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Ballmer: IBM in the crosshairs

Selling to CEOs with a different "point of view" will translate to revenue growth, the Microsoft head says.

At Microsoft, it's no longer just about bits and bytes.

The company has for years marketed its products to the tech elite within big companies. Now Microsoft is making concerted effort to speak the language of top executives.

Why? Because business managers, marketing executives and other nontechies are increasingly involved in technology purchasing decisions, Microsoft argues. Another reason for the shift is IBM. Microsoft's chief rival in the business software area has been pitching to CEOs for years, relying on its business-savvy consultants to help win deals. In essence, Microsoft needs to speak Big Blue's language.

At a press conference on Thursday in New York, Microsoft's CEO Steve Ballmer spoke to about 500 corporate executives about his company's overarching plan for business computing.

Ballmer--known for his "developers, developers, developers" chant to rally the Microsoft troops--changed his tune for the business crowd. This time it was "people, people, people"--how end-users can be more productive and creative with the right tools.

He drew a contrast between that approach and IBM's, saying the company is increasingly focused on services and consulting. Big Blue, naturally, .

After his keynote speech, Ballmer spoke to CNET News.com about the Microsoft-versus-IBM rivalry, the role of hosted services, and prospects for growth.

Q: Today there seemed like a very deliberate sell to the CEO, to the business executive. Why is that? Has there been a change in the way your software is bought?
Ballmer: The truth is that the way information technology decisions are made in a company is really complicated. You really have four points of view, and we have to work with all of them--end-users, central IT, line-of-business executives, and then the business leaders, who could be the head of sales, finance or operations.

Most of our enterprise IT customers and partners say: "Look, you got to create the air cover for us. If we're going to create these kinds of solutions to let our business be 'people ready,' it can't be just us talking. Microsoft, you have to talk too." I actually get a lot of feedback from IT customers, who say: "Look, whatever the business message is, you have to help us with the air cover. We'll talk specifically about the technology."

You drew this contrast with IBM, saying that they're a consulting company and Microsoft is a software company. IBM is clearly interested in consulting, but if you want to do some of the Office-based applications that you showed today, you need consultants.
Ballmer: Let me be more clear: We're not anticonsulting. I just came off the board of Accenture recently. I've been on the board four or five years. This is not about being against consulting. This is about being for empowering people, so they can they can empower their company.

This is not about being against consulting. This is about being for empowering people.

And I think IBM's point of view is it's all about the consulting project or the outsourcing. What we would tell you is...we believe in giving people the tools that let themselves collaborate, get insight, deal with exceptions. One of the big differences between good companies and great companies is that great companies deal with the problems and the exceptions a lot better than the good companies.

IBM will tell you we are their No. 1 competitor, so in that sense it sets up the comparison. And we both just started advertising campaigns, so it begs the question: What's different?

Judging from the number of headlines, you'd think that Google or Sony are your most-feared competitors. What's the nature of the competition with IBM?
Ballmer: Clearly in business there's IBM. There are not that many times people are picking between our products and theirs, like Notes, Domino or Workplace, or whatever they're doing. And I do think our point of view is quite different from IBM's. And I think if you asked IBM about their biggest competitor, I don't even think they'd say one of the services companies. I suspect that they'd say us.

So how well is Microsoft doing against IBM?
Ballmer: I think we've never done better. And we're just gaining traction every day. Seriously, look back to a few years ago. Outside of its mainframe presence, DB2 (IBM's database software) is a very weak No. 3. Very weak No. 3.

The mainframe--I'm not going to say it's unimportant, it purrs along. They're really losing a lot of traction with Notes. We have more big customers than ever looking to do Notes-to-Exchange migrations with the chaos of Notes, Domino, Workplace, etc. We really weren't in the management business three or four years ago. With System Center, we're starting to build some real traction. Tivoli, if anything, I'd say is floundering--my sense. If you look at the app development platform, our Windows server business is going great guns. WebSphere is kind of limping along.

Linux is a competitor--I'm not going to say Linux is not a competitor. That's more of a dogfight. But IBM is not Linux. IBM is WebSphere, Tivoli, DB2, Notes and those things. And I'd say at least in the last three years, in those areas we compete, they have lost traction and we've gained traction. That may be a different view you'd get from them, but I've never felt more on a roll.

In the scope of all your businesses, where's the bigger opportunity for Microsoft--business, entertainment and games, or the end-user market?
Ballmer: People talking about the transformation that is happening--software as a service, advertising--big opportunities. We think about the move of video delivery and music and entertainment over IP networks, and gaming meets real world--huge opportunity.

(The corporate IT market) is the biggest business today by far. And we think the kind of innovations we show for people-ready business, the next two or three years, this is probably the biggest dollar growth for us.

(Consumer services) is probably an area of great profit growth in the middle term, but we need some more investment. (Games and entertainment) is an area where we're just turning the corner from investment mode. We're not in full profit, right, because there are still things to invest in.

We'll get profit from every place. But big dollar growth, (business computing) is probably the area of biggest dollar growth.

Let's talk about lock-in. If customers take advantage of the full suite of products like you showed today, they would be hooked into Microsoft. It's valuable--I don't think that's the argument. What would you say to people who say X percent of my budget is upgrading Office, and I don't have any alternatives?
Ballmer: Number one, I'd say in most big accounts, even though we're very successful, our software represents maybe 1 or 2 percent of the IT budget. If we get two-and-a-half percent of somebody's IT budget, that's a big deal for us. The money that actually goes to Microsoft is relatively small.

Number two, you can buy all of this, none of this, or pieces of this. We like to show it in its best form. But can you plug a Nokia phone into it? Of course you can. You'll find while we think the whole is bigger than the sum of the parts, if there are other things you want to connect to, we actually connect to more things than anyone else. People want us to always be more interoperable. I think there's great interoperability in what we have.

And number three, a lot of what we're talking about here is investing in a way that lets you save on something else. If you have a high-end document management system, what we have here for a lot of people is more than enough.

You didn't discuss services like Windows Live today. In an interview we did with Bill Gates, he said that business would be the recipient of hosted services more than consumers. What's coming on that front?
Ballmer: Yeah. Today I chose to talk (more) about the "what" than the "how." Software as a service is sort of the "how." And the focus today was on larger businesses, rather than smaller businesses. And I think larger businesses will be slower to embrace some of the elements of software as a service. Certainly when we talk about our Office Live offering, you can expect to see all or at least much of (Office 2007) in a Live form in the not-too-distant future.

From a financial point of view, do you expect that there will be a shift in revenue from Office installations to hosted subscriptions?
Ballmer: In the short run, I don't actually see them trading off very much because most of what will convert (to subscriptions or advertising) is relatively small. (For) big business, I don't think ad-funding is ever going to be significant. Let us read through your mail, General Electric, and we'll put up the right ad, and you won't have to pay for mail--I don't think that's a compliance-friendly approach.

But a subscription to a hosted service might interest a large business.
Ballmer: A subscription might. But if you actually you look at it today, a lot of our software for business is actually priced like a subscription. Our licensing already looks more like a subscription. It's pretty flat year to year. We basically said, let's make this a subscription.

On the subject of services, can we revisit the big reorganization that Microsoft did last fall? The idea of that was to be more nimble and to focus on services. Can you assess how you've done on those fronts?
Ballmer: I think we've done pretty well. My goal was to drive a bunch of decisions down a level by collecting things under three strong leaders. I think that's happened. I'm not sure if it was the organization change, or just the general pick up because we're entering the end of this product cycle, but certainly you see Office embracing Live, our Dynamics product line embracing Live. We bought FrontBridge. We're embracing Live even in server and tools infrastructure. Windows Live--we got tons of stuff coming out every day on the beta there, which I think is pretty exciting. Xbox Live, with the 360 launch, we took up a level in terms of capability.

How much was that a reaction to all the attention Google was getting?
Ballmer: I wouldn't call it a reaction. The fact of matter is, five years ago, I first started talking to our people about the importance of software as a service. Then we had a lot of things we had to deal with. Linux came up as a hot competitor. We really had to get our innovation agenda straight around that. We absolutely had to shift Vista and Office, and we're getting toward the end of the cycles--a little bit longer maybe than we would've hoped for. But we're picking up now and taking the next level on that (services) theme.

In the business world, what's the level of trust between you and your customers on security?
Ballmer: Better, and (it) always needs to be better. Improving! Look, I think people really understand we really have made security and trustworthy computing a top priority. I think our customers think we're doing a much better job. (With) security, unfortunately, you're only as good as the last problem somebody had.