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Ballmer the undaunted

Never at a loss for words and always passionate about his company, Microsoft CEO Steve Ballmer describes his attitude as "super optimistic."

In describing his attitude these days, Microsoft CEO Steve Ballmer is "super optimistic."

Microsoft would appear to have a long list of serious concerns: the recent antitrust setback in Europe, including a proposed $613 million fine; ongoing security issues with the Microsoft's software; a stagnant stock price; the steady encroachment from Linux; and a murky release date for the next version of Windows.

Undaunted, Ballmer prefers to maintain that the company's legal worries are abating and that Microsoft is poised to release exciting products for homes and businesses.

Ballmer sat down with a group of CNET News.com editors and reporters just after the European Union decision in late March and before announcing an accord with Sun Microsystems last week.

In a wide-ranging interview, he talked about the state of the tech industry, the company's right to continue adding features to Windows and Microsoft's transition from adolescence into adulthood.

Q: Where are things, from your perspective?
A: I am in a super-optimistic kind of mindset about not just our company but the ongoing impact--the accelerating, perhaps even, impact--that technology--and the software part, explicitly--is going to have on society. I think that our glass is, if you will, not half-full yet. We have a lot of work to do--a lot of exciting things--and we are going to be able to create things that are going to change the world and bring value to our shareholders.

The EU case again raised the question about what should or should not be integrated into the operating system. Is your thinking evolving about the proper contours, if any, of what should be added to the OS?
The (U.S.) consent decree says we can do, from a product design standpoint, most anything we think is appropriate. But we have to do it with certain obligations for flexibility, publishing, etc. Between the district court and the appellate court, there is some notion of what they call a rule of reason--that is, what we are doing has to be better for consumers than it is bad for competitors.

So, in your ideal world, what, if any, limits should there be on what Microsoft can add to the OS?
I do not think there should be limits. I think what there should be is a rule of reason. I understand the rule of reason; that is the law, as applied to us in this country. We honor that, we support that, we live with that. It says, "Look, if there is consumer benefit here, and the consumer benefit is clear, and the benefit sort of outweighs other issues, we should go ahead and do that." Then, the consent decree says we should do that in a way such that we comply with that decree. If the thing is middleware, we have certain obligations; if it's not middleware, we have different obligations.

How do you measure consumer benefits? I guess the argument is long term versus short term. In the browser space, for example: In the short term, Internet Explorer certainly was free, and Netscape was $30. But in the long term, the critics would say Netscape is not really viable now.
The courts articulated the test, and we think about that, as we integrate new capability. It is not up to you; it is not up to me. Is it OK that Netscape is out of business? I think so. Apparently. The rule of reason is: It is OK. Nobody ever said the browser did not meet the rule-of-reason test. It absolutely met the rule-of-reason test to go in.

So, with the current rule-of-reason test, as it is being expressed here, if you went back eight years or so, that would still be an allowable procedure?
Yeah, absolutely, I would still integrate a browser. We would still integrate the Media Player.

With your concept of integrated innovation, is Windows becoming more closed?
There has never been a platform more open than ours, as evidenced by the fact that there has never been a platform on which people have written more applications or supported more devices.

You can make an argument from the open-source side that--
No, no, nobody can make the argument that open source is actually more open and sensitive to encourage more third-party innovation.


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You could say all the things about open source, but clearly, more people have used more application programming interfaces and interfaces in Windows by several orders of magnitude than any other product ever written.

What is the biggest challenge for Microsoft these days?
The key is keeping as aggressive, keeping as focused on doing the right things, recognizing that there are new things that we need to do. Frankly, we are in a world where responsiveness to certain kinds of issues is far more at a premium today than it would have been 10 years ago.

How so?
Ten years ago, there was much more premium on just generating new function, not on responding to issues in existing functions. I mean, nobody was talking about security problems in Netscape and IE in the middle of the browser wars. People would just say, "Give me, give me. I need new features, new features." Well, we are in a different world.

Is it OK that Netscape is out of business? I think so.
We have other new expectations and responsibilities under the consent decree and all that came with it, so the key is to continue to be able to be bold and interesting and put new scenarios in front of people.

We used to try to execute on one, maybe one-and-a-half fronts: the desktop and then maybe a little bit of a back end on the server. Now, we are trying to execute on six or seven fronts.

There was an interesting piece in The New York Times following the EU decision, in which the writer posited that Microsoft has basically become like an essential utility. The basic point was that with all these legal battles that you are constantly fighting, is it more of an issue of you saying, "OK, we are an essential utility." Is it a far-fetched idea that Microsoft should be regulated like a utility?
Well, I think it is a bit of an unusual principle because the sovereign authority, the country in which we reside, has spoken. I mean, it is finished. The regime is clear. We have got pronouncements from the courts. We have got a consent decree. We have a framework in which we have to live. And the EU is another sovereign authority.

We would like sovereign authorities to kind of agree on what those rules are. We are hopeful for that. We tried to help provoke compromises that would allow the framework to live together, and we did not get there. We hope that through the appellate process in Europe, we can come to a regime that is common, at least on both sides of the Atlantic. I wish the EU had had more deference for the U.S. regime, as set forth not only in the consent decree, but also in the pronouncements of the court.

Given that Microsoft's stock has not risen as much as the Nasdaq has recently, what is the reason for all your optimism?
We have passed through a transitional phase in the last few years, and it is much easier for me to be optimistic, for a few reasons, and I will go through probably three of them.

No. 1 is seeing the pace of change and the impact of technology unabated, despite all the blippity-blop and bloopity-bloop in the press about, "Is IT dead?" and all that. I never believed it, but it is sort of good to be through it.

No. 2, I see what we have coming in our labs, and we have just got an incredible pipeline of stuff. I am super enthused about what we have in our pipeline.

No. 3, we have crossed from the phase of lawsuits and settlements to a phase of moving on with life--this EU thing aside--where everybody is sort of getting all hubbubed up about it. Yeah, it is an important thing, but there is a framework in the United States. We have learned how to live in that framework. We're rising to our new responsibilities.

Somebody asked me, "Are you past your prime?" No, we are not past our prime. We are through adolescence and into our prime, so we may not have the same kind of random herky-jerky energy of adolescence. But now, we are showing more (how we can) hum on all cylinders with the appropriate responsibility of an adult in his prime.

You have talked about big bets, and one of the biggest ones is "Longhorn." It is not just the OS; it is all the other things you want to do, with Office, etc. It seems like this is going to take longer than you had hoped--a long time, whatever adjectives you want to use for it. How do you run the business in the meantime? It is a long time between versions of Office and Windows.
Let us really ask that. First of all, we did decide that we need a big step forward. We think there are a lot of advances that we want to make for applications for the consumer that we were not going to get out of what I would call a small step; we needed a big step.

Big steps always take long periods of time. I felt good about that decision--I feel good to this day about that decision. That is No. 1.

No. 2, it is not like Office releases, in any sense, have slowed down. We did Office 2000; we did Office 2003; we are working away on the next release. Most of our customers do not use Office 2003 yet. It has been in the market, what, four or five months--something like that--and maybe 1, 2, 3 percent of the installed base use Office 2003 so far. I think we have got plenty of headroom before we need another product to bring huge benefit to a lot of people.

Let me come back to Windows. With Windows, I think we have a lot of Windows releases that are very important. We had Windows XP. We had a new mobile form factor, Tablet PC; we have a new entertainment form factor, the Media Center--and those are both important steps forward. And we have XP Service Pack 2.

The key is keeping as aggressive, keeping as focused on doing the right things, recognizing there are new things that we need to do.
Now, it does not have what I would call the sizzle marketing name, and it shouldn't, frankly. But if you ask, "Do I think that has a big, important impact on customers?" In the spirit that I talked earlier about responsiveness being as important a part of the game these days as sort of de novo innovation, yeah, I think XP SP2 is a big darn release. We made a huge prioritization step to say that even if we need to take some things out of Longhorn or push Longhorn back--or some mix of those two--we will do that in order to prioritize XP SP2.

So, I think we are making the right decisions, and I think XP SP2 will be part of that. Then, we will get Longhorn, and it will be the kind of bigger generational advance for consumers and developers that we want it to be. Maybe customers want some incrementalism between big bangs, as opposed to big bangs every two years, and I guess we will get some experience with that kind of cycle as well.

Does that slow Longhorn's debut, because you did that?
It changes Longhorn's debut. Maybe we will carve (off) a couple of features around the edges. Jim (Allchin, vice president of Microsoft's platforms group,) and the team are still doing some of the rework of the plan.

Are all the major security features that you are going to be coming out with, though, pretty much in SP2?
There is more in Longhorn. There is another wave of very significant stuff that will not come until Longhorn.

Behavior-blocking stuff, then?
Yeah, some of the behavior-blocking stuff does not come until Longhorn; some of the stuff we are doing to be secure, down to the hardware level, only comes with Longhorn.

You came out and said, "Oops, we screwed up on search, we should have done a better job."
I would not say "better" job but "sooner." We did not commit serious research and development effort as soon as we probably ought have.

Does that go back to the organizational issue that we talked about earlier?
Well, it has to do with a lot of things. We had a lot on our plate, and we did prioritize, for better or for worse. In a funny way, we made the same prioritization as our No. 1 competitor at the time, Yahoo. I mean, as bad as I feel, I hope they feel even worse, because they actually had the lead in search, and they didn't invest, and Google came out of nowhere relative to both of us.

I think we were having a hard time, frankly, sorting through exactly what our MSN strategy was. At the time that we should have been making maybe more of the investment, we were still thinking more about the possibilities of Internet access and broadband Internet access as being part of our business, and that was wrong-minded. If we had seen that sooner, I think we probably would have freed up more capacity for search sooner.

There is a perception that you get in the game only after it is hot.
Sometimes, we get in when it is still cold. TV software--believe me, we have been investing in software for the television experience long before we can make money, anyway. The number of people who will be there when that thing takes off who were there when we all started is very small. Pen-based computing--I think we got in early. We've sold hundreds of thousands of tablets. We haven't sold millions.

Media Center--I think it is an example of something we were early on. We are not going to be early on everything, and we are not going to be late on everything. What we have to do is be best at everything. Even if we are not first, being best matters. Being the guy who figures out how to really make it an incredibly strong value proposition is important. Sure, it is always nice to be first, but it is essential to have the best offering.