Microsoft and EMC renew their vows

NEW YORK--It was a lovefest Tuesday here at the Plaza Hotel where Microsoft and storage company EMC announced that they are extending their strategic partnership another three years.

The software giant and information management company have been working closely together for years, but they didn't formalize their relationship until 2006. Now things are going so well for the companies, they've decided to extend the formal relationship. As part of the extended partnership, the companies say they'll be focusing more on storage and virtualized environments. They'll also concentrate on productivity and security solutions to prevent data breaches.

We caught up with Microsoft CEO Steve Ballmer and EMC CEO Joe Tucci here at an event they hosted for their enterprise customers where the two executives talked about balancing their cooperative and sometimes competitive relationship. They also discussed how the current economic environment is affecting how their large corporate customers are spending money, and how they hope their continued partnership will help them each drive more business.

Below is an edited version of the conversation. CNET's Marguerite Reardon interviewed the CEOs in person in New York and Ina Fried joined the interview via phone from San Francisco.

Q: Who do each of you see as your biggest competitor today in the corporate technology world?
Ballmer: I think if you look on the enterprise side today, there's two primary forces. I would say certainly Oracle is on the list of primary competition and then primarily Linux-based alternatives.

Now, IBM shows up for sure. In certain spots we overlap with Cisco. Google is starting to show up a little bit. But certainly Oracle is a primary competitor as is Linux. But Linux as sponsored by IBM, but it's Linux more than it is any IBM product. That's the big competitive dynamic for us in the enterprise.

What would you say, Joe?
Tucci: It's a little bit harder to answer. We have four business units that address the enterprise: virtualization, storage, security, and content management archiving. And for each one, different competitors pop up. On the virtualization side, we have co-opetition with Microsoft a little bit. On the security side, you'll see companies like Symantec. On the storage side, there's no shortage. You'll see IBM, HP, Network Appliance. On the content management side, you'll see IBM.

How does your partnership improve how you each compete against these companies?
Tucci: I'll start with content management. One of the things we've been working on for a while is working closer on integration with SharePoint and Documentum, which we think brings together two important aspects of content management--user experience and real, back-end repository experience--and puts them together.

We also think we can have the best end-to-end solution out there in security. We are taking Microsoft with their rights management software to more end points, which we think will make us stronger against Symantec and others.

Ballmer: And the partnership makes us stronger versus our Linux-based alternatives on the desktop. Part of the way we compete with open source desktop stuff is by having stronger total value-add. We can't beat Linux on initial price. So, the notion of being able to go and say, here's a solution that you can really use to do fantastic security, fantastic data loss prevention from the client through the back-end, that's a powerful part of our proposition. And that's an example of how you get these things to dovetail.

Tucci: Microsoft is making huge forays in the overall operations management space, and we partner together with some technologies there. So, I think together Steve and I both feel we can be more competitive in the marketplace and provide real value for our joint customers.

In the agreement, one of the areas you talked about working more closely in is virtualization. VMware is affiliated with EMC, which is probably Microsoft's biggest competitor in virtualization. So how credible is the notion that your companies can work together? And where do you draw the lines of cooperation? And how does that benefit customers?
Ballmer: We're not sitting here pretending we're partnering with VMware. That's more competition.

With EMC, which is a large majority owner in VMware, but is also independent, there's a lot that rides on virtualization. The fact of the matter is the storage business is being transformed also by virtualization. And virtualization is transforming the storage business. We want to do very well in virtualization. While Joe may own 80 percent of VMware, he still thinks it's a good idea to sell storage in places where perhaps we'll win as opposed to VMware.

Despite the fact that there's a level of competition with EMC's majority-owned division or entity, there's also a lot of cooperation around how virtualization affects the rest of our product line and the rest of EMC's product line. Let me just say, we're happy with the state of affairs. Of course, there's going to be competition in the virtualization space. I think EMC is as good as you're going to get in terms of being able to both--I won't say compete, but own a competing entity, if you will--and partner with us where we want to. We really respect Joe and the EMC team for that.

Tucci: I agree with everything Steve said. I think I'd add a point that says to really serve our customers, you need to form partnerships and alliances. And if you look for that alliance or partnership to be perfect where there's zero areas of overlap, I'm not sure that's physically possible with two powerful companies. So, what you have is this co-opetition.

As long as, like Steve said, you define the rules, you both know what you're doing, and have respect and understanding. For sure there will be many Microsoft applications running under VMware, and that's fine, because it's a win-win. There will be many times where a customer will pick Hyper-V and want to use EMC storage. And that's fine. We'll work together there.

I think it's an acknowledgment by two people that have great respect for each other, and two companies that are powerful, that this is a very good way to go.

Ballmer: There's enough shared interest for this to work. If it's 90 percent-95 percent competition, it's hard to get the little bit of cooperation. We're nowhere like that. We're 80 percent-85 percent cooperation, something like that. So, that makes it easier to do the whole thing.

Tucci: Good point.

Ballmer: I can't tell you we're "co-opetiting" or whatever you call it very well, for example, with Oracle. So, I'm not pretending you can do it with everybody in the business.

That leads to my next question. Partnerships in general are very tricky to manage, because, as you mentioned, you're cooperating but you're also competing in some areas. What are your companies doing to ensure that this partnership benefits each of your interests?
Tucci: Well, you're right. It's just like anything else in life. Whether it's a marriage or two people working together, it just takes time. Nobody is going to have exactly the same identical views, and it just takes time. You've got to work through them.

Steve and I dedicate time to having reviews very regularly. We have two people, very qualified people in the back of the room here, that work this alliance as a full time job. And we talk all the time. When things aren't right or something goes wrong--let's put it this way--we fix it. And when things are good, we celebrate it and do more of it.

That's what we're doing today, we're saying, "Okay, it's been so good, to Steve's point, the 85 percent total cooperation is a really good number, we're going to extend this thing for three years." Steve and I are going to raise the bar. We want more success, and we're going to hold our teams accountable.

Ballmer: These things tend to go into one of three buckets. One, they break down, there's just too many problems, and sometimes that does happen to partnerships.

Number two, they're really largely irrelevant. That is, we kind of work together, but the partnership never really gets any energy. And we've had some of those, I would say.

And then the third case is where they really work. In the case with EMC, it definitely falls into the third category.

The thing that I wasn't sure about when we started--Joe was, I wasn't, and I give Joe credit for this--was would it really be important enough to the EMC salesperson and the Microsoft salesperson to matter? Because if it's important enough to matter, it's important enough to the customer. Then it also stays important enough to the R&D guy, and it is important enough.

When we go into sell an Exchange solution, we get to talk about storage, content management, and services along with the EMC people. So we're talking about things which are really important to both companies, and really important to the customer. The customer cares about what the deployment is going to look like; how highly available will that Exchange implementation be; what's the storage configuration going to look like. That's an important part of the overall decision-making process. And because it's important enough to the customer, I think that really helps.

I didn't know going in, I'm not a storage expert. Joe said, trust me. Joe and I have worked together 25 years now basically, in a co-opetition arrangement, pretty much the whole time. And I would say it has really worked.

I want to shift gears a little bit here, and talk about what's happening in the economy. How is the downturn affecting spending? Where are your customers spending and where are they not?
Tucci: I think there are several things that I've seen, and I'm sure Steve will have a bunch. Most of our customers are dealing with some restructuring. They're trying to cut costs. They want quicker ROIs (return on investments). They want to make sure they continue with their truly strategic solutions. And they want to position themselves for the future. So, you have to really be in tune with your customers.

Ballmer: Yeah, I would say the restructuring thing is affecting almost everybody. They all have a quota from on-high that says we're cutting the IT budget by X. That's the way it feels to me. I don't know whether you see it, that everybody has got that as a mandate. I'm not saying it's the only thing they're trying to get done, because they're still under pressure to deliver projects. But that's the short term.

But do you see anything specific? Obviously they can't just shut down the whole operation entirely. So in what areas are they spending? And in which areas are they cutting?
Ballmer: No, but they're not being told to do that. Let's say they want to save 5 percent to 10 percent. That's typically the range, I think. To save 5 to 10 percent, you've got to save a little bit on a lot of things. You probably have to shelve a new project you might have done. That's why Joe said, you've got to be in tune, because it's not like there's nothing new getting done. But some new projects are getting killed. And some cost-saving things are actually being funded. There's also pressure on vendors to reduce prices. All of this is kind of going on simultaneously.

Tucci: One thing we are seeing this year versus last year or versus the last several years is that customers are looking for quicker ROIs. How quick is quick, and which projects may be quick will alter by customer. Obviously in New York you have a lot of big banks that have just merged. So, one of their key priorities is to help them put these banks together and get these systems together. In some cases they spend a little money to save a ton of money.

And as Steve said, they're also putting pressure on you for more cost savings, more benefits, and more support.

In terms of your partnership, though, how is what you're doing going to drive cost savings and therefore drive business for Microsoft and EMC?
Ballmer: At the storage level we certainly all agree that selling virtualization-based solutions drives cost savings. It fits with the theme of the time.

Something like the Data Loss Prevention service, you could ask how it fits into this environment. Even in a tough economic environment, that kind of appliance-based technology is going to get funded. And we've got a low-cost, well integrated solution. We really have a super nice solution, in my opinion.

Tucci: I think one of the things CEOs--and you're looking at two of them here--don't want to do in a risky environment is take on more risk, right? And yet you know in a risky environment like this there will be more risks. You saw the event that happened in the government where they fired a contractor and that contractor introduced a virus into the system. So, customers are going to watch their security closely. So, there's lots of opportunities there. We're going to make sure that we help customers and avoid additional risk than what they're already experiencing with the economy.

It seems like the root of this current economic crisis is the overall deleveraging of the economy. Does that mean that technology can play less of a role or at least less soon in fundamentally solving the economic crisis?
Tucci: I don't believe that at all. I think the opposite actually, but go ahead, Steve.

Ballmer: I've got to say this carefully. Nothing is going to stop deleveraging. So, the economy has to reset. At the same time, you've got to say, "Where do you get economic growth?" And the truth is you only get economic growth from the following things: population growth, inflation, productivity increases.

We can't help with population. Financial leverage is going to go negative. We can't really change that. Population we don't influence. And inflation, the government is going to take care of. That leaves you with productivity. I think if you did a fair analysis of the last 25 years and said, "What's been the top source of productivity gain in the U.S. or world economy?" It has been information technology.

So, I don't know that we fix the negative factor of deleveraging, but I see a glimpse of hope in large measure from information technology.

Tucci: Right on, Steve.

But let's look at maybe two or three specifics. I think there are a few things relative to the stimulus package that everyone agrees with. A) We need one. B) It should help create jobs. And C) Maybe it's good to address some of the systemic issues we've had in society for a long time, like health care.

So, when you think about solving health care, you're not going to solve it without a lot of information technology. When you think about going from an analog grid to a smart digital grid, you're not going to fix that without a lot of information technology. When you think about the issues in education, ditto. And I could go on and on and on.

I think a lot of the programs that are very likely to make our stimulus package or stimulus packages of other governments throughout the world, will be a strong component of information technology. Do you agree with that, Steve?

Ballmer: Absolutely.

Do you think that because companies have less leverage, that will help speed things like utility computing where businesses pay for technology more as they use it as opposed to an upfront capital cost?
Ballmer: It might. I think at the end of the day it won't be that tit-for-tat. It's not going to be felt quite that way. I think there is a cloud computing theme, and at the same time, there is a deleveraging theme. They may reinforce each other slightly, but not as directly as you might think.

Tucci: I agree with Steve 100 percent.

Wow, you guys are in a lot of agreement. That's awesome. Now, I know that you each have partnerships with Cisco Systems. But in particular, Steve, Microsoft has been competing more and more with Cisco. You mentioned that earlier. So where do they fit into what Microsoft is doing?
Ballmer: Well, there's three interesting dimensions. On their core business side, the networking side, we work together. But we never found a go-to-market activity to support that activity that's as powerful, for example, as the one we found with EMC. So, we've always cooperated, and we still do today. But it's never popped in the way this partnership does, which is an interesting difference. Our engineers work together, but our salespeople, by and large, don't work together.

On the unified communications side, which is the future of video, voice conferencing, collaboration, and communications, we're competing. We started out adding some voice and video and conferencing capabilities to our software. Cisco has gone further. They've bought some competitors in the e-mail and collaboration space. So, we compete, and that will be robust competition. And we'll live with that. So, it's got that dimension.

And now they've got this new business that I'm not sure anybody knows exactly where it takes them. They seem to want to jump in on the server business. We like to license Windows Server to people who sell servers. So, we're busy trying to make Cisco a good customer. But I'm not sure exactly where they go, where that takes them as they jump in and really go head-to-head with the HPs and Dells of the world. It's going to be a new thing for them, and I don't know what it has to do with their storage business really.

EMC and Cisco have partnered much more closely. There's even been rumors that Cisco might want to acquire EMC. Can you explain the relationship?
Tucci: Primarily our partnership with Cisco has been around their switches, which we've used in the storage environment on the storage area networking side, and, of course, on the network-attached storage side. We also resell their IP switch as part of our solution. So, we're a Cisco reseller, and that's gone pretty well for both companies. We have done some work on security and the management side with them, too. And that's the extent of it. It's an important partnership.

Is it as important as your partnership with Microsoft?
Tucci: I don't want to rate partners in their order of importance. We have a set of tier A partners, and both Cisco and Microsoft are tier A partners. I don't differentiate in the tier As who's the most important partner. That is a fruitless and no-win exercise.

Ballmer: That's a good way to lose partners. I'll support Joe on that. Of course, I know we're a more important partner, but Joe would never have the chance to say that.

Microsoft just announced its first companywide layoff. Obviously, Microsoft has cut jobs before. But are there any reflections about going through the process of making those cuts that you could share? Has it given you some sort of different insight into what your customers are experiencing?
Ballmer: Well, certainly the more business experiences you have, the more you can empathize with experiences other people are having. So there's no question that part is right. There's also no question it's never fun to have to tell folks that they're no longer employed.

I would say that we're fortunate. We're trying to figure out how to get there primarily through right-sizing and efficiency, as opposed to withdrawing from businesses that we're in. And there's probably a certain fundamental business health that comes with that. It's unfortunate that it takes this kind of a draconian measure. But we're moving forward and helping the folks land on their feet. It's something we needed to do, and I'm glad we did it for that purpose.

You mentioned earlier Oracle as your biggest competitor. In the past I think when you've been asked the same question, typically IBM is the first one. What kind of shifts have happened to make Oracle front and center in your mind? Is it largely through their acquisitions of many other companies that you competed with?
Ballmer: The question was enterprise specific. So if you look at who are the most important product vendors--product, not service--I think it's changed a lot in the last 10 years. There was kind of pre-bubble, during bubble, and now post-bubble. Pre-bubble, IBM clearly would have been on that list. The bubble I consider kind of an anomalous time. And IBM is still IBM, and as Joe and I were talking about earlier privately, they're still a force because they're IBM. But if you actually look at who's got the products, at the end of the day, the product vendors that are important in the enterprise these days are Oracle, SAP, Microsoft, EMC, and Cisco. I would say that's really from a products perspective.

Tucci: I'd probably include the IBM mainframe.

Ballmer: And the IBM mainframe. Joe is absolutely right. I'd agree with that. But ironically--you've got to listen real carefully--he said the mainframe. He didn't say anything off the mainframe, and that's the part I agree with. The mainframe we all sort of compete with, including IBM, since that's not a growth business. The question is, when and how does that disappear?

If you take a look and say, "Who is best positioned amongst that group?" Cisco, we talked about our co-opetition there. And as people leave mainframes or do mission-critical apps, they're either going to put them in on top of Oracle and whatever Oracle tells them to, or they're going to put them in on top of Windows, and that's why I kind of list them at the top of the list.

You mentioned that you're starting to see Google more in the enterprise. Where are you starting to see them? And what sales approach can you take against them?
Ballmer: They're nipping around. It's not like I would say they have a very serious presence, but they're out selling essentially the Google apps on a hosted basis to people. We compete very well. We've got far stronger and more functional applications, but that doesn't mean you don't feel the competition. And there have been accounts certainly where they show up.

But they don't have an on-premise solution. Despite the fact that a lot of people want to move hosted, a lot of people don't want to move hosted. Google also doesn't have data loss prevention. There's a lot of things they don't have, and a lot of those are things we're doing together with EMC.

Tucci: Let me just jump in here, and obviously this wasn't a question for EMC, but I'll answer here.

I really do think that the winning model here is not going to be everything in the cloud or leave everything in the data center. I think the hybrid model is the big winner.

Those that can provide the hybrid model are going to have a great future. Microsoft is providing a hybrid model. With Google, you've got to be pretty much in their data center to do it. And I think over time that's not going to be the winning model. I really believe that.

In terms of that hybrid model, it seems like Microsoft will have a much clearer public answer to that when it can offer Office Web Applications both on the desktop and in the cloud. Right?
Ballmer: Well, I don't know. We have what people want today. People don't want to run Office applications in browsers. That's not their problem. Some people would like to see the back-end management of their e-mail and their documents handled out in the cloud. So we're seeing a bit of interest in things like Exchange and SharePoint Online. Actually we're working with EMC on a number of those deals. I don't know if we can talk about the big one we just won together on that. But one of the big pharma companies has a project that we won together on that ilk. So I don't feel like we're missing it. Yes, we've talked about what we'll have in terms of Office running in a browser, but that's not really critical to what we're seeing as the market opportunity right now, at least in the enterprise.

So large companies are more attracted to free or low cost than they are to the browser?
Ballmer: Google is neither free nor low cost. That's not a joke. We're talking about the enterprise. We're not talking about some screwball consumer thing now. We're talking about the enterprise. Google charges a very hefty price, comparable to our prices, when it comes to the enterprise.