(Applause.)

INTERVIEWER: Good morning. Let me introduce my colleague, Gartner’s lead analyst on Microsoft and Vice President, Dave Smith. (Applause.) And let’s have a very warm round of welcome and applause for Microsoft’s CEO Steve Ballmer. (Applause.)

Steve, thank you for joining us again today.

STEVE BALLMER: It’s a real pleasure.

INTERVIEWER: Why don’t we start with questions from the audience. Let’s roll the videotape.

(Begin video segment.)

QUESTION: Hi, Steve. I think you should reconsider the idea of breaking up Microsoft into two companies; one company that deals with operating systems and another company that deals with applications. I think it would be a good thing. What do you think?

QUESTION: What specific things are we going to see from Microsoft over the next year to 18 months to address the security problems you’ve traditionally had?

QUESTION: We are very concerned about security. IE has another exploit in security; it’s beginning to cost us a large amount of money and we’d like to know what Microsoft is going to do to address the security issue?

QUESTION: So, Steve, last year you predicted that the Liberty Alliance and our effort to create an alternative to a locked-in Passport-like architecture had zero probability of mattering. What other predictions would you make for next year that will have absolutely zero chance of mattering?

QUESTION: My company has invested quite a bit of money on the .NET Framework and I need to know what the future of the .NET Framework is.

QUESTION: Steve, in terms of the approach to licensing and Software Assurance, there seems to be some pushback in the marketplace to Microsoft’s recent approach, and I wanted to see how you’re addressing that.

QUESTION: What really is Microsoft’s strategy around packaging Software Assurance for the larger enterprise?

QUESTION: I’d like to ask Steve Ballmer if he has any surprises for us in the way of licensing arrangements in the coming years.

QUESTION: When is Microsoft going to address licensing for ASPs, so that we’ll be able to afford to support Microsoft applications for our clients?

QUESTION: I’d like to know how you’re going to price your platform, the .NET platform versus the J2EE best- in-breed vendors?

QUESTION: It seems like a shame that when I buy a new PC today, 40 percent of the bill is what I pay to Microsoft when I’m getting radically updated hardware for such lower cost.

(End video segment.)

INTERVIEWER: Well, let’s start into some of the questions that are here. Let’s start with the whole issue of Software Assurance. There’s been a lot of negative PR and frankly a lot of concern on the part of our clients about Software Assurance. The question is when and what is Microsoft going to deliver as substantive value added to make the transition to Software Assurance feel like clients are really getting something extra for their dollar?

STEVE BALLMER: Well, the Software Assurance offer we have in the marketplace has a couple of different components. Number one, and very, very popular, frankly, with customers, is Software Assurance gives the customer a right to all patches, all fixes, all upgrades, all of everything that we do with that product over the period of time of the Software Assurance agreement. Even before the so-called new licensing programs went into effect we had literally thousands of customers around the world who had enrolled under what we call Enterprise Agreements. Enterprise Agreements are essentially Software Assurance type agreements in which a larger set of machines are covered.

We do recognize the opportunity, the desire, the request and the need, all of the above, desire by us, requests from the customers, need from the customers to ensure that we are delivering more continuous value as opposed to just big, lumpy upgrades. And some of that is going to come in the form of things, which are really assurance — fixes, patches, things that people need and can get in a simpler way if they’re Software Assurance customers.

Some of it’s going to come in the form of tools. We’re providing our Software Assurance customers now, and it will keep getting better with a set of tools so that they can run almost a Windows Update like service inside their own corporate firewall. We think that’s important.

We think the notion of bringing out add-on packs and capabilities, as opposed to just big, new lumpy releases will be a part, not the only part but a part of Software Assurance.

And then, of course, big upgrades have real value and if you take a look at the pricing we did assume that we would in this period of time of the typical Software Assurance contract, which is three years, that there would be a significant upgrade that the customer would be interested in, and that package has to deliver I think a good value for our customers.

If you take a look at it today, Microsoft software for the typical large account would still represent significantly under 2 percent of total IT budgets, and we think still represents a very good value, but we understand for a number of customers represents less of a value today than it did a year ago.

A lot of learning for us through the process of these last changes; our number one goal when we started out with the new license program, frankly, was to simplify our licensing. We used to have things that people couldn’t understand — cuts, buts, ruts, puts; these were all terms in our licensing and we said let’s clean it up.

Well, we learned that sometimes when you clean things up and simplify them, which starts with a noble sound, you can wind up costing some customers more money and that’s problematic.

We still have customers today who would tell us, look, we can’t understand your end-user license agreements, they’re too long, they’re too complicated, we don’t understand, and so we’re looking at simplifying those.

I guarantee you we know now we’re not going to simplify anything in a way that causes any of the kind of hardships that we’re seeing financially for some of our customers today.

With all that said, we did complete the transition to our new licensing program earlier this year, a couple of months ago, and we have seen very high percentage of all of our customers engage in sign-ups under our new licensing program.

INTERVIEWER: For those who might be thinking about signing up, is there anything tangible or anything you can say that they can get within the three-year window at this point in time that might make them want to sign up?

STEVE BALLMER: There are certainly going to be upgrades on all of our major products, and we already have our next Office release is in beta. We’re hard at work, it’s been in the press, there’s a new Windows release coming. We have new server releases. And for those people who have either the servers or the CALs under assurance there’s new capabilities that come there. We have put out V1 of what we call our Software Update Server technology, which is only available to our Software Assurance customers to allow them to distribute software in a nice way inside the corporate firewall.We’ve got some other stuff that I’m excited about that would apply to both Office and server customers in terms of add-on, but we haven’t finalized the plans so I’ll probably hold those for now.

INTERVIEWER: Well, I think the issue of value and cost is a very important one these days, as everyone I think would agree, and one of the gentlemen we had on the tape talked about something we’ve talked about here before, something we referred to as the Microsoft tax, the increasing percentage of the overall spend when someone buys a new PC that goes to Microsoft. He said it was 40 percent. Our estimate is probably about the same.

Today, you can go into Wal-Mart and buy a PC for $199 without Microsoft software, of course, and without a monitor. Isn’t there a whole new market there that you could help enable if you were to lower the prices?

STEVE BALLMER: Well, if you take a look at our price for a home computer, which is what you find actually on Walmart.com, I think, you wouldn’t find it in the stores — it doesn’t sell well enough to be in the stores, but on Walmart.com you’ll find a $199 computer. Our price for Windows for that machine has been invariant for — and you can say it hasn’t come down, but it’s been invariant for eight years, seven years, a long period of time at this stage. And I think we deliver, in fact, a lot more value today than we did then.

Now, why is that computer $199? The fact of the matter is, it’s not our software price. Most analysts would say we get maybe $50 for a copy of Windows. So that’s not $250 with Windows and $200 without. Somebody is subsidizing that hardware. Somebody is losing — I mean, people know what power supplies and disks and processors all cost. Our price list for Windows to OEMs is now published on a Web site. That was required under the consent decree. So that $50 charge, I would argue that a customer who bought a $250 computer from Walmart.com with Windows on it is going to be a heck of a lot happier when they get home than somebody who buys a $199 computer that doesn’t run most software.

INTERVIEWER: Well, let’s take a different look at this. We all know that demand is price elastic. If the price drops, demand is going to increase. So if on that $200 class piece of hardware you were to charge $5 for Windows, that’s a reduction in price down to $205 for that package. Don’t you think that you could help stimulate demand on the low-end by coming up with a different pricing scheme for low-end machines?

STEVE BALLMER: I think it’s the difference, and I’ll be blunt, the difference is somebody gets to pay $250 for a computer with a piece of software that has the application set that Windows XP has, that has the fit and finish, that has the capabilities for photos and music and image; that’s $250, or it’s $200 — because we couldn’t go to $5 a copy and support any R & D basically, or the machine costs $230, let’s say, and will that really drive a lot of demand? No. Will it wipe out our ability to do innovative work like Windows XP, because that it would do. You take $20 off the price of Windows and our ability to do innovative R & D goes out the window and I don’t think we’d see a big boom in demand if computers were $20 cheaper.

INTERVIEWER: I mean, we’re not trying to be ridiculous here. We’re not proposing that Windows everywhere is $5 a copy but why not a proportional tax based on the cost of the box to help grow the low-end, re-stimulate demand and get the industry growing again?

STEVE BALLMER: There are more logistical nightmares associated — if you think we had pricing and licensing problems here, boy, would we have pricing and licensing problems with our OEM customers in that scenario.

And still take what I said; would $20, would the difference between a $200 — first of all, that thing is not a $200 computer. Somebody is subsidizing it and losing money on it. So let’s really go to the price points that exist in the market. Would there be a material difference in sales between a $475 computer and a $500 computer? There might be but the logistical hassle — you know, we’re working hard. We have a Home Edition and a Professional Edition to try to give some differentiation in price. There are guys who think around and say, what would it like to have an education version of Windows, how would it need to be different, could we get it done and offer it somehow on a lower price, particularly for this country but also for lesser developed countries. So we’re not blind to the issues that you’re saying, but we’re trying to be smart about it because I don’t think people’s gut reaction is right. I don’t think a $475 machine outsells a $500 machine so radically as to be worth our taking the precipitous action you talk about.

INTERVIEWER: Well, I think if you look at it, I won’t belabor the point, but if you do look at it from the perspective of all the retailers who put up 10 percent off sales and do get an awful lot of people to come into the doors and perhaps buy those things, they may be loss leaders but they do stimulate the market.

But I wanted to get into a different issue around licensing. Thus far most of the licensing strategy seems to be more device-centered as opposed to people-centered. In fact, your recent Windows Media PC that you’ve introduced has the feature where the DVD that you burn can’t be used on any other device other than that, even if it’s a device I own. When are you going to try to do licensing more on a per-user basis, or are we going to have to live with that way forever?

STEVE BALLMER: Yeah. You can actually pass the DVD to other systems that also have a proper license, and actually that has more to do with the licensing of DVD patents and where we have paid for them or not. We pay for the DVD patents on the device, the Windows Media Center PC you buy, and we haven’t licensed the patents for you on other machines. That’s why the license works the way it works.

But to your real general point, we agree it would be nice to have a variety of different options per user, per device, et cetera, in our licenses. The key question is how do we do that and not have the level of complexity explode as oppose to contract. Having yet another way to license from us that people might or might not understand could be a good thing, might not be, but we’re actually right now, I was reading some mail on the way out here, we’re doing a full re-look at the end-user license agreements, but as I said we’re going to make absolutely sure that if we simplify we simplify it without any pain for the customers.

INTERVIEWER: Is it a goal to get to per-user licensing? Is it a long-term goal?

STEVE BALLMER: There are scenarios in which per device makes more sense. There are scenarios in which they’re per user. There are scenarios in which it is cheaper for a customer to go per device.

Take the standalone machine that gets used by 30 people on the factory floor. Most of our customers tell us they’d like per-device licensing for that and they’d like per-=user licensing for people who have multiple machines.

So it varies, shall we say, and I think we have to be very careful not to drive religion but to listen to the feedback we got this time and look for simplifying principles that keep costs constant or reduce them.

INTERVIEWER: Let’s pop this up a bit and let’s look at the software industry in general. First, let’s start with you and your position in that. You’re the CEO of the most successful software firm on the planet, $40 billion of cash in the bank, a quarter of a trillion dollars of market capitalization.

I’d like you to think of the following questions potentially as the industry leader and provide some advice. And the first area of advice we’d like you to share, frankly with the vendors who are here and elsewhere is around the whole issue of the doubt around the integrity of companies, of financial reports, the skepticism with regard to the integrity and ethics of business. Are there two or three suggestions you’d have, particularly for the software industry, of what CEOs should be thinking about and doing that they’re not doing today?

STEVE BALLMER: Yeah, I think that the renewed focus in the world on the issues of propriety and governance are all good. I’m not sure I would sit here and preach do this or do that, except I would say to people who are running software or other companies, be very attentive, be very attentive.

There are certainly, I’m sure we’re going to find when all is flushed through the system, there have been some egregious cases where people willfully committed mistakes or willfully made mistakes, I guess I should say.

On the other hand, there are just plenty of things that unless you’re mindful and you’re really watching and you’re very thorough, there are plenty of things that people might wonder about as practices and you just never even thought about.

We think we have a very good board. We’re very proud of our board. Business Week does a story that puts our board — there was good, bad and needs work — and our board made the needed-work category. And we said, aw, shoot, and we thought we had worked on it already and it was in really good shape. So I’m studying, OK, what do they mind about our board, because we have very good board members? But it just means constantly you should be kind of revisiting these governance issues, and that’s probably the one piece of advice I’d give everybody, because the degree to which you’re attentive is the degree to which, even if you have sort of small things around the edges to tune up, you’ll tune them up well and you’ll keep looking good in front of employees, customers and shareholders.

INTERVIEWER: One of the things we do see a lot of software executives worrying about is something called UCITA, which is essentially a license for software companies to effectively operate above the law. Do you think that’s fair, and why not something like that for the automobile industry or the tobacco industry or the gun industry?

STEVE BALLMER: Well, you see it is the law, just to take exception with your phraseology. UCITA is the law and I understand that you’re obviously quibbling with the law as is written.

UCITA is a part of the Universal Commercial Code that talks about whether software licensing, whether software actually gets purchased as a product or licensed as a product and do the end user license agreements apply or not apply, and this UCITA regulation has come down on the side that software end user license agreements apply.

Now, with that comes whatever set of language the software vendor, be it us or be it somebody else, wants to put in. It was controversial because some people, including us, but even the standard industry’s practices in many cases have things, which some analysts and some customers find problematic.

But UCITA is the law. We all follow it and there is I think at this stage a pretty good, there’s at least a set of general practices, which most of the software industry follows, and so I think from the software industry perspective that’s not really a very controversial topic anymore.

INTERVIEWER: Steve, let me correct you. UCITA is not a law. UCITA is a proposal for laws in the 50 states. Two of the 50 states have, in fact, adopted the UCITA proposal; 48 are holding back. And the software industry is lobbying the other 48 states to go ahead and adopt provisions such as software vendors should not be held liable for any defects in their products other than the cost of the product that was purchased.

STEVE BALLMER: UCC at the national level has decided what they want. You’re right, it still requires state uptake; that’s a fair correction.

The way the UCITA regulations work it actually is about the enforceability of the license agreement. If the license agreement says the software is not warranted to do anything, then there is no warranty to do anything. But if a company wants the warranty or wants to have other provisions in their end user license agreement they can. That’s what’s really being discussed in terms of state adoptions of the UCC code.

INTERVIEWER: The real issue is whether other industries should be entitled to that kind of protection as well.

STEVE BALLMER: Every industry has the right to be able to sell its products on the basis that it wants to sell its products. We’re not the only industry that is in this shape and the UCC code provides different protections to different classes of goods. That is true.

INTERVIEWER: What other industry has the ability, or claims the ability, to put itself above the law in terms of not being responsible for any damages associated with its products, other than maybe the tobacco industry until recently?

STEVE BALLMER: I really have to take exception. The software industry does not put itself above the law. It does not. The software industry, including our company, follows the law in every regard.

The question is for products like the ones that we make, should there be the ability to do a license and that license has provisions — software, as I’m sure everybody in this audience knows, gets used in varied and sundry ways. It’s a much more malleable product. It can be used in many more interesting and intriguing ways than this bottle of Evian can. This bottle of Evian can be dropped, it can be picked up and it can be drunk from. It doesn’t have a lot of programmability to it. And so a product as flexible as software, not only our company but virtually everybody in our industry then says, look, we have to make sure that we have a reasonable set of protections in terms of our liability in terms of how this is used.

If somebody uses a piece of software to send an evil message, a terrorist message, is the software vendor or the service operator liable? No, I don’t think so. So there are many ways in which our products get used, but I really have to take exception with any notion that says the software industry is operating outside the law. This is the law. We’re working in the context of the system appropriately on the law. In my time traveling, talking to customers I have only once ever been asked about the question of the UCC code and where it’s going from a customer.

INTERVIEWER: Well, let’s go to the ethics question, and how products are used, and so forth. There’s a really interesting item on the ballot for the stockholders’ meeting for Cisco this November, and it was put there by some stockholders, and the ballot question essentially is asking, or demanding rather, that Cisco identify what Cisco products, if any, are being used by the government of China to deny free access to the Internet and to block free speech on the Internet. Should companies in this industry be concerned about uses of technology like that? Would you be concerned, for example, if your products — and this isn’t about you; this is about the industry in general — were being used for those kinds of purposes? Should the industry take a stand that you don’t want to sell products for those uses, or do you not care where they’re used?

STEVE BALLMER: The way you frame the question it’s sort of like one of those when did you stop beating your wife type questions. (Laughter.) No, do I want our products used for evil? No, no, no. (Laughter.) Would I have a clue how to stop it? No, no, no. (Applause.)

I’ve got to remind you of a couple things. There was a time when you couldn’t sell microprocessors in Eastern Europe to Russia. You know what people did? People would come into Vienna, they’d load up their pockets with 286s, and they’d walk back to Budapest, and then fly to Moscow. The technology got there.

There was a time when the U.S. government said no security technologies are allowed to be exported out of this country. What happened? The bad guys got their security technologies from other companies.

Cisco has no clue what the Chinese government is doing with its products if the Chinese government doesn’t want it too. It will go buy them in Hong Kong, and drive them back across the border. It will tell them they’re being used for one thing and use them for another.

So as a CEO, no, if somebody put that shareholder resolution on our ballot, not because we’re evil, bad people and want to condone whatever evildoing is going on out there, it can’t be stopped with the tools and approaches that are being recommended. And I’m very sensitive to the issue, but at the same time — (laughter.) I’m sensitive on all sides to the issue. At the same time, I don’t really know what the sensible thing would be to require of any company, of Intel, of Cisco, of Microsoft — I can come up with cases that are important for all of us, but I can’t come up with the right requirement.

Where the laws are clear and where, for example, we hold e-mail on behalf of about 160 million people in the world and that’s something that’s private to those people, but to the degree that there’s valid government inquiry and valid government court orders to see some of that mail, because it may come from the bad guys, so to speak, okay, we would produce it, of course.

INTERVIEWER: Well, let’s follow through on this problem. One last question on ethics, and then we’ll get to technology after this. And the question —

STEVE BALLMER: I like them both, so either way.

INTERVIEWER: And the question has to do, let me pick on one of your competitors for a moment, Oracle. Twenty years ago Oracle decided it didn’t like the fact that a professor at the University of Michigan was publishing benchmark information about Oracle’s products, so Oracle first allegedly tried to get this gentleman fired, and then changed its Ts and Cs so that its terms and conditions said you may not publish any performance-related information with regards to this product without prior approval from Oracle. And lo and behold, over the next 15 years or so almost everybody in the industry copied that clause, just sort of a conspiracy of silence, let’s all keep this under control within the industry.

And recently the Attorney General of the State of New York went after one of these companies, none of the aforementioned companies because this isn’t a thing about specific companies, and his position was, you know, that it’s unconscionable that a software developer would seek to chill and censor public speech and debate about its products.

This strikes us as a practice the software industry is engaging in that it may not be above the law, although the Attorney General of the State of New York thinks that it may be a violation of the law, but it certainly might be one place where Microsoft could take a leadership position and say we will no longer try to block free speech about our products. How about that?

STEVE BALLMER: I like this. (Applause.) That’s interesting. That’s the first year you’ve gotten applause. Tom’s asked me this question now four years running —

INTERVIEWER: Three.

STEVE BALLMER: Three?

INTERVIEWER: Three years running.

STEVE BALLMER: Three, I thought four, five. Probably next year, too, unless we do something about it. (Laughter, applause.)

The fact is I’m glad we at least heard a few rounds of applause. I’ve never had a customer ask me the question, to be fair, and we’re kind of the little guys in the database business. This is only true in the database business. And we are drafting behind the market leaders. We have followed the practice of the market leaders.

Will I revisit it again, as I promise you each year, and each year I do, I go through it, I’ll look at it again this year and it’s called the cone of silence question now inside Microsoft and they said,
“Remember, Tom’s going to ask you the cone of silence question.”
(Laughter.)

And just a show of hands, for how many people is this a real issue? Let me see some hands, please. Okay, I’ll use that as input to making this decision. (Laughter, applause.)

INTERVIEWER: I’ll give you another point of input.

STEVE BALLMER: Yeah, go ahead. (Laughter.) I know you’re going to anyway.

INTERVIEWER: Talk to the other CEOs in your industry with whom you have a speaking relationship — (laughter) — and get together a list of all the people that the software industry sent cease and desist letters to threatening them with lawsuits if they go ahead and continue to publish the information that they’re publishing and maybe you’d get a good list of hundreds of thousands of people who could give you additional advice on this.

STEVE BALLMER: We’ve sent zero such letters, but I will ask Larry, with whom I am on speaking terms.

INTERVIEWER: Not just Larry.

STEVE BALLMER: Just as an example. The only one we’re really not on speaking terms with is the one who wants me to predict something about it next year. (Laughter.) So good input. (Laughter.)

INTERVIEWER: Let’s move on to another subject.

STEVE BALLMER: And we’ll come back to it next year. (Laughter, applause.)

INTERVIEWER: You can bet on that.

Let’s move to another subject, growth at Microsoft. Growth is certainly one of the major issues that you must be thinking about. I know it’s a major issue for pretty much everybody these days. But we’ve looked at things like .NET that may provide some intellectual leadership for those who can understand it, and we’ll give you another opportunity to try to explain it to people, but also aside from intellectual leadership, how does it provide for growth for the company and what is going to provide for the growth of the company?

STEVE BALLMER: Yeah, let me characterize our company this way. We have a core of technology that we think comprise sort of the key platform or building blocks for Microsoft. I wouldn’t necessarily even call them businesses; they’re just the core technology foundry for the company and then we build businesses around that. The Windows desktop or client is a business. Office is a business. MSN is a business. Handheld devices, Pocket PC is a business for us. Xbox is a business, Business Solutions; these are all businesses, our servers and tools business, which is now growing in terms of new function, new capabilities.

At the core, though, is the building blocks, the core building-block technologies. Windows has been in that core, and now we’re infusing into the core technology to help people take advantage of the XML revolution. That’s what .NET is. The benefit of XML we think is best characterized as helping connection. But just like DOS was in that core in the early ’80s, and we infused Windows and then Windows was in that core, and we infused IE and Internet capabilities, and now Windows is in that core and we’re infusing .NET to take advantage of the next revolution in computing, which we think occurs around XML.

So you can look at all that and say, where’s the growth? Well, all of those I think of as just the enabling bunch of technologies for the businesses on the periphery. So where does the growth come? I think the growth comes in the seven businesses that we have flanked around it. It’s conceivable we’d also enter new businesses but there are seven businesses we’re pursuing today.

The PC market I think will continue to show some growth, particularly in the home, and particularly in developing markets. It’s not going to grow as fast as it’s grown before, and that’s going to certainly be a limiter on the growth of the Windows business.

We see ways to help knowledge workers, information workers, that far go beyond what we’re doing today. We actually had dinner last night, and when we were talking about dinner last night, you mentioned business intelligence is very much on people’s minds. I think the world’s only scratched the surface in terms of technologies to help with business intelligence. Yesterday we announced a new end-user tool in the Office suite that helps people work with end users, connect to, work with and manage XML data. I think things like that will be important.

So each of these businesses we see growth opportunities. Some of them might look like single-digit percentages. Some of them I think have double-digit-type percentages per year in front of them. And at the end of the day we still come to work and try to ask every day what other new ideas are there for us.

INTERVIEWER: This is a dangerous question to ask Steve Ballmer, because Steve is going to run on for 20 minutes if I ask the general question of what’s new. It’s not the question I’m asking, but just Office.

STEVE BALLMER: But I might answer it anyway. Go ahead.

INTERVIEWER: You might answer it that way anyhow. (Laughter.) What we’re really looking for is a sense, you know, and it doesn’t have to be the version 11 release or whatever, but in the next three to five years, let’s put handwriting recognition off on the side, let’s put voice recognition off on the side, is there something new, profoundly different, some real dramatic innovation or just the steady progress of improvement that you’ve been making over the years? So is there a big shift coming or is it a bunch of little changes?

STEVE BALLMER: Well, let me just sort of rewrite Tom’s question. Beside the fact that you’re going to totally revolutionize the user interface, beside that, what’s new, Mrs. Lincoln? Is that the question? (Laughter.)

INTERVIEWER: Are you revolutionizing the user interface?

INTERVIEWER: It’s a set-up question if I ever saw one.

STEVE BALLMER: Well, you threw out handwriting and voice, I mean you threw out Tablets when you threw out handwriting. So besides that, yes, I think there are other things coming, so let me talk about those. (Laughter.) But I do want to highlight —

INTERVIEWER: Here we go again.

STEVE BALLMER: If we didn’t have any fun I wouldn’t come back, and they’d kick us out anyway.

OK, so what else is coming? The big breakthrough even for the Office suite lies around this notion of XML. And you could say, OK, what does it mean to an Office user? It means a variety of things. It means improve collaboration capabilities, improved information management capabilities, improved ability to find and do what they want to do. We have separately a whole thrust in Office to add kind of better service infrastructure behind it so that people can get better online help, connection to support engineers so that they can just better discover and figure out how to do the things they want to do that they don’t know how to get done in a product like Office today.

There’s new Office apps — I’m just going to keep streaming through these. There’s new Office application categories, one of which I’m not sure we’ve announced yet, but believe me, if you just think about the number of places — take this meeting. He doesn’t have a PC with him, and he doesn’t have a PC with him. Why not? What’s the software that’s required to make sure that instead of bringing a clipboard with paper next year, you bring a PC? If I looked out in the audience, what’s required, what’s the software, what’s the collaboration capability, what’s the note-taking software look like, what does the reading software look like, what does all that have to look like, what does the integration have to look like between voice, video, PowerPoints, although we’re not using those today, to have this be effective?

How would you capture this meeting for the attendees and be able to play it back in the right way? If you go home, you don’t want to just go home and tell people to watch the Web cast. What you really want to be able to do is go home with a set of notes and you want your notes linked to the Web cast so you can tell your people,
“I want you to drill into this point,”
and the note time-wise is synched to something in the video. That’s a new kind of collaboration, note-taking, information management application.

You guys have bashed us all over the park on what you think about our SharePoint Portal Server. Okay, that’s fine, but at the end of the day, the ability people have today to really share and find information inside corporate intranets is not what most people want it to be. We recognize that. We think we have a good initial set of offerings between SharePoint Team Server and SharePoint Portal Server. We’ve got to take it to the next level.

And all of the stuff I talked about is independent of the fact that, yes, the computer will recognize speech and handwriting, et cetera, over that period of time.

Did I answer your question?

INTERVIEWER: No. (Laughter.)

STEVE BALLMER: Or was I too specific? (Laughter.)

INTERVIEWER: That’s great, Steve. Let’s look at one other market that you have invested heavily in over the past few years, the overall consumer market. Has it paid off as yet? Are you going to continue to be making heavy investments in it or are you going to redouble your efforts for the enterprise folks?

STEVE BALLMER: Well, there are sort of two different questions in there. One, how are we doing in the consumer market, and the truth is from the number of users perspective, we’re getting stronger every day, and from a profitability to the shareholder perspective, there’s a lot of room for improvement. (Laughter.) But that’s not going to scare us away. The consumer market is important. In fact, one of the ways the PC got popular in enterprises is because it got popular with individual consumers. And I think it is a big issue for any company in our business to ignore the consumer market, because there are phenomenon that happen in the consumer market that affect the enterprise business. So we’ll keep going and keep investing.

Some people ask, how can you invest in both the consumer market and the enterprise market, and the answer is we invest heavily. There’s a lot of technologies you can share back and forth. I mean, we’re introducing better spam controls now in MSN 8. It’s a big feature. But spam is an issue in corporations today, too, as more and more people get bombarded, so we’ll bring the technologies back into the corporate market.

People say, well what about things like storage. Well, the truth of the matter is the storage needs of managing a large Web site like MSN and the storage needs in a large corporation, they’re not all that different.

So from a technology perspective we’re making broad horizontal investments and then where we need to we’ll dial up the R & D specifically to focus in on the enterprise.

INTERVIEWER: Let’s look at a particular announcement you made a couple of weeks ago. You’re now shipping, and this is in the consumer segment, 802.11b, Wi-Fi, wireless connectivity access points and cards and paraphernalia. And when we looked at that announcement we scratched our heads. What we saw was industry standard commodity hardware you can get from any one of a dozen companies and some cute little utilities from Microsoft that felt more like patches for XP.

And so we’re trying to figure out where this fits strategically. We came up with three alternatives. The first one is this thing slipped out without you noticing it. (Laughter.) The second is you found a new way to generate incremental revenue for patches that otherwise would have been made available through Windows Update. (Laughter.)

STEVE BALLMER: Try number three. (Laughter.) Keep going, baby.

INTERVIEWER: Or third, you’ve decided for some arcane reason that you want to move into the commodity hardware business and compete against hardware commodity vendors.

Which is it?

STEVE BALLMER: We have I think a team that has a lot of ideas on how to add software to the way homes get networked. I’m not going to try to tell you there’s a large, long, deep set of software that comes with the first product. The fact is because we have a broadband service that we provide with MSN, we’ve had guys working on modems, broadband modems with certain kinds of wireless technologies anyway. They said, look, we want to go get some experience; here’s the set of things we think we can do from a software perspective that will be interesting going forward.

I won’t tell you it is the number one thing on my radar screen internally to your first point, but Bill and I went through this thing, we heard what they had to say and we said,
“OK, give it a try, let’s see what we do, get your sort of V2 software moving more quickly and let’s go ahead and try it out in the marketplace for now.”

INTERVIEWER: We did also find here down at Disney another consumer device. I was wondering if this was some kind of a top secret beta that folks should know about. It’s called the
“Ballmerang.”
(Laughter.)

STEVE BALLMER: Fascinating. (Laughter.)
“Do not use without proper eye protection.”
(Laughter.)
“Recommended for children six and over.” “Made in China using Cisco routers.”
(Laughter, applause.) Can I —

INTERVIEWER: Absolutely, you can have it.

STEVE BALLMER: Actually, my seven-year old will think this is pretty cool. (Laughter.) I’ve never seen it before.

INTERVIEWER: Let’s shift to a different context here. You know, it’s real easy to ask you, and I’m not going to ask you the question, you know, what keeps you up at night. From year to year, the threats that Microsoft faces change. There’s a really big threat, for example, from the Department of Justice two years ago, and that threat is no longer a high level threat; you worry about it, I’m sure. So how have the threats to Microsoft, the things that keep you up at night, how have they changed in the last year?

STEVE BALLMER: Well, any good and successful business is going to have threats and if you remain successful it is likely the threats do shift over time, particularly in an industry as dynamic as ours. I mean, the fact of the matter is the things that I’m focused in on — I won’t even call them threats, the but the things I’m focused in on, the level of expectation that our customers have for us is higher than it has ever been and when we under-perform, whether it’s on the security front or we under-perform in terms of the way we manage licensing transitions, when we under-perform the fallout, the negative fallout from that kind of performance is worse than it’s ever been.

And so in some senses I’d say one of the great issues we’re working on is, how do we raise our overall level of excellence in customer satisfaction, customer trust, customer connection. I don’t list it as a threat; I’d just say, look, the bar, maybe the bar was down here someplace when we were cute, 1995, 1996 Microsoft; the level of expectation is way up here. And certainly we haven’t emerged from the Department of Justice lawsuit, but as at least it’s faded from press attention, the level of expectation just shines out like a beacon in the night, the level of expectation from our customers. And rising to that level of expectation I’d say is certainly on my mind.

The second thing that I would say very much is on my mind is changing competition. If you were to ask me two years ago, Sun would have been someplace very high up on the competitive list. Today, I’m not saying Sun’s not a competitor, but we’re focused on a lot of other things. We’re looking at Web Sphere, we look at Linux. We probably see those things as much more serious issues today than we did a couple of years ago.

The third thing I would say that has ebbed and flowed is people issues. Having our people motivated and excited is a key thing. Two years ago, two and a half, three years ago with the dot-com boom/bust or boom at the time, it was tough to keep people really focused in on the long term. Today our issues are to help keep people motivated and excited; they’re not going anywhere, but to keep them motivated and excited when it feels generally, probably to everybody in the room, it feels generally like we’re in kind of a blah period for technology. And I’ll remind everybody here just like I do everybody internally, 10 years from now technology will be very different, the level of value we’ll all be adding to our businesses, to society will be much higher and we just have to kind of keep upbeat about the long run even if the short run is a little pessimistic.

INTERVIEWER: This is a really nice way for wrapping this up, in fact. You took us from in your answer there all the way back to the beginning questions where we were looking at Software Assurance and customer expectations and concerns. This has been a great discussion, Steve. We really appreciate your coming. Can we count on you coming back to discuss the cone of silence next year? (Laughter.)

STEVE BALLMER: I told these guys I schedule my whole calendar for the year around the Gartner event, and as long as you guys don’t move it by a week or two, yes, you can count on me being back next year.

INTERVIEWER: Great.

STEVE BALLMER: Thanks, everybody. (Applause.)

INTERVIEWER: Thank you. Thank you, Steve.