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It's all about software, says Gates

Just before his farewell CES keynote speech, Microsoft's chairman reflects on Redmond's rivals and the changing face of Windows. Photos: Gates' last call at CES?

LAS VEGAS--For years, Bill Gates has been trumpeting software's ascent from the lowly PC to everything from cell phones to home entertainment.

No doubt, that move is already taking place. But it's unclear whether Microsoft's dominance in the computer industry will carry over to new consumer-oriented markets, or whether rivals such as Google and Apple will ultimately gain the upper hand.

In an interview just ahead of his farewell speech Sunday at this year's Consumer Electronics Show, Gates spoke to CNET about competitors, the future of DVD, and why all of those seamless connections between digital devices exist only in keynote speeches.

Q: One of the themes, this year and every year, is about how consumers want access to their media wherever they are and on whatever device, seamlessly. It always seems that the seamless piece is what's really hard and where the experience tends to fall short of what we see in demos and keynotes.
Bill Gates: I'd say the most important step is that you use the cloud so that if you have licensed a piece of music, if you buy a new phone, it's there. If you buy a new PC, it's there.

Making the user move things between devices has been one of the downfalls. If we just allow them to be in the cloud, then any time you said who you are, you are connecting up to all of the content, no matter where it came from.

In five years, where will Microsoft need to be in order to have met the challenges from companies like Apple and Google?
Gates: Apple is a competitor and partner we've had for a long time. It was only three years after I started Microsoft that I went over to Apple and did Applesoft Basic for the Apple II and Office for the Mac as a product.

Microsoft's chairman discusses the outgoing and incoming digital decades.

But there were a couple of years in there where they were less of a competitor than they are today.
Gates: Well, they were almost dead for a couple of years in there. Yeah, it's a very competitive space. We've got to advance our platform. Windows really succeeded because we had a greater breadth of software available on Windows.

Now, when we think Windows, we think Windows Live, Windows on the phone. We have to keep it as the leading platform. We obviously have a lot of strengths with our development tools and our strengths in the business area. We're doing some breakthrough work in the cloud and with natural user interface.

I love the fact that it is so competitive. Google is ahead in advertising. Apple is ahead in music devices. There's room for us to be successful.

Are there specific things that need to change about the company's products or culture?
Gates: Remember, it's all about software. So why are we talking about those companies? There are very few companies that understand software. The phone is becoming about software, the TV experience is becoming about software. Our bet goes back to the founding of the company--that software is going to be at the center (of things). It really is coming true.

I think the core of who we are and what we do (is) believing in a platform. We're better positioned than anyone. Do we have to continue to work on our advertising scale and our search and some usability things in our music products? You bet. But that all comes off the core of being a company with the best research group, by far, of any software company, and a breadth of talent that everyone is envious of.

Does Warner's move to support Blu-ray exclusively mean that HD DVD is dead? If so, what does it mean for Microsoft? Obviously, you've been a big supporter of HD DVD.
Gates: The last studio announcement was Paramount going exclusively to HD DVD, so there's been some back-and-forth. It's kind of a classic format war. You have to think of what we are doing with our HD-interactive software as being actually neutral to any of these platforms.

The third platform, which I don't think anybody would dispute will win in the long run, is directly downloading over the Internet. That's the way Mediaroom TV works. That's the way Xbox Live works.

We've got more content with Disney and MGM coming onto that. It's been very, very successful. The convenience of not using media--we've seen that in music. iPod, Zune, your phone--that's how you are going to carry your music.

Your collection, it's up in the cloud. Any new device you get, it's there. That will happen for video too. The actual physical-format battle here isn't really, in some sense, that important. But getting the movies so you can access it through any broadband device--that's the future.

Would you do a Blu-ray add-on for Xbox?
Gates: Third parties can do peripherals for Xbox. Obviously, all of the different optical-drive technologies are supported in Windows. At the core, we are about software and making sure the HD activities get to critical mass.

I'm proud of the product...Vista will be a lot stronger in the next year. We're taking the lessons learned from that and building the next great version of Windows, which will be even better.

I was reading a bunch of "Biggest Tech Disappointments of the Year" stories, and Vista was on most of those lists. Do you think Vista has some work to do, in terms of convincing people it's something that they need?
Gates: Vista passed 100 million (units shipped), which is a pretty phenomenal number. A lot of people put it on their favorite-products-of-the-year (lists) because they are using neat new features that are there. We certainly got a lot of feedback about getting device drivers (out). There were some compatibility things we didn't handle well. Definitely, we're a lot smarter there.

I'm proud of the product. There are a lot of things that, as the year went on, we got the polish and the extra drivers out there. Vista will be a lot stronger in the next year. We're taking the lessons learned from that and building the next great version of Windows, which will be even better.

Is there an opportunity, where it's not tinkering with the OS, but rather making the overall platform more compelling?
Gates: There's none of that we haven't been in, way before there was an iLife. Microsoft Works goes back 15 years. The photo stuff in Windows just keeps getting better. We did a Windows Live release that had photo gallery (component). Movie Maker is a very strong product, and we are continuing to invest in that.

Can we package it up so it's a clearer message around Live? I think definitely, there's things to do there, but having those neat scenarios be part of what you just get with a PC, having that be clear--I think that's important for the consumer market.

It seems like Windows Live has become the primary vehicle for that. Is that true?
Gates: (For) most of those experiences, because you want those photos online, a lot of the innovation will be in Windows Live. Some things like Movie Maker will stay as Windows client things. But Live is the center of attention. That's a product we will update in a pretty dramatic way on something like a yearly basis.

It seems the notion of Media Center specifically as a way of getting content doesn't seem to be a huge platform. Does merging the Media Center folks with the IPTV folks open the door for one platform?
Gates: Yes, we can bring those together. What you are going to see is that IPTV and Media Center have gotten to a size (such) that content people are doing unique things. Robbie (Bach, head of the Entertainment and Devices unit) is going to show some Nascar things, some Fox things. Interactivity and personalization really count.

Our deal with NBC on the Olympics is about taking video, and we'll offer that on general Internet PCs and other ways of getting that video. The idea of programming video and bringing in the interactive pieces--that's a vision we've had for a long time now. It's becoming reality, with Mediaroom with over 1 million (set-top boxes) and Media Center a bigger percentage of Windows than ever.