Downturn could be Microsoft's bonding moment

REDMOND, Wash.--It takes a lot to get different parts of Microsoft to really work together. But the current economic turmoil might just be the thing to do it.

At least that's the working theory for Stephen Elop, the former Macromedia CEO who joined Microsoft a year ago to take Jeff Raikes' place running the software maker's business unit, which includes Office.

"It's remarkable how some of those hairiest issues or those longstanding sacred cows, in tough economic times all of a sudden you look at them and say, you know what, we've got to deal with these things," Elop said in an interview this week with CNET News.

On Friday, Elop is traveling to Pennsylvania to speak at the Wharton School of Business. He'll be talking plenty about the downturn to be sure. But he'll also be pitching business students and others to prepare for what comes after the downturn. Elop pointed to the way Sears used the Great Depression to shift its business from catalogs to retail stores.

Elop finds himself in the middle of a similar shift as Microsoft finds itself trying to shift from being a business that makes money by selling businesses software every couple of years to one that, in many cases, gets paid to develop software that it will then run in its own data centers on behalf of customers.

As part of his presentation, Elop will also show a concept video that shows a number of technologies, many of which were on display at this week's TechFest, all working together.

In his interview, Elop talked about the economy, what has surprised him in the year since he joined Microsoft, and about the company's vision for the future. Here is an edited transcript of our conversation.

Q: As far as the video, it's really easy to imagine that looking several years out, the hardware gets there. It's fairly easy to imagine that the software that powers it. What struck me is the most ambitious part of the plan is that five, six, seven years from now, all the parts of Microsoft are going to be talking to each other that well.
Elop: So, what I would say to that is I can understand where that skepticism comes from, having come into this company, but I think what you could place more value on is the impact of touch economic times, and the impact that that has on any company.

When I was at Macromedia, we made our most difficult decisions, our most focused decisions around alignment, the big bets during the worst times. And, of course, in the years that followed it turned out we made some good bets, and the company was taken to levels that it had never before seen.

And it's remarkable how some of those hairiest issues or those longstanding sacred cows, in tough economic times all of a sudden you look at them and say, you know what, we've got to deal with these things. An example of that that popped out into the public domain as we went through some of the changes here in January was Office Live, Windows Live. And fundamentally when you look at it from a customer perspective, and what does a consumer expect of Microsoft in terms of an experience, fundamentally they don't want to see divisional lines, they want to see a well integrated, well considered experience that meets their needs.

So, apply a few constraints, like there's fewer resources tomorrow than there were yesterday, stir in like what's really like in terms of how we place our bets, and...all of a sudden it starts to make sense, and you can make those decisions, where maybe some number of months or years earlier you couldn't.

I am personally a big believer and advocate for taking advantage of tough times to go after those things that quite frankly there just wasn't the reason to or the stomach or the constraint necessary.

I'd refer you to President Obama's speech (this week).One of the things that resonated in his speech for me was him saying, you know what, when you boil it all down, we have to solve the health care problem, we have to solve the Iraq problem, like we don't have a choice anymore. I mean, well, maybe before we could have printed more money and somehow we got -- we can't do that anymore. We're having to do that to rescue the economy and make up for the over-indulgence of all of us over the last 25 years. That's what we have to unwind.

So, in that environment fundamentally if we're not going to pass on this huge burden to the future, now is the time we can make those hard decisions.

And my hope is in the political context that the politicians can actually get to that space where they say, you know what, Republican, Democrat, whatever, we've got to solve this, we just fundamentally have to solve it.

Q: So, which is easier, getting Democrats and Republicans to work together in Washington or getting different units in Microsoft to work together?
Elop: It's absolutely easier to get people at Microsoft working together than it is solving the problems in Washington. And the reason for that is because politicians necessarily in a democratic society have to differentiate from one another, have to prove that they're somehow better or different than the other in order to be viewed as successful and get re-elected and get their paycheck.

Q: If that's the case, if that's really what's going on, why has it been historically so tough for the company to bring to market visions that cross these broad product lines?
Elop: You know, increase the pressure, increase the constraints, take away largely unlimited resources, and all of a sudden you're in a position where you say, you know what, how are we going to get the most bang for the buck.

And that's what Steve (Ballmer) has us focused on, you know, what are the bets. A lot of the focus, for example, in the strategy review work that we did within our division was on areas where you know quite frankly I want to spend more money, I absolutely have to spend more money, but that means necessarily I have to spend less money in other areas, and placing those fewer, bigger bets, making those decisions. I think you'll see more and more of that.

Q: So, the bad economy, the best thing that ever happened to Microsoft?
Elop: While the theory of your statement is true, regrettably the thing we can't erase this from or erase from the whole process is the fact that, for example, on January 22, 1,400 people lost their jobs. So, I'll never say, "oh, this is the best thing that ever happened," because there are people in my community whose kids have come into my kids' school and said, my parents lost their job or whatever. So, from a personal perspective, that's not true.

But anything that increases the likelihood of groups working together and that spirit of collaboration coming together is a positive force, so it does help.

Q: In your area what are some of the things that you are saying, you know what, we can't invest as much in?
Elop: I'll give you a couple examples. We said, for example, when we look at our business intelligence strategy, we have a great opportunity to democratize business intelligence, to take advantage of people's knowledge of Excel, to take advantage of the strength of SharePoint. However, having a vertical play in the planning space, monitoring and analytics is good, but in the planning space that goes directly at Business Objects, Cognos and so forth, is an area where ultimately we could be successful but relative to those other bets we need to scale back on.

We also made decisions as it relates to ERP (enterprise resource planning) where we made very clear what our strategy was some months earlier in terms of how we were investing in products, but we had to take a hard look and say, you know what, there are some areas where we've got to manage our investment here...and so pulled back on certain areas.

In unified communications it was an increase in certain areas, but there were some peripheral elements and things we were working on. We said, you know what (we have to go after) voice, Cisco.

Q: One of the things that came out of Steve Ballmer's comments to analysts this week is he said that Office 14 is coming next year. Some people said, oh, they're pushing it out because of the economy. Is that the case?
Elop: It's not at all related to the economy or anything like that. It's the natural rhythm of how we're executing on that release. So, there was no, "Hey, delay the release because of the economy." Not at all.

Q: You came in certainly vowing to look both at what's really working well at the company and what isn't. What are some of the things that surprised you in both directions?
Elop: On the things that have continued to impress me, this is a great week to answer that question, because you can't help but walk through TechFest and see the degree of innovation here, pure and applied research both, coming into the company, seeing how that translates into product development. I mean, walk around that room as you did, meet the people, and just realize the raw intelligence and capability, all of that raw horsepower that exists at this company is remarkable.

It's also remarkable the absolute scope and breadth of this company. That sometimes leads to the confusion you talk about. It might be months into a program where you didn't even realize something was going on five divisions over and three buildings across; I mean, you just don't know. But the surface area of the company offers so many interesting opportunities.

For example, some of the research you saw or other things that are going on where, for example, some of what informed the video and some of our future productivity and how people will interact with technology for productivity reasons is derived from learning from the game space and what people are thinking about for the future of Xbox and things like that. They're a long ways apart but in many ways it's about human interaction, and all of a sudden you get the benefit of that. If we were just an e-mail company or a word processor company, we would never get the benefit of that insight. So, all of that really brings it home.

I think on the so what's challenging and so forth, I think what you referenced earlier, with that breadth of the company, could we be making tougher decisions sooner? That's why going into this period of constraint and everything, I'm definitely a champion of alignment. Hey, we can't keep doing A, B, and C, let's pick one, let's go, let's get aligned, let's get the teams working together.

I mean, there's obviously some major battles and struggles and all of that that you see in the company, the competition with Google in the search marketplace, there's a lot of examples of that, and yet server market, 10 years ago, I would never have thought about Microsoft as providing mission critical server products, but look at that business now, it's a beautiful thing.

Q:How does Microsoft adjust to the fact that a lot of these new businesses are funded in different ways than Microsoft's traditional software businesses?
Elop: I think--I mean, it depends business to business. I think the most important thing is to go in with your eyes open about what you're doing. You're right, you know, there are very few businesses on the planet like the Windows business or the Office business or even the server business for that matter. Yet at the same time there are new business models emerging that could be stronger or more interesting, and you just have to go in with your eyes open.

What you can't do is you can't say because those business models are different we won't do them. You have to fully embrace new opportunities and lead in that space. If you don't, and someone gets in ahead of you and it turns out to be something new and interesting and exciting, all of a sudden they could be miles ahead of you. I can think of one example here in particular where someone saw something that we didn't see, I guess, and away they went, that being Google.

So, you have to go in with some intelligence about it, some foresight, and you've got to be willing to learn, and you've got to be willing to fail fast, and you discover, hey, we thought this whole thing was interesting, turns out it's a dog, back off and try something different.

I think the company, certainly in my experience now over the last year, is very willing to experiment with and adapt to new and changing business models. The whole concept of Exchange Online, SharePoint Online, for example, in my division, clearly the economics are different. There's a larger revenue opportunity because instead of just getting a certain amount of software revenue, we get software and services revenue for providing that service, but we have to deal with the whole issue of, hey, but we're running a datacenter, and there's (a cost of goods) and gross margins are different and what have you.

But at the end of the day, if we said we're just going to stick with our original business model, well, someone else is going to do that. So, you have to embrace it and you have to be the very best at it, ultimately being interested in ensuring your customers are taking advantage of as much Microsoft stuff as you can possibly help them do.

Q: Why does it matter to have Office in the browser? We've heard for so long from Microsoft about why the best experience for productivity apps probably isn't in the browser. Why is it important to have them?

Elop: Let me tell you where I think the best productivity experience is. The best productivity experience will be one that successfully integrates in a beautiful and elegant way the benefits that you can achieve in a rich client environment, whether it's a PC or refrigerator or whatever, but it's where you have local processing and graphical power to give you the richest experience, marries that with what you can do randomly when you're in a browser on someone else's PC as well as the mobile environment.

It's not about rich client is better than the browser or browser is better than the phone. It's also not about, hey, we're going to have a Web application so we can go and compete with Google and see who can add bolding and underling. That is not the point. The point is that that organization that can deliver on that broad scenario most effectively will continue to be successful.

The way we compete with Google is with the all up Office System. And by the way, you don't just stop at the client, you know, Word, PowerPoint, Excel, OneNote and so forth; it's also about the degree of interoperability with unified communications, with the SharePoint Server, with the CRM Server, all of that. So, now let's talk about competition between that experience for our customers, bolding, underlining, italics in a browser. It's a very different conversation.

So, I will not let you define the competition as our little Web app against their little Web app. That's not the story.