LAS VEGAS--Microsoft CEO Steve Ballmer arrived at the Consumer Electronics Show with his usual optimism, but he also brings a clear sense of reality: The tech industry is in for some rough times.
"The fact of the matter is, this is not a downturn, this is a bit of a reset. Those are quite different and we're trying to really suss through what we think that means for us," Ballmer said in an interview here with CNET News Thursday, a day afterat the conference.
Ballmer talked about what the "reset" will mean for Microsoft, as well as lessons learned from Vista and Microsoft's move to put Office on the Web. When it comes to what worries him most, most days it's still Google, although he concedes he has had to spend more time recently on economic issues and making sure Microsoft makes the adjustments it needs to. He wouldn't go into detail on what (and who) Microsoft plans to cut, but it is clear that some changes are coming.
The following is an edited version of that interview:
CNET News: Obviously, Microsoft didn't necessarily get everything it might have hoped for in terms of the critical response for Vista. What are you guys planning to do differently with Windows 7?
Ballmer: Well, I think we made some choices in Vista to improve security at the kind of expense, if you will, of compatibility. With Windows 7, we're able to build compatibly off of Vista and really sort of just tune, if you will, the user interface, the performance, and at the end of the day, it'll be what the users think of the product that we're building, and we'll start getting beta feedback this week.
Q: How hard are you pushing the team to get Windows 7 out this year?
Ballmer: I'm not pushing the team hard,. They set some goals and objectives and of course we'll ship the product when it's--as I said last night--both right and ready and when we know when that is, we'll share that.
Q: One of the biggest parts of the PC business that's really taken off amid an, obviously, challenging time overall is the Netbook segment. What has that meant for Microsoft both in terms of the technology, but also from a business standpoint? How does that impact you?
Ballmer: Well, we've done very well on Netbooks. When they first came out, I'm not sure if people knew whether they were PCs or something else, and I think everybody kind of understands now that a Netbook is a small-form-factor, low-cost personal computer. And we're doing very well with Windows XP, which fits. Vista does not fit, and we're working hard to make sure Windows 7 fits very well on the Netbooks.
You know, from a business perspective, low-cost machine means a little less revenue per unit to Microsoft, but I think it gives us an opportunity to see expansion of the overall PC market.
Q: Obviously, everything that you're talking about here at CES comes against the backdrop of a very challenging economy. What does that economy mean to Microsoft and its plans?
Ballmer: Well, I think there's two ways to take a look at it: First, what's going to happen to let's call it revenue in our industry? Revenue will be lower in aggregate in our industry than it would have been, and that will (affect) Microsoft, Cisco--you name the company--Intel. We'll all be affected by that.
With that said, the pace of innovation in our business will not change. The opportunity there won't change. And so the key is: how do we right-size a little bit as an industry, and that means different things to different companies to adjust to the fact that revenues will be lower. And yet at the same time, keep a strong push on the R&D that's going to power the future. And each company will discuss its plans. We're kind of in a quiet period, so I don't have much to say about that.
Q: Turning to search, that's obviously a key area for Microsoft. You announced athat will get you some more distribution, but clearly there aren't enough distribution deals out there to make the kind of headway you need to make against Google. What else does Microsoft need to really be a serious competitor to Google?
Ballmer: Just keep working. I mean, look, this is not something that changes overnight. Everybody wants us to snap our fingers. We have a good competitor, and yet at the same time, we see real opportunities to improve the search experience, to differentiate, but it's not going to happen overnight. We're going to have to keep working and working; innovating product-wise, marketing, branding, distribution, and we're going to have to be patient about it.
I like our new release. We're making two releases a year. We continue to attract great talent, which lets us do interesting things. Our cash-back program has some early promise in terms of what I call business model differentiation versus Google, but we'll continue to work.
Q:: Fair to say four years in, though, you would have hoped you'd made more progress in market share?
Ballmer: Maybe. Maybe. I'm not sure that would have been anything other than naïve because the market leader is a strong company. And we're going to have to keep at it.
Q: You have said that while you're not interested in buying all of Yahoo, you would be open to some sort of a search deal. How likely do you think that is?
Ballmer: No way to handicap it. I think at this stage, it's probably fair to say I'm not even sure Yahoo would handicap it. They're out doing aand we'll just have to wait and see how all that shakes out.
Q: You said a little while ago that there weren't any active discussions, is
Ballmer: Yeah. I think probably fair for us not to comment too much.
Q: We've talked about Google, we've talked about the economy. Which actually occupies more of your time in terms of which do you spend your time worrying about?
Ballmer: Well in general, the answer is: Google, Google, Google, Google, Google. Now, the truth of the matter is, for a period of time of a couple of months, we do have to go through and say, OK, what do we really think this economic thing is, is it a year thing or is it a reset, and then we build from a new base, and how do we parse and act on the consequences?
So there's a little bubble period in here where I'd say I'm spending a little bit more time. But in general, I can't control the economy. We can drive and control and affect our competitive position, so the lion's share of my energy would be there.
Q: Microsoft, in the past, has been able to get through even some, you know, typical economic downturns by kind of trimming at the edges. Is it fair to say that whatever you have to do this time, it'll be more significant than anything you've had to do before?
Ballmer: It's premature to comment. I mean, the fact of the matter is, this is not a downturn, this is a bit of a reset. Those are quite different and we're trying to really suss through what we think that means for us.
Q: One of the biggest changes coming in the Office side of things is the fact that individuals and companies will soon be able to access Office over the Web. What doors does that open?
Ballmer: There's two aspects: One aspect is sort of the notion of can I get access to the software when I'm not at my own computer, and you'll get access to some stuff when you're not at your own computer. That's nice. People want the full capabilities, generally. The second thing is: do we provide better and better facilities for people to collaborate from within the productivity environment? And I think that's a bigger deal, and you'll see us do both of those--push both of those themes in the new Office release.
It's important to do, it enables some new scenarios, but I don't just say, "Oh, isn't it great, I can run Excel in a browser, or a subset of Excel in a browser." I'm not quite sure that that in and of itself is a breakthrough. Google and people want to run around, "Ooo. Ahh. Woo," you know--I don't quite understand that.
Q: It's been few months since Bill (Gates) switched from full-time work to working with the foundation. Any surprises in terms of what that's meant or what has it meant in terms of changes for Microsoft?
Ballmer: I don't think anything all that surprising. You know, I think we're trying to get settled now in a rhythm. Bill and I see each other, you know, we have a regularly scheduled lunch, there's board meetings, he has a regularly scheduled meeting with a couple of the internal groups. I think he's figuring out how he spends his time. But I don't think any real surprises.
Q: Is it a little weird to be giving the CES keynote? Obviously, you give a lot of big speeches.
Ballmer: Yeah, I mean, yeah, for some reason, it had that oeuvre, and yet like I say, last night I went back to my room and said, "That was actually a much easier speech to give than many others." I wonder why I was thinking that that would be a hard one to do.
Q: In terms of the economy and what that means, what are the kinds of things that are least impacted inside Microsoft and what are the kinds of things that do pretty well?
Ballmer: You mean what'll sell and what won't sell? I think PCs are going to sell a little less well, which means Windows will sell a little less well. I think servers--because capital spending will get hit, servers will sell a little less well, which has got to affect servers. Now, we still are taking share in the server business overall, so I don't know what that'll mean for our overall results. Phones, Web, those things ought to all be growth opportunities for us.
Q: Do you think this reset, as you called it, will force Microsoft to get out of some things that you've been doing?
Ballmer: I'd say at the macro level, the same things that we've been doing. At the micro level, I'm sure there will be some things where we have this many people and, you know, we might right size, or maybe we're expecting to go to this many people (moves his hands in to show a smaller level of growth)... I think that's more likely; to stay more flat on some of the projects. You know, there will be things that may not make as much sense. I don't know. We'll have to see how that all comes together.