Steve Ballmer: “Seizing the Opportunity of the Cloud”

Remarks by Steve Ballmer, CEO of Microsoft
Microsoft CEO Summit 2010
Redmond, Wash.
May 19, 2010

KEVIN TURNER: This next session is called Seizing the Opportunity of the Cloud. And let me welcome our UFC fighter, and my boss, our CEO Steve Ballmer. Please give him a warm welcome.


STEVE BALLMER: Well, thanks. I have to admit that last session just fired me up. The genius of it I had to love, the inspiration, the excitement. The whole day has been pretty good, but I have to admit I did get a little fired up. Just even some of the words, which you’re not really allowed to use when you’ve been in business a little longer were really gratifying for me to hear, and I’m glad to have the opportunity to follow up on that.

In a sense, the juxtaposition of let me just say Dana talking about his business, and Evan having a chance to talk about vision, and the need for kind of inspiration, and vision in product kind of leads me to the things that I actually do want to talk about today.

I generally try to hit a little bit of a balance, talk a little bit about what’s going on in the world of technology, and a little bit, frankly, about kind of how we think about our company, and what we’re trying to do in the world of technology and hopefully a little bit of discussion of the company always prompts some thoughts that might be useful to others.

As we have gone through the day, it’s been fascinating, whether it’s been in the breakout sessions, in the main tent, the dialogue is really not about the things that most people think CEOs sit and think about all the time. You know, a return on equity, blah, blah, blah, short-term, to a person the discussion is focused in on how do you get your product right, how do you take care of your customers. It’s focused in on being patient. I went to this shareholder breakout session, and everything is kind of how do you be patient. Jeff Bezos, how do you be patient, how do you think these things through. And, in a sense, it’s consistent with the reflections, I think, we have about Microsoft and what we and our industry are trying to do.

At the end of the day, there’s almost no short-term metric that people take a look at that’s really very valuable to ask you how healthy is a technology company. What are you trying to do? How are you trying to shape the world? What really matters? I sit and reflect on kind of where we are, and what we try to do. To me, it’s a lot about talking to employees. Employees are probably at least, I think, in all of our cases, they’re the No. 1 constituency that really cares how the company is doing, even more than customers, and even more than shareholders.

And when we talk to our employees about are we in good shape, it really comes down to five things, five things really, really matter. No. 1, are we getting the best talent? How is the talent pool? How are we doing? Do people want to come work here? Every year now in our sales meeting, the No. 1 market share statistic I go through is our win/loss rate for college recruits against what you might consider the obvious cast of characters who would be competing with us on college campuses, how are we doing? The answer, by the way, is we have a disproportionately high market share. All fair, all right.

But, we win 70, 75, 80 percent of the time when we go up against even the best technology companies in terms of college recruiting, particularly as you deal with some of the issues which a number of the companies in the room deal with in terms of the law of large numbers. You’re also trying to recruit new senior talent that can really help you drive and push into new areas. Sometimes, John talked a little bit about acquisition, it comes through acquisition. But in our business, a lot of what you need to do to acquire talent is really to go out and acquire it.

Evan was talking about you’ve got to have inspiration. You can’t just take a bunch of people who don’t know an area and say, oh, ho, ho, good luck. We haven’t been in the videogame business, we’re going to take a bunch of sort of engineers with no passion, with no vision, with no inspiration, and say go build videogames. In our own case, that was a major investment that we would have made starting about ’99-2000. We dug a fantastically large hole by investors’ standards of about $6-7 billion, and ever since then  (hums music)  thanks to Dana, I guess, I have fight song in the brain, but we’ve been marching forward. But it took people with inspiration.

Search, we’ve done a lot of work in that area, but we’ve also been out getting the talent, people who have a point of view. How do we reform, how do we change. What is going to really be different about tomorrow that’s different than today? And I know talent is on everybody’s mind, but it’s a health factor effect.

Balanced investment, particularly with the economy going loopty-loop. I still don’t know where it’s going. After this morning’s panel, probably my worst fears were confirmed, but, nonetheless, wherever the economy is going to go, the need to kind of think in a balanced way about an investment, particularly in a tech company, is hugely important. We spend about $9-1/2 billion in R&D. I think Kevin said that earlier. There is absolutely no way to assess payback on the bulk of that in under about three years. Should we be doing a lot more? Should we be doing less? You know, you go to see your analyst, your favorite analyst always has a point of view on exactly what the model should be, and blah, blah, blah, and the truth is, it’s about balance. We have a particular problem in China in our business, which is piracy is sky high. We would earn about 20 times  no, that’s not right, 15 times as much money per PC purchased in the U.S. as we would China. That tells you we’ve got quite a piracy, even India would be about four times better than China.

So, I go kind of gently to try to educate government officials about this around the world, blah, blah, blah, and they say, well, it’s all about your shareholders. It’s not about your shareholders. If we had the additional $6-10 billion of revenue, would we deploy more risk capital, would we put even more money into R&D, and the answer is, of course, yes. But making the balanced investment, particularly when things get tough, when a lot of what you’re investing in has no immediate term even evaluation metric, let alone return, I mean, is this R&D project really going to matter? How do you judge that? Answer, by the sales it generates in about five years. But being smart, being balanced, thinking about those things and being able to defend to your employees, your shareholders, whoever, hey, I’m really investing enough, and sometimes I think more often than not we wind up defending all of us, are we investing too much, in fact, in our futures. How much patience are you supposed to show?

Patience is a virtue here. You keep investing, you just invest, you get it right. If you don’t get it right, dust yourself off, you get kind of a new cast of characters if you need to, new talent, and you keep coming to find the unique inspiration. And, I think, there was a theme around patience. And yet, at the same time, if you stop and think about it, you don’t want patience ever to be an excuse for lack of performance. There are things you’ll actually do that are just flat out bad. We’ve done some of those. And at some point you’ve got to be willing to adjust also accordingly. This is one that we’ve spent a long time on.

I think, today or maybe somebody I was talking to, I think it was Jeff maybe last night, somebody said, what are the worse mistakes you’ve made, you know, bets? And I guess it was Jeff this morning that said, it’s the bets you don’t make. It turns out that by far, at least in our business, by far the most important thing that we have to decide is what to do. Every three years, we have to rebirth ourselves. Every product, every two years, three years, whatever it’s going to be. And so, really picking the right area, whether it’s to be in new product categories, new lines of business, taking a new approach, man, every good thing we did generally started with getting it right on the front end. Picking the right things to invest in, and every mistake, usually it’s because we picked a business that just wasn’t worth investing in, as opposed to simply mis-executing.

Product flow, I’m going to talk a lot more about product flow, but in terms of people ask how do you innovate consistently. It turns out one of the things I think I have most come to appreciate over the last two, three years is that, in fact, there is an aspect of R&D and innovation that’s just an execution game. That if you have smart people they will do something innovative, as long as you hold them to task of executing in some kind of reliable way, it won’t provide the vision for something that is entirely new, but it will provide beauty and improvement in a lot of ways. The saga of our Windows product is probably one of the better chronicled, and I’m sure many people went through as sort of a cycle, either at home or at work, with our Vista product. Just not executed well, not the product itself, but we went a gap of about five, six years without a product.

I think back now and I think about thousands of man years, and it wasn’t because we were wrong-minded in thinking bad thoughts and not pushing innovation. We tried too big a task, and in the process wound up losing essentially thousands of man years, of innovation capabilities. And so a discipline and an execution around the innovation process I think is essential.

And in our business, last but not least, particularly for this talk, there are big technology shifts that happen. And John talks about big market transformations, making the bet. I probably think there are very few of them, and the really big ones you have to totally jump on, whether you’re playing to take an existing business to the next level, or you’re trying to break into a new business. And we are right now, all of us, actually, in the midst of one of those. And I’m going to talk about this thing we call the cloud.

It occurred to me that Craig and others were up here, cloud, cloud, cloud, not clear to me that the CEO Summit audience will be deep and rich in an understanding of what is the cloud. We went and did just some kind of interviews for a speech I had to give at the University of Washington with students, and you would be amazed. You would think the student audience  but, it sort of embodied the buzzword has become very important in our industry, and it represents the next frontier. Craig kind of talked about this as the combination of what he called cloud and natural user interface, and I’ll explain in a minute why I think those are related.

So, we sit here and we look at these things and say, how are we doing? Are we driving forward? How do we improve. I forget exactly Kevin’s quote from Sam Walton, but essentially thou wilt improve thyself. And if you want to assess health in the technology business, you’re going to wind up looking essentially at the kinds of things that I have on the slide.

In our own case, we apply another lens on top of that, which is not only are we in the right areas, and maximizing innovation, but are we being forward-looking enough, or are we being too forward looking? What is the right window for innovation? Six months, ten years, three years, it turns out that having a perspective on the timeframe that you’re trying to intersect is incredibly important. We have bet on things that were too far in the future, and there’s kind of this gestalt now in the Internet business that everything happens in six months, which is patently nonsense.

If you talk to the guys like Evan, who built a great company, there’s a lot of tough, hard engineering work that doesn’t happen in six months, not in the Internet business, nor in any other. So, picking the right timeframes and windows to bet on is absolutely essential. We’ve been betting and investing in the cloud for in some ways about ten years, and in earnest, and in a way that I think is market impactful we’ve been investing for about six or seven years. And yet it’s only now that this uber bet, I think, is going to start really impacting certainly our business customers. On the consumer side we’re already far more, I would say, in midstream. In our own cases we look at the move to the cloud, one of the things to ask is do we like the portfolio of areas in which we’re investing. We invest in the PC, the phone, and the TV. Those are intelligent devices that are going to continue to morph.

Craig showed you a little bit this morning of this Natal technology. But, it’s not really just for playing videogames, you want to watch TV, you want to have a video conference, you want to talk to your friends across the Internet. One little shopping application they like to show where in this case they picked a couple of teenage girls, get a chance to put clothes on one another virtually across the Internet. It all works perfectly well in that kind of simulated environment with a catalogue of clothing. These are areas of innovation, PC, productivity, communication and collaboration, server and service.

Decision engine, I’ve heard a number of people drop the  what shall I say, the swear word around here. You can Bing yourself after this meeting if you like, that’s a replacement for whatever you might have done earlier with the other guy’s product, I’m tempted to send everybody the results of their own Bing queries, including the Twitter results, which are very nicely integrated so you could see what people are saying about you if you wanted to real time.

Of course, the area of the phone, there’s so much landscape and technology that we’re passing on, and yet we have by far the broadest footprint of anybody out here. And the question we ask in the cloud environment is, is there something new that we have inspiration for, vision for, that we should take advantage of this unique transformation. Right now I’d say we’ve got our hands pretty full. Yet, everyday I’ll have employees who will say, come on, there’s this cool new area, or so and so company is doing really well, why don’t we just kind of jump into that. And the pressures in a dynamic business I’m sure we all well understand.

So, what is this cloud thing we talk about? In some senses I think that the best way to think about the cloud is it’s a place where we will all work, we in the tech industry and all of the IT people who work for companies like yours. We’ll work to fuse the best of what we think of as the PC today, the phone, the TV, the Internet, and the corporate data center. And it’s a land of opportunity. I was with one of the CEOs in the audience who is a business partner of ours, Bernhard Charlet, whose company does design software for product design, product lifecycle management, and the like. And he was saying, look, we’ve got a great business. We built it up. Many of the most important products in the world are built and managed with our software. And yet, with the cloud the ability to let our customers get that stuff deployed more quickly, at less cost, with more agility, to share information better between suppliers and their vendors, in terms of product design information. It’s a phenomenal opportunity to change the way things work, and we’re fusing concepts that come essentially from these multiple areas.

When people talk about the future of content, and what will happen with movies and TV, and music, the truth of the matter is, none of those things will exist in the future in the way we know them today. There will be integrated content experiences delivered electronically to multiple devices, with more intelligence behind the content than we’ve ever seen today. We’re already experimenting that with a number of partners, for example, in the context of Xbox. What ads would you want to see? How do you build advertising in as a fundamental concept. How do you then show people what they’d be interested in. How do you provide interactivity into the sports event that somebody might be wanting to watch. So, fusing the best of these notions.

There is incredible opportunity in the cloud, incredible opportunity. There will be more inventors creating more interesting innovations and having better access to customers globally, whether they want to bill a business, sell advertising, charge a subscription, the opportunity, and the opportunity for companies like ours to build the infrastructure to enable that is quite high. A lot of the dialogue in the press today focuses in on the responsibilities that will come with the cloud, privacy, what are the right standards on things like privacy, and censorship, what are the right practices and technologies?

When we go talk to companies like yours about the cloud, the first thing you’ll come back with is, what about security? What about uptime, and availability, and the like? So, there’s a set of new responsibilities that will get borne, and actually a set of new innovations that have been created.

I get asked a lot about privacy, and policymakers, this, that, and the other thing. I have to say, maybe in the sense of the old expression, to a man with a hammer, everything looks like a nail. The guy who runs the software company, everything looks like a software problem. Privacy, is there some absolute standard of privacy that everybody believes in? Probably not. I’m sure if I went to my teenaged son, he would happily trade a lot of his privacy for $10 a month. In his case, maybe $1 a month at this stage. You know, he’s trying to make a little bit of money here for the summer. On the other hand, would I trade any of my privacy away at all? No. Not at all. And so, the opportunity for innovation to both create these opportunities and responsibilities in the modern world, I think, is high.

The cloud. Everything about the cloud is a little bit different when it comes to technologies. The software that we’ve mostly built for my 30 years at Microsoft is software that says, we want the computer to do X. Let’s write programs that just do them. In the new world of the cloud, we actually have the opportunity to learn from what is going on in the world and in the Internet. Maybe it makes more sense, sometimes, to statistically estimate what you probably meant than deterministically give you an answer. You could see this in our spell checker. We’ve had a spell checker built into our word processor for years. It will help correct your spelling. The best word processor we have today, I think, is probably the one that’s built in our search engine, because it is actually statistically correcting spelling, getting feedback, learning, and improving.

Craig showed you maps of the world that are constantly getting better. Not only better in the terms of the map data themselves, but the images, the Twitter feeds, the blog posts that describe what’s going on. The cloud can learn about you, and personalize to you. Craig talked some about that. The cloud enhances social and professional interaction. We all think about, OK, Facebook, Twitter, social networking.

The truth of the matter is, consider the following process: Suppose we wanted to set up a secure little website for everybody in this room to post and share information about this conference. Well, while you’re sitting here, we hand you a laptop, and you get an account, and life is pretty good. But if we want to just top that off, and make it really easy for an arbitrary group of people to get together and collaborate on a topic securely, which is what most businesses will tell you they want to do, at least with their employees, customers, trading partners, it’s not easy to do today. The opportunity to use the cloud in new ways to enhance interaction is high.

The cloud wants smarter devices. Some of your IT people come to you and say, we’re taking it all back. We’re moving everything back into the data center. It’s going to be like the good old days. We’re not going to use mainframes anymore, but we’re going to bring it all back. That’s the best way to get security and compliance, and simpler meetings at the audit committee, blah, blah, blah. The truth of the matter is, that’s not what’s going to happen. The cloud actually wants smarter devices, smart devices that are secure and manageable, and low cost, but the cloud wants smarter devices.

If we want these devices to learn about you, to help you collaborate in new ways, and you see that, smarter and smarter phones, smarter and smarter PCs, smarter televisions, which we barely scratch the surface of happening even as we speak, with the kinds of next generation user interface that Craig talked about.

And last, but not least, the cloud is going to completely change what we think of as a data center. The software, the hardware, I kind of wish I had one, but we have these new shipping containers, they’re just full, the shipping containers come full of computers, and they have storage, they have computing power, they have network capability. The goal over time is, you throw down a slab of concrete, you plug in a power source, you plug in a network connection, and you plug in a garden hose. The garden hose is for cooling purposes. It used to take a fire hose. We’ve been working with partners now, you get it down to a garden hose.

And the cost and complexity of building software, and deploying data centers, and doing things on a geographically distributed basis changes. Now, we will do that in services that we provide to you. And we’ve been busy selling services for communications and collaboration, but many of you will say, I’m not willing to trust my business yet. I’m not really willing to put the account database for my bank in your service run by your employees. Many governments are sure it’s the other government that has access to the information in these shared data centers. There is some confusion. If a U.S. company doing business in Brazil has a data center down there, which number of PATRIOT Acts is it subject to disclosure on? I actually posed the question, and I really don’t know the answer. The U.S., the Brazilian, the Chinese, how will this get sorted out? I don’t know, we’re going to have to work these issues through. And in the meantime, we need to make sure that these advances that drive the cloud services that Microsoft, and Facebook, and Twitter, and the people we compete with, those same advances you can use to reduce the cost and complexity of computing in your own environment as well.

And so we see kind of a new generation of, you could say, data center in a box, slab of concrete. I get sort of pushed by government officials, they all say, please build a data center in my territory, please, please, build one here in  I’ve had a pressure both from the Flemish and the Wallonian Government in Belgium. You build one one place, you’ve got to build them in the other. The truth of the matter is, there’s only about two people who work in these large data centers. So, it can’t be about jobs.

And the truth of the matter is, right now, we built a massive one of these things in Chicago. There were far more jobs in the construction of the data center than in the operation. But if you’re really just throwing down concrete, a little bit of a roof, and some shipping containers, the cost and complexity that comes out from the hardware, in addition to the improvements we make to the software can be run around the world, backed up, managed, seamless is really quite, quite different.

I want to wrap with just a bit of a discussion about some things you should look forward to, talk to your CIOs about, push on, over the course of the next year or so. We happen to be in the middle of a particularly great product flow. We have a new version of our Office product, our SharePoint product, our Exchange product, our database product, our Windows product, blah, blah, blah, blah. But putting these things together to deliver business value, we think we have more that we can do for you in the next year than in a long, long time. Changing the way people find, access information, and make decisions. I don’t know about the rest of you, but when things hit the fan during the economic times, I actually wanted to take some numbers, take a look at debt as a percentage of GDP, over history, cross reference it with some business results. I had a picture of the spreadsheet in my head. You know, two weeks later, and four analysts’ time, and I actually had what I wanted. But I could have described it. We’re much closer to having the technology now that lets you build that against both Internet data, and the data that lives inside your own company.

Conferencing, communication, collaboration, phenomenal improvements that you should expect this year. The way you broadcast, publish, communicate with your people, one of the remarkable things to me is all CEOs care a lot about communicating with their folks, and yet the infrastructure that we find in a lot of companies really doesn’t make it easy. How would you have a webcast and talk real time to your people? How would they give you real-time feedback about what they’re doing without overwhelming you? What is the equivalent of private Facebook, private Twitter, that really you kind of keep intramural, so to speak, in the company, phenomenal things coming this year.

Agile business process. Somebody asked earlier, still way too hard to essentially customize one application and solder it to another. Get your people to ask us about it, we think we’ve got ideas. Website interaction, and then a whole host of things for security cost, and management of IT itself.

So, I think you should expect, whether it’s from us, or the industry at large, you should push and you should expect a lot more. We happen to be in a hot wave. Some of the guys we compete with are in a hot wave. I encourage you to really push and test the subject with the folks who work for you, because I think this will be a year of fairly unprecedented opportunities for enterprise organizations.