HolidayBuyer's Guide

A Gates reality check

Microsoft's founder rates the company's ongoing efforts in security and discusses how to get PCs into more hands across the globe.

In the business-software market, Microsoft is in an unaccustomed spot: It's a bit player in the shadow of much larger rivals.

If Gates & Co. have their way, Microsoft will become a force alongside Oracle and SAP in the multibillion-dollar business of selling human resources, financial planning and other software. The company has set lofty goals: Microsoft has said in the past that it hopes to rake in $10 billion per year in business software sales by 2010.

However, sales at the company's Business Solutions unit aren't growing as quickly as hoped. A new software platform intended to unify the company's disparate product lines won't be completed for at least three years. And there are questions about the overall demand for business software amid industry consolidation.

History shows that when it comes to new markets, Microsoft keeps trying until it gets it right--or it gets out. In this case, Gates is willing to bide his time. He spoke to CNET News.com about his strategy, ongoing efforts in security and how to get PCs into more hands across the globe.

Various Microsoft executives talked this week about how, long term, there are going to be four large players in the business-software arena: Oracle, SAP, IBM and you. How do you see that future?
Gates: I think it's an oversimplification to say there will just be the four players. You'll see some consolidation and you will see people who have built things from the ground up taking their special stuff and building it on top of, say, our platform. The more you have good tools and more extensibility hooks, then you will get people sharing what we already do for them so they don't have to try and duplicate that piece.

Year by year there will be consolidation. There will be people who decide to drop accounting or just do customization. This will always be a very complex market.

Are there customers that had built on top of Microsoft at the foundation level saying that, if Microsoft is a competitor on the application level, then they want to look at, say, Linux or Java?
Gates: There certainly has been a need to reach out to our ISVs (independent software vendors)...We're not going to do product bundles in a way that would be disadvantageous to them. We are not going to incent the sales force in some way that would be a big problem for them. We've needed to go out and talk that through. In most cases they already competed with the company we bought. It wasn't some new competitor but it was a competitor that would have the Microsoft name.

In our history as a company, on the Windows platform, we've always been both a platform provider and, in many of the key categories, a competitor of people building on Windows. That worked well for Windows. I don't think we've lost many, but boy, it means it's very important for Microsoft to be out there talking to people, explaining where we are going, what pieces go on the platform side, what pieces don't go on the platform side. I had a concern about that. So far it's turned out to be less of an issue than I expected.

Lots of people want Microsoft to do something on the antivirus front, and you guys have said you are going to do that. At the same time, the role of securing Windows as a platform is not something Microsoft wants to tackle on its own. The Symantecs of the world want partners, but that seems like a really tough relationship to balance as you enter those markets.
Gates: I don't think so. The history of Windows is that we do something in the platform and then there are some things missing that sell in high volume as add-ons. If a broad set of people want the thing, then in some future version (we add it). We're very clear; we show people, we tell them and then we build it in the system.

The history of Windows is that we do something in the platform and then there are some things missing that sell in high volume as add-ons.
People used to buy TCP/IP stacks. People used to buy basic backup software. People used to buy fonts. At least nominally, people paid for browsers...When you come into the world of software you know that if you are up at a higher level and you have something superimportant, it's going to move down, down, down and eventually be part of every copy of the operating system if it is something superimportant.

Security is a very broad topic. There are so many different pieces of security, which creates immense opportunity for people like Symantec--if they keep innovating. There will be some things that they do that will move into the platform. We're very open with those guys. We talk to them every day, massively....We will get the benefit of the platform getting better and those partners continuing to add value.

With Microsoft Business Solutions, you are making a big bet that in the midmarket, companies will want different things than they do today. How long do you think it will be before that pays off?
Gates: It's a great space for us in terms of the growth opportunity. You know, we are patient people. Everything we get into--even the Office software--took us a long, long time. We introduced a word processor that was not the No. 1 processor for about five years.

For the Macintosh first, if I recall.
Gates: We had a DOS word processor that was not a leading product. Mac Word was leading on the Mac. We didn't overpass WordPerfect on the PC for a long time after we'd become No. 1 on the Mac and a long time after we'd gotten into the word processing space.

There's not, like, some year we have in mind where things just explode. Every year we get more partners, every year we show the technical road map of what's common between the products and how it exploits the platform and Office in a better way.

Where should things be in the next couple of years?
Gates: Within the next--well, these releases are all pretty much in the next year--the idea of what we are doing with portal, business intelligence, roles and Web services, all that should become very, very clear. Some of the other stuff where we actually enhance the platform in some pretty deep ways...that takes several years after that before we get around to it.

With installed bases growing and testing taking longer, is it harder to do these big upgrades?
Gates: You have to be very agile in improving the software. If you look at the number of neat new things in Great Plains, Navision and Axapta...it is way faster than it's ever been. We've brought methodology to it. We are sharing across the three products. We are actually working at a level of the product where it is very easy to innovate. You are not changing the things that are harder to change.

Salesforce.com, which addresses a similar market, has been one of the more successful companies to come at it from the "software as a service" approach. Doug Burgum (a senior vice president at Microsoft) said earlier this week that Microsoft can solve that question of "How do you deliver software as a service?" Where are you with that?
Gates: Software as a service was a theme of a company meeting nine or 10 years ago where we heralded the idea that packaged software was done and now it was just all going to be shipped over the Internet. In fact, like many things around the Internet that were predicted to happen quickly, they are simply things that take more time.

Do you think it's still a couple of years before a lot of Microsoft products are offered in a hosted way?

You know, we are patient people. Everything we get into--even the Office software--took us a long, long time.
Gates: We actually have people offering Microsoft CRM (customer relationship management) in a hosted way. There are things we can do to make it even stronger in a hosted environment. We are doing those things. There are a lot of customers who still want on-premise. In terms of on-premise, we're growing faster than anybody and doing quite well. Clearly, we want to accommodate both models and give people even the flexibility if they want to switch from one approach to the other approach. We'll have more to say about that.

You have particular interest in emerging markets. There's a whole rest of the world that today doesn't buy a lot of software and doesn't have a lot of computers. Microsoft has been trying a lot of different things, such as Windows XP Starter Edition and some trials before that. What are you learning?
Gates: Computing is expensive, but when I say that, I don't really mean the hardware and the software. I mean the communications cost. In all these countries, communications costs wipe out the cost of the computer or the software. What do people do? They go to a sharing approach where you have a community center with a computer or an Internet cafe. The Internet cafe phenomenon is really quite unbelievable in some countries. In China, in particular, it's phenomenal.

Now we have a special version of Windows that when one user is on it, there is no problem for the next user. You can just come in with all your files on your USB drive. There are technical requirements from these community centers and these Internet cafes. We learned a lot about this when Microsoft put PCs in all the libraries in the United States...we reach out to these Internet cafes as a customer base.

Our India Research Center has a particular focus on low-cost computing, which basically means finding a way to use various wireless approaches to avoid having any communications costs....That really can make a difference, but we need some magical wireless approaches to get the communications costs out of there.

What are the things Microsoft sees as its opportunities?
Gates: The broad area is called mesh networking. It's a collaboration of actually every one of our research sites. The U.K. guys are, historically, the networking experts. Both China and India have a super interest in this rural low-cost computing stuff. It's going to be a few years before we can prove this stuff out. Having a lot of donated software, donated training and then helping to get the communications costs down a dramatic amount--those are the ways we really foster (computing) in the places we don't see PCs yet.

What about in the slightly more developed areas where there is a business opportunity for Microsoft?
Gates: Of this triumvirate--communications costs, hardware costs, software costs--the communications costs dominate. And then the hardware costs dominate. And then comes the software cost. We offer Works for like a buck or two bucks. We provide all the software you'd ever want in a consumer type activity space for super, super cheap. Sometimes we even do donations, mostly educational-related or community access type projects.

Governments have done special tax deductions, or companies have for their employees, or unions have for their members. Mostly in Europe, there have been a ton of those things where we package the software up in a lower-cost way. There are people who don't have PCs where we'd like to help them get PCs and then there are people who have PCs, have our software and haven't paid for it. Those are really two different challenges.

You guys have been doing a lot in the last few months to address piracy, kind of carrot-and-stick stuff.
Gates: Yeah, Windows Genuine Advantage. The biggest place where there is a problem today is China. There are other places, but it's stark that the No. 2 PC market in the world is not in the top nine of Microsoft revenue. That has nothing to do with market share, believe me.

Not some zeal for Linux?
Gates: It's software being used without being paid for.  

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