Ballmer: Xbox 'can take Sony'

TORONTO--Although much has been made of the challenges Microsoft faces in readying the next version of Windows, CEO Steve Ballmer said that "big bets" like Longhorn are not a reason for concern.

Rather, Ballmer said the time the alarm bells should go off is when Microsoft starts saying such technological leaps are not worth the risk.

"I think the day we say that to you, you ought to worry," Ballmer told thousands of partners gathered for the Worldwide Partner Conference here.

In an interview with CNET News.com after his speech on Tuesday, Ballmer addressed the benefits and consequences of such bets, the effect that security issues have had on the company's image, and various other topics.

Q: The maturing Microsoft has been a recurring theme recently. That was a lot of the reaction, for example, to the recent memo you sent to employees. One person wrote last week that, "Having vanquished IBM, Microsoft now faces the risk of becoming IBM." I'm curious, A: what you make of that and B: others might look at IBM and say that's a success story for a company that has been many things in its history and has simply found a new way.
A: Let me say a couple of things. First of all, we haven't vanquished IBM. They still have a $12 (billion) to $13 billion software business. Every dollar they derive is still a dollar over time that is available to us, pretty much. I think we've done a good job where we compete, and we still have a great opportunity in front of us relative to IBM and the competition there.

When people say IBM, IBM's core franchise was a software-based franchise. The mainframe was kind of about hardware, but it was also about mainframe operating systems. They have not been able to regenerate their software franchise. They have been able to do some things which are interesting in terms of regenerating their business with services. They don't have an overwhelming presence in any software category off the mainframe. WebSphere doesn't have an overwhelming presence, (same for) DB2, Tivoli, Notes.

When I say are we going to become IBM, the question is are we a company that can keep innovating and regenerating itself in the software business. I think we've done a pretty good job. Imperfect, but pretty darn good. People say, "Yeah, but there's people that have been first with some things that maybe you should have been first with." People point to iTunes, or they'll point to some of the Google search stuff. I'll say, "Yeah, there's still good competitors out there." But the fact we have some good competitors doesn't mean we don't have the ability to generate new opportunities for ourselves, to compete, to win.

I know what people mean when they say, "They've become like IBM." I won't let that happen. With my every fabric I want to make sure that we keep a culture that allows us to continue to be passionate and innovative and, in a certain way, a little weird, a little unique. I think that's very important. People don't want to go work for a big sedentary, blah, blah, blah.

I am betting we can take Sony in the next generation.

I think the work that Bill (Gates) and I have been doing, really together, is to make sure we are investing in new areas. Look at what we have done with Xbox. We may still be losing money, but we have gone from nowhere to a significant player with a whole different approach. We've generated something brand new. I bet we can take Sony next generation. I am betting we can take Sony in the next generation.

Since you mention Xbox, there was a recent poll of top most admired brands and Microsoft wasn't in the top 10 this time. How important is that in terms of the overall consumer business?
Brand is important. Brand is always important in the consumer business, and I think we have an excellent brand. The last several years we've done very well. We did very well this year. What causes people to go up a point or down a point? I think frankly until we whip this security thing, it doesn't surprise me that we might have dropped a little bit.

We're still quite highly rated, but we've got to do better. We are working to do better. I think if we can really get XP SP2 (Service Pack 2) out everywhere it needs to be in the consumer market. I think that will help a lot. (Microsoft announced Monday that SP2 will ship in August, about a month later than expected.)

Several profit warnings came out last week. Everyone's immediate reaction was, "Oh, enterprise software isn't growing." Where do you see the areas in enterprise software that will grow?
For us--I don't know about the industry--but for us management is going to grow, security is going to grow, the server platform itself ought to grow, collaboration, business intelligence. I can look at almost anything and tell you I see absolute growth possibilities.

The server market is going to continue to grow. Things that were done on Unix systems and on mainframes are going to continue to move down market. That's going to cause market expansion and we're going to grow. That's going to happen.

I think the business model (shift) around enterprise software has happened.

Collaboration and business intelligence--taking enterprise data and making it accessible to people--that will certainly grow and it will grow for us. Security, some of the things we do in security will be built into our products, some will be value-added offerings on top--but for us it's all kind of upside from where we are today if we get any revenue at all.

In reading your memo, you talked about significant innovation in Office. It wasn't clear if that was Office 12--coming before Longhorn and not being tied to it.
The key decision we did make is that Office would also support pre-Longhorn systems so we weren't completely tied to a Longhorn schedule. It's less tied than our initial thinking. Our next release of Office should exploit and light up on Longhorn but absolutely it will be available to run on pre-Longhorn releases of Windows.

Is it reasonable to think that it also might predate Longhorn in release?
It could or it might not. I'm not going to make any specific comment about Longhorn's schedule.

In terms of the way people consume enterprise software--sales and maintenance versus a subscription model--how do you see customers wanting to consume it? I don't know if that's tied to the hosting question or not.
I think the business model (shift) around enterprise software has happened. Not all. Some of our customers still like to buy packages and we sell them packages. A lot of our customers, an increasing percentage of customers over the last three, four or five years--have chosen to buy our enterprise agreements. They are not a subscription because you own the stuff when you are done. They are not like classic maintenance, exactly, but that's become increasingly popular with our large account customers.

I think we'll continue to see that ramp, but we've already seen the big acceleration. Business model changes that we would have seen I think we have largely seen. We've moved from where most of our revenue was one shot, then another shot, to where most of our enterprise revenue is recurring revenue at this stage.

In terms of hosting, I think there is still a change that will happen in the way software is engineered. Software will be engineered increasingly, where there is not only the value that's kind of in the CDs, if you pardon the expression, but there's value in terms of ongoing connection between the provider of the software and the user.

In the consumer market, we have Windows Update to point to that looks like that. Windows Update was designed with the consumer in mind, and now we are adapting it to enterprise. I think that kind of a model, let's say continuous value add, I think that will become more significant over time.

Probably the part of the business that is furthest ahead on this today is the way the AV (antivirus) guys do it. AV is really more of a service than anything else today. It's not hosted exactly. It's sort of hosted. Things get streamed off the central server.

With the legal picture getting settled, does it feel like there is, if not fewer restraints, at least a clearer landscape?
The legal matters are as they are. From a bandwidth of communication standpoint, there was a period a few years ago particularly when legal issues were taking up a larger percentage of our available time to talk with people than I would have liked. I think we've had some hard work, and still do, hard, important work on security. Those aren't behind us, but I feel we have our hands around them. What that allows us to do is spend more of our dialogue with our partners this year talking about not security, like I did in the past, or concerns about where we would wind up being because of legal issues in the future, but really focusing squarely on that which they care the most about, which is building their business by winning in the marketplace.