with the best of devices. Today these are really islands to some degree. You write great programs for the PC, and you get great outcomes. But you write programs for the Internet in a slightly different way. You manage and control servers differently in the enterprise than in the cloud. And, of course, we have full islands of independent communication and programmability for things like phones with text messages, and their own operating system, TV, et cetera. And the shift in software plus services is really about bringing together in kind of a new software platform the technologies that let us in a no compromise way merge the best of these four models of computation. The PC gives you control; the enterprise gives the business control; the Internet gives us scale, anytime operation, and immediate deployment; and devices give us the convenience of new form factors. We’re working on bringing these things together, and at the same time doing that in a way that builds from today’s successful products but brings to bear important new technologies.

As we think about this phenomenon, what’s the best solution for the world if it can be done? To aggressively embrace the world of Software Plus Services, and at the same time to bring forward the current user knowledge, programming knowledge, systems integration knowledge, code, and software from today’s world into this new world of software plus services. What we need to do is drive the future by building on the present; drive the future building on the present. As we say in English sometimes  (speaking French)  or for those of you that speak that part of English: “The more things change, the more they stay the same.” Drive the future.

So what is the future? The future is about having a platform in the cloud, just as we have an operating system for the client, for the server, for devices. We will be launching a platform for the Internet cloud that lets you write programs and have them deployed and managed, that does computation and storage, and management, directly out in the Internet. We’re not getting rid of servers. We’re extending the basic programming model and management model that we know today from Windows and Windows Server to the cloud. Software development approaches will need to change. People will want to write applications that actually span this whole world. And so we’re driving .NET, and .NET through Silverlight, and JScript to support rich application development across the cloud, the devices, the servers, and, of course, the PC client.

Deployment, the world will insist on a model that I call “Click to Run.” That’s kind of the way Web sites today work, or HTML works, you click something and it runs. You don’t click, hit install, you don’t click and configure, you click to run. And the model in the Software Plus Services world will be a model of Click to Run, that will take cost and complexity not only out of enterprise IT  I’m sorry, not only out of cloud IT, but also out of enterprise IT.

The user experiences will change. People expect consistency in user interaction models, and in application delivery across phones, PCs, and TVs at work, and at home. Social networking will drive in as a fundamental system service, as a fundamental system service. You won’t just think of social networking as some special purpose application, every application in the enterprise and in the consumer world will have a notion of social networking. You’ll even see us start to drive that in the enterprise in the next versions of Office, and SharePoint.

And of course the business model is going to change, and we’re going to drive that change, advertising, subscriptions, online transaction. I hope the announcements that we made yesterday about our partner business models around our online software, Exchange, SharePoint, OCS (Office Communications Server), LiveMeeting, and Dynamics really fit the bill, because even as we’re driving that business model forward to new approaches, we see it as fundamentally critical that our partners are in it with us, and involved with it in those steps forward.

But as we drive for this future, we, Microsoft, and we with our partners, we’re going to build on the present. This world of Software plus Services is not a world for our partners that should be scary, or problematic. If you know Exchange, you know Exchange, and those skills and technologies, they will translate as we move from the server to the cloud. Building SharePoint apps today? Great, we’re going to take you with us into the world of software plus services. Same thing with Dynamics.

SQL Server, we’ve announced our SQL Server Data Services in the cloud. Directory, identity and directory are really a fundamental part of what a lot of us do today in providing security, and privacy, and protection for our enterprise customers. We bring that forward as we move into the cloud with great federation between Live ID for the consumer world, and Active Directory for the enterprise world. And of course today, the bedrock, the foundation on which everything sits in the server world is Windows Server, and it will continue to be Windows in the cloud. So the skills, the code, the technologies move forward.

This isn’t going to happen overnight in the enterprise world. It’s not like our customers are going to wake up tomorrow morning and say: “Hey, look, we all want to abandon server implementations and move to the cloud.” But what you need to be able to do is know that the learning, the training, the investments that you’re making today will seamlessly move to the new world, and you’ll be able to span a world in which people want to do cloud-based implementation as well as enterprise on premise-based implementations. And we have a fantastic approach to allow you to do that.

And particularly because of the way we’ll do the identity federation, if you have a customer that wants to have some things in the cloud and some things on premises, you’re going to be able to do that with a single log-in, single ID, single approach, much the way we’re doing today with Active Directory in Exchange Online.

I think we have just really, seriously, a fantastic way to let you bridge the world. The consumer market might race to be cloud based. The enterprise world is going to be a mix for a while, and we’re going to embrace that consumer, and run with that consumer to the future, and at the same time preserve your investments, and our enterprise customers’ investments in the present.

The same thing is true in terms of the client. The world, it’s ironic, people talk a lot about whether people want thin clients. And I don’t deny people want reduced cost, and complexity of management. I think we’re all hearing that from our customers. But people don’t want to really give up the richness and capabilities of a rich client. We even see that in phones. What’s going on in phones today? Phones are actually getting richer. That’s what Windows Mobile is, that’s what the iPhone is, that’s what Symbian is, that’s what Android is, all of these things are getting richer. And Windows PCs will be the richest, most capable device that most people ever own. And yet we have to give people click to run deployment so that people don’t have what I might call the cost of the rich client.

And with technologies like SoftGrid, which is part of our enterprise product line today, with the things we’re doing with Silverlight, and .NET for the client, we can take the basic Windows products and add the kinds of capabilities that allow people to get click to run operations, but with the fantastic capabilities associated with the Windows PC today.

The same thing for Microsoft Office. You’ll see a range of announcements over the next six months about the directions we’re taking with Microsoft Office. We need to make it click to run. We don’t need to make it less full-featured, and less functional, and less capable, but we have to drive it down this path. And it will remain the center of people’s  the productive side of people’s lives. So the investment in training, and work that you’re putting into products like Windows Vista, and Office 2007 move forward.

And last, but certainly not least, even as the business models change, for us the notion of partnering with all of you remains fundamental. We build from the present. I’m not going to tell you the world of the future looks exactly like the world of today. We all know that’s not true. Ten years ago, 15 years ago, there were actually partners who made a living integrating TCP/IP protocol stacks into Windows. Unless I miss my guess, that business doesn’t exist for any of you today. And there will be businesses that you’re in today that won’t exist 10 years from now, because the technology will have advanced so far. But we’ll build from the present, we’ll bring along your capabilities, your skill, and your code, and we’ll continue to build on the fundamental premise that united all of us stand, divided we fall. We have over 650,000 partners around the world, and it’s one of the great strengths of Microsoft is the relationship that we have with all of you. And as we build to this world of Software Plus Services, we’ll build together.

That’s the future, that’s where we’re going. But we also live in a world of the present. You have lots of keynote speakers, and lots of breakouts telling you lots of great things. I just want to tell you, I could not be more jazzed up about the product line we have in market today, and coming, and what you should be able to do with those to drive business value.

Corporate desktop value, Vista is ready to go in the enterprise. Let’s all go do it, Vista and Office 2007. SharePoint is almost hotter than we’re all able to manage. I have more customers complain to me that we don’t have enough partner capability around SharePoint than anything else going. We’ve scratched the surface now with business intelligence, and our PerformancePoint product line, and you’re going to see us put the pedal to the metal, so to speak. Dynamics CRM and ERP (Enterprise Resource Planning) are taking off.

We’ve said we really want to be the leading player in enterprise search. So we went out and bought a company that has some of the most fantastic technology, so literally you have a front end, a search-based front end to enterprise data, whether its’ stored in SAP, or Siebel, or some other custom application, with this acquisition we’ve done of FAST. Stephen Elop had a chance to talk about Exchange and SharePoint, and our other online offerings. This is the year to really get after unified communications, with the new release of OCS later this year, Web conferencing, video conferencing, and audio conferencing, that opportunity is right there, all we have to all do is just kind of reach out and seize it.

And of course, last, but not least, it’s game time for us in virtualization. I’m sure we’ve got a number of people here who are also fantastic partners of our competitors, but if you believe, as I do, that it’s time to democratize virtualization, to make it affordable not just on three, four, or five percent of servers, but really to be able to virtualize the entire world, Hyper-V is here. The System Center Virtual Machine Manager is here, let’s get after it and let’s show the world how to bring the benefits of virtualization to the other 95 percent of servers.

I thank you. Thanks for everything. Have a great WPC. (Applause.)

Q&A Moderated by Geoff Colvin, “Fortune”

I forgot, I don’t get off that easy. We’ve tried various Q&A formats, we’re going to try one this year that I’m very excited about. We’ve been collecting questions form partners, I guess over the last week or so. Geoff will have a chance to talk about it. And we have Geoff Colvin, who is an editor at large for Fortune Magazine, who I’ve seen work very effectively to challenge, to get the best questions from you, and certainly challenge me with the best questions form our customers and partners. So please welcome on stage Geoff Colvin Senior Editor at Large, Fortune Magazine, who will conduct the interview.

GEOFF COLVIN: Thank you, Steve. Thank you very, very much. It’s great to be here, and I’m glad to be here with all of you.

As you know, I’ve got a bunch of things that I wanted to ask you about, and in addition I’ve been working with Microsoft’s staff to collect questions from everybody here, all through this audience, and we’ve got lots of them, lots of them. So I’m going to be asking about those, as well.

And I want to start with something that I know is on everybody’s mind, we relay have to do this first. Last week historic day, a truly historic day, July 1st Bill Gates no longer with a daily role at Microsoft. The question comes from Theresa Henning, New Horizons in Chicago. She says, how do you stay motivated to accomplish more than what Mr. Gates has already done for Microsoft in the past?

STEVE BALLMER: Well, it’s nice to have a big bar, a high challenge in front of you. And I’m motivated by big challenges. I love working with the people I work with, our customers, our partners, and our employees. I love the impact we have on the world, that charges me up. When somebody says, hey look, Bill and Microsoft have accomplished so much this far, what motivates you, onward and upward, more innovation, more drive, more output, more change. The world of technology and innovation is going to change more in the next 10 years than the last 10, more in the next 20 than the last 20. And I am driven to make sure Microsoft is driving ever more innovation, and it will be great to have Bill part-time and on the board to support us, but it’s full speed ahead.

GEOFF COLVIN: I’ve always had the impression that motivation isn’t really an issue for you anyway. (Applause.)

STEVE BALLMER: Fair enough.

GEOFF COLVIN: Another thing I’ve got to ask you about, in the news, in the news every day now, here’s yesterday’s Wall Street Journal, it says Icahn Gains Microsoft As Ally To Oust Yahoo Board. Now, I’m sure everybody here wonders what the state of play is in the Yahoo situation, it’s been in the papers for months. Here’s a question from Andrew Thomas who is with Fred Health in Australia, he says, I read in the New York Times this morning that you may look to start talking with Yahoo again. If this goes through what is the future of Windows Search/Live, and the services you’ve already built around it?

STEVE BALLMER: Yes, let me comment on that. We love what we’re doing today in search. If you go to www.msn.com you use our Live Search every day, every month, every year, every release we’re making incredible progress in innovation, both on the results that you see, the user experience, the relevance, the advertising, and we love what we’re doing, and we’re going to drive forward in any event.

There is a  what shall I say? There’s kind of a return to scale, though, in Internet advertising. The more customers you have, the better, actually, the set of advertisers you have, the better advertisers  and people actually like the ads in search. There are a lot of places people don’t like ads, but in search ads actually help the experience. So if you put together our volume and Yahoo’s volume the thought was that should be a good thing.

I can’t really comment much about what’s going on today with Yahoo, but I can tell you that with or without anything going on, on that front, I love what we’re building. It’s fantastic. If we can accelerate our strategy, great, but we’re depending on our own guys, our own engineers, their brilliance, their efforts, their energy, that’s what’s going to  and a lot of hard work, and a lot of patience, and a lot of tenacity, that’s what’s going to give us the breakthroughs versus Google.

GEOFF COLVIN: I realize you probably can’t say much specific about the Yahoo situation, but let me ask you a broader question, which has to do with business models. I mean, we see lots of great companies changing their business models in response to a changing world. And when people see the interest in Yahoo, whatever may become of it, they wonder, is Microsoft going to fundamentally change its business model to one that’s based on advertising?

STEVE BALLMER: No. Yes. Both. I had a slide up, which is really very important in the answer to the question. I said, we believe in investing in four businesses, the PC, the enterprise, the Internet, consumer Internet, and in devices. The corollary to that is, we want to have four business models. I think it’s probably fair to say that our enterprise business model doesn’t look anything like the old PC business model. And many of you have hassled us to try to make it even more different. There are some people who think we have licensing a little confused to this day, because it looks too much like the PC.

What we need to have is a PC model, single buyer, single user, OEM, blah, blah, blah. We need an enterprise model. We do need an advertising model for the consumer Internet. We need a devices model where we embed software and hardware, like we’re doing with AT&T and Media Room, and frankly, even in our enterprise world we’re going to need the subscription and operations model. So I get asked, are you trying to throw out the current models to do one new ad-based model, and the answer is no. Are we trying to also have an advertising model? Sure.

There’s one more thing I’d give you to think about, particularly to our partners. Let’s say we went  because if you want to actually deliver people advertising that’s meaningful, you’ve got to know a lot about them. So suppose we went to one of our joint big accounts and we said, we’ve got good news, we’re going to save you blah-de-blah, I don’t know, 50 percent in software licensing costs, but in return you have to let us track everything your people write, type, see, look at, and visit. And if you let us know everything about your employees, and their behavior, and your business, so we can deliver exactly the right ad.

Let’s say you’re a collections officer in a bank, and you’re trying to collect money from an, I don’t know, rifle manufacturer, Dear Rifle Manufacturer, and then an ad pops up and says, hey, want to buy a gun? I think we’ll have problems with that model with our enterprise customers. So I’m not trying to switch out the old, I’m just trying to add the new.

GEOFF COLVIN: Got it. (Applause.)

Here’s another topic hat has come up a lot in a lot of questions you receive, and that has to do with competition. A lot of competition you’re facing. This morning’s newspapers, all the major papers this morning have reviews of the new iPhone, they mostly like it. There’s also a front page story in the Journal that you saw on Google, abut them having problems selling ads on YouTube. I know it breaks your heart, right.

STEVE BALLMER: Nobody can quote that.

GEOFF COLVIN: You’ve had the media training, I see. But, look, here’s a question there’s a lot of concern over. Here’s a question, to this person forgive me if I don’t pronounce your name properly, I’m doing my best, but it’s (Lota Van Lidiyoida ?) from Cap Gemini in The Netherlands, and the question is, how does Microsoft plan to face the, “you’re not so cool anymore” attitude in the world toward Microsoft? It feels like you’ve been ignoring it for too long, Apple and Google are not cooler, they are just riding the wave of coolness better at the moment. So surf’s up Microsoft, are you going to take the challenge? (Applause.)

STEVE BALLMER: Bring it on, I say. This is not an unknown  there would be people who talk about the topic in the question all the time. And the truth of the matter is, there are sort of three different phenomena going on. People who are new, or companies that are new, or reborn, because the two you talked about I’d say one was dead, and sort of came back to life, and who knows where they go next, and the other is kind of new, they are more newsworthy.

The way we be newsworthy, if we’re successful, in and out, every day, all the time for the next 10, 20, 30 years, we’re not going to make it on, hey they’re brand new, we’ve never seen them before. We’re going to have to surprise people. And I think we will. I think we’ll surprise people with the quality of new PCs people see, where we’ve worked really hard with Vista, and people say, wow, these things are actually lighter, they actually have better battery life, they’re cheaper, they’re more affordable, they’re more flexible, they come in more sizes, wow, that’s cool.

I think you’ll find people, as we get to our next generation of Windows Mobile devices, people will stop and say, not everybody gets by well without a keyboard. I don’t know about the rest of you, I actually find it easier to have one when I’m typing a piece of e-mail. So what we need to do is have products that surprise people, that delight people, and particularly on the consumer side.

To this audience I think it’s probably pretty fair for me to say, we’re really kicking it out, doing very well with our enterprise customers. We’re surprising them, the products are good, we haven’t surprised people quite as much as we need to, to surf the cool wave. But, man, you take a look at where Vista is going, you take a look at Windows Mobile, and watch us  watch this space for news on search.

GEOFF COLVIN: Ah ha. I’ll remember those words. Thank you. We will watch this space. Big topic, big topic that you’ve talked about, Allison talked about, lots of people have talked about already, but some specific questions, and that’s software plus services. And specifically what it means for the people who are here.

Let me ask you the first question here, this is from Andrew Rowe of Fusion IT in Grand Rapids, Michigan. How do you see the synergy working between Microsoft’s new software plus services offering and its current partners who are offering partner hosted services? Many of us feel that Microsoft is now competing with its partner hosted services partners on many levels for the same business?

STEVE BALLMER: Yes, I certainly understand the question, and yet I would say, as we start introducing more and more of these cloud service offerings, we’re actually in the process also of re-engineering our server software. We have great hosting partners, but the best you can do is the best you can do with our existing server products hosted and managed well. We’re basically reinventing some of the server software particularly as it relates to scalability, geo-caching and replication, management, cost of operation, and all of the improvements we’ll make in order to do our own cloud services, which ware necessary, they’re innovation that we and we alone can do, we will also repackage back over time into our server offering. There will be customers who want to work on our scale platform in the cloud. There are going to be customers, though, who want hosted, dedicated solutions from you. We will support both.

I think if you go out 10 years from now, and you ask, which of these two phenomenon, cloud services from companies like ours, or hosting services, I think it’s probably fair to say that cloud services will grow faster than the hosting opportunity, but that doesn’t mean hosting isn’t going to grow. And certainly if we don’t do cloud services, our key competitors will do them, and we can’t give them the edge and innovation that provides. So we’re supporting both models.

GEOFF COLVIN: Right. Here’s a related issue. This is an ad, full page ad in this morning’s USA Today, a Microsoft ad. And we heard from Allison that there were some partners here who had a concern about it. It’s a Microsoft ad, it says move to Windows Vista with confidence, introducing Windows Vista Small Business Assurance. And one thing it says is, free hands-on personalized phone support to help with questions related to your Windows Vista transition. Well, now some partners here are reading that and saying, does that mean people are going to be calling up Microsoft, they will have the customer relationship, and is that going to cut us out of the picture?

STEVE BALLMER: Well, if you actually look statistically in small businesses, most small businesses, small not medium-sized businesses, not enterprises, most really small businesses only have two, three or four employees, and statistically you would say most of them buy their computers either via mail, or in a retail shop. They may actually work with a partner, but more likely than not they don’t. They kind of self-serve, or they have a brother-in-law, or an uncle, or somebody who provides kind of tech support. And I would say the message in the ad is really targeted at people who today wind up being largely self-sufficient, and we need to tell them they’ve got a lifeline. Certainly for people who are dealing with professional partners like the folks in this room, they’re going to keep coming to you. They want to have one point of contact, and our partners are the front line for that.

GEOFF COLVIN: Right. So this is not some nefarious plot to cut them out of the loop here?

STEVE BALLMER: No. No, it’s not. But it is a very straightforward attempt to let people know in ads what we’re letting you know. It’s time. Vista is ready. The driver compatibility we’ve achieved, the application compatibility that we’ve achieved. The new machines that OEMs are shipping that are really now nicely optimized to run Windows Vista. I mean, the service pack that we put in place. We’re confident. Let’s all go move forward and get the job done.

GEOFF COLVIN: Yes. Here’s another software plus services question. This is from (Hymai Argenal ?) at Dynamics CRM Partner. In order to leverage the software plus services vision to its potential, I would like Microsoft to provide an ecosystem e-commerce market for its partners’ vertical solutions via the partner program. Can you make this happen?

STEVE BALLMER: I hope so. Is it Hymai, you said, who asked the question?

GEOFF COLVIN: Yes.

STEVE BALLMER: I agree with Hymai 100 percent. We still have some work to do. We have some work to do, but it will be one of my great WPCs to come to when I can firmly announce that we have all the infrastructure in place to support the view that Hymai expressed.

GEOFF COLVIN: Right. This leads sort of to another fundamental business model issue that has been expressed by some of the folks here, and that has to do with open source, Linux, and other stuff like that. How do you see Microsoft vis-à-vis or Microsoft versus the open source world, and where is it going?

STEVE BALLMER: Well, okay. There’s a few questions. Number one, are our products likely to be open sourced? No. We do provide our source code in special situations, but open source also implies free, free is inconsistent with paying for lunches at the partner conference. (Applause.) With that said, there are a number of different things. Will we interoperate with products that come from like Linux, from the open source world? Yes, we will. Will we encourage people who want to do open source development to do it on top of Windows? Yes, we’re proud that the best PHP system in the world is actually the one that runs on Windows today, not the one that runs on Linux. So we’re going to encourage open source innovation on our platforms, and around our platforms. And, you know, we see interesting things where bits and pieces of technology, commercial companies are now starting to provide it in an open source form or to digest in an open source form. And we’re open to that as well. But our fundamental business model will remain kind of commercial software, advertising, enterprise licensing, et cetera.

GEOFF COLVIN: Right. Another manifestation of this changing world surrounds unified communications, big opportunity. People wonder about the relationship with Cisco, a coopetition relationship with Cisco. If customers come to them, to the partners, asking for help with unified communications, who should they come to? What should they call Microsoft for, what should they call Cisco for, how should they deal with it?

STEVE BALLMER: I don’t know what you should call Cisco for. That’s why they call it coopetition, and I’m going to focus on the non-coop part, the -tition as they call it. Look, we compete with Cisco. Sure we work together, their routers, their security stuff, but when it comes down to unified communications, this year, as we release the next version of Office Communications Server, we’re going to be out there telling our partners why for presence, why for instant messaging, why for video conferencing, why for audio conferencing, why for Web conferencing, come on, it’s OCS, OCS, OCS, OCS, OCS. Our people aren’t going to lollygag around and tell you, maybe you should talk to Cisco. If you want to talk to Cisco, talk to them. But we’re going to get out there and thump, and bump, and sell to the best of our ability, and we say to our partners, come on with us, let’s go get that done. (Applause.)

GEOFF COLVIN: You have a clear point of view on that one, don’t you?

STEVE BALLMER: Yes, I do.

GEOFF COLVIN: Okay. Here’s one that’s come up in the larger context of, these partners are speaking to CEOs and CFOs at various organizations, and some of those people don’t speak the language of info tech. They’re concerned, but they don’t speak the language. The question, are we really getting ahead of the security problem, and how can we prove it to a CEO or a CFO who is concerned, but doesn’t understand the lingo?

STEVE BALLMER: Tough one. Tough one, it really is. Security, unfortunately, is one of these things that for non-IT people is really out of sight, out of mind. I was talking with some of our guys, when was the last time we had a very high visibility security  not Microsoft, but the world at large? And it’s been a while. The more  and that’s a good thing, and we’re all excited about it. Wow, we’re all doing our jobs. But the more we do our jobs, the harder it gets to do our jobs.

The truth of the matter is, particularly on things like identity theft, industrial espionage, theft of financial resources, the security stuff, the privacy stuff, is just as important as ever, and we’re going to have to all, starting with Microsoft, continue to work hard to make sure that the threat is clear, and it’s not going to come from 16-year-old hackers writing viruses anymore, and unfortunately the guys who really want to steal from a business actually aren’t trying to get famous the way the guys are who tried to write these hack viruses. So I agree with the questioner, we’re all going to have to work hard to make that sort of clear and important to non-technical people.

GEOFF COLVIN: Yes. We really only have time for one more topic, but it’s an important one that I want to ask you about, and that’s emerging markets. Most of the economic growth in this world is in the emerging markets, huge opportunities. Here’s a question from Bill Breslin, Insource Technology Corporation here in Houston, what is Microsoft’s strategy in emerging markets, and how can partners participate including on government relations regarding policies and standards, local market development, and demand generation?

STEVE BALLMER: Our emerging market strategy really has four different pieces. Number one, we have to build the right, not just Microsoft, but industry relationship with government. Government has to understand that the technology industry can cause economic growth, can help with important societal problems, education, health in these countries. The government has to support and defend intellectual property protection, all of that is very important. The government itself has to be a legal user of software. We’ve got to make the right kind of deals as an industry so that government can move forward.

Number two, every emerging market actually has what I would call a top of the economic pyramid. The biggest oil company in any emerging market is as sophisticated and able to pay as Exxon Mobil, or BP, or anybody else. And we have to understand that rich people and rich companies in emerging markets want the same service, and probably should pay the same price as people anywhere else in the world.

There’s an emerging middle class in these countries, and the emerging middle class, and a number of the smaller businesses, we all need to really seed with the right kinds of training, incentives, pricing, that’s where these ultra low-cost PCs, $300, $400 really matter. We all have a lot of work to do. I think there’s also going to be a range of innovation where kind of next generation combo-devices, a device that can be your phone, throw it in a docking station and it becomes a PC, so you get better economy against any kind of low-cost investment.

And then, of course, all of these emerging markets also have a bottom of the economic pyramid, these are people who probably will not be able to themselves afford technology in the near future, but we need shared use scenarios, Internet cafes, kiosks, phones, TV as a tool to also get Internet access, we need to really work hard on technologies for what I might call the bottom of the economic pyramid.

So our strategy, four different pieces, it’s hard to tell what an emerging market is these days. Russia, Russia is a very rich country in many, many, many ways, but it’s also very rapidly growing. China is rapidly growing, but it does have a very large bottom of the economic pyramid. Various countries in Africa, some of them are resource rich, and they’re changing. So I think there’s not sort of one definition, but there’s probably four key priorities in all of these sort of exploding economies.

GEOFF COLVIN: Well, it’s a great forward-looking note on which to end. Unfortunately, we’ve got to stop. But on behalf of everybody here, I want to thank you for sitting down with me today. Thank you, Steve.

STEVE BALLMER: Thanks to all of you, appreciate everything you do.

Thanks, Geoff.

END