Ballmer talks up Microsoft's consumer business

REDMOND, Wash.--Steve Ballmer made the case Thursday that Microsoft not only gets the consumer market, but is set to grow its business there.

Speaking at the company's financial analyst meeting here, Microsoft's CEO began his speech by talking about the current state of the company's consumer business. His talk follows Kevin Turner's chat earlier in the day focusing on momentum with business customers.

"Our biggest consumer product, no question is Windows," Ballmer said, noting that most computers these days are sold to individuals, rather than businesses.

"Suffice to say I didn't love everything in the market about where we were two years ago," Ballmer said, referring to where Microsoft was with Vista.

By contrast Ballmer said he was pleased with both sales and market share for Windows 7. "This is a very gratifying year," Ballmer said.

On the Office software suite side, two-thirds of units (though a far smaller share of revenue and profits) go to consumers as well, Ballmer said.

As for the emerging businesses, Ballmer noted that the company took a long time to turn Xbox into a profitable business, but is now making money and a leader set to gain ground with its motion-sensing Kinect controller, formerly known as Project Natal.

"Kinect really is kind of a 'wow' thing," he said. "I like where we are. I think it's going to be a very exciting Christmas."

As for the Bing search offering, Ballmer said "this is a year that has had more than a year's progress in it," Ballmer said, noting that the company went from 8 percent share to 12.7 percent in the U.S.

"We're not confused," he said. "We've got a lot of work to do."

He didn't say when the unit would be profitable, noting that he said last year it would take several years. Bing's users, Ballmer said, are younger in general than those of any other search engine.

"I like the progress that we've made, but it's going to take a lot more," Ballmer said.

Ballmer's speech is just getting under way. Check back for frequent updates.

Update, 1:35 p.m.: Ballmer talked about Microsoft's need to catch up to the iPad, saying the company is hard at work on making Windows 7 better suited to tablets. Click here to read the full story on that.

1:40: Windows VP Brad Brooks is on stage demonstrating both Windows PCs as well as a fall update to Windows Live that is currently in various stages of beta testing.

1:45: Brooks showed a demo of an internal software prototype code-named "surfboard" that is designed to show what a better touch interface for media consumption might look like. However, the interface seemed less polished in many ways than the media center interface that already ships as part of Windows 7.

1:51: Demo of Windows Phone 7, though nothing new so far.

2:01: I've been peeking ahead at Ballmer's slides and one talks about the company's retail store effort, confirming stores planned to open later this year include Bellevue Square Mall near here, the Mall of America near Minneapolis, Minn., and Oak Brook, Ill.

2:07: Returning to the stage, Ballmer is talking phones, noting that Microsoft designed the core chassis of the Windows Phone 7 devices, with device makers only doing work on top of those basic designs. As for making up for lost ground, Ballmer said. "It isn't going to happen overnight."

"We say 'I'm a PC,'" Ballmer said. "I'm a phone too."

Turning to the stores, Ballmer noted that it used to be the case that many of the most interesting PC designs, including past tablets, don't get play at retail. Having its own stores allows Microsoft to show "the latest and greatest."

He said the stores may not make money, but they shouldn't lose money and said that the stores are in business "to sell stuff."

Ballmer said both Windows and Windows Phone will get heavy marketing promotion later this year.

2:15: Ballmer has given way to CFO Peter Klein who is sizing up the financials of the cloud business. He begins by noting that the cloud allows Microsoft to compete for tech revenue it hasn't in the past, given that it is now selling more than just software.

In addition, Klein said, "it allows us to sell to more users," including both new customers as well as more people at existing customers, such as workers who don't have their own PC. Additionally, he noted that there is less piracy in a world of services, because you are only delivering your product to paying customers.

2:45: On to Q and A. Klein joined on stage by Ballmer, Turner, and Mundie. First question was again on tablets, with Ballmer clarifying that Microsoft's answer to the iPad, at least in the near term, will run a tuned version of Windows 7--not Windows Phone OS--and use Intel, rather than ARM processors.

3:02: In between tablet questions, one analyst asked Ballmer what he would consider to be success a year from now in the phone business.

Market share is one measure, Ballmer said, noting that Windows Mobile had been losing share. "I would hope we have an upward trend," he said. "That's important."

Also important he said is that it get good reviews, noting that the company won't have "what I would dream about as our ultimate share in a year."

Another analyst asked what Microsoft would do if Windows Phone 7 was another Vista.

"It won't be," Ballmer said. "I'm not contingency planning."