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Feeling the heat at Microsoft

Antitrust woes, a protracted battle for Yahoo, and a shifting software market. Welcome to Steve Ballmer's world.

For a man who just got fined more than a billion dollars for antitrust violations, Steve Ballmer is feeling plenty of competitive heat.

In an interview, the Microsoft CEO pointed to tough competitors in every part of the business. Longtime foes like Oracle and IBM remain, but Google, Apple, and Linux all loom large.

Against that backdrop, Microsoft is locked in a protracted battle to acquire Yahoo. Ballmer spoke to CNET News.com shortly after the launch of new server software in Los Angeles.

Microsoft announced a last week. When you guys made the announcement, did you know that the EU was planning to levy further fines against Microsoft?
Ballmer: We knew it was pending, we didn't know it was this week, but we knew it was coming at some point. This is not news today. We are in compliance, they agreed we are in compliance. This is a fine for activities that predate the compliance activities that Ms. Kroes talked about last fall. So this is not new news in terms of compliance. It says there was a past transgression and they assessed a fine for that past transgression.

So are you fairly confident that your EU regulatory hurdles are behind you?
Ballmer: I think as a company with a big market footprint, we will constantly be looked at by regulators in all parts of the world. That's part of what we do, and that's kind of our world.

Do you expect Europe to be the biggest regulatory hurdle if the proposed Yahoo acquisition happens?
Ballmer: Oh, I don't know. I have nothing interesting to say about that. I think regulators will look at that in all appropriate jurisdictions, and I'm sure they'll give us a fair shake in all appropriate jurisdictions.

Bill Gates said about a week or so ago that Microsoft isn't looking to unilaterally up its bid for Yahoo. What's the next step? Is it nominating your own board of directors? Where do you go from here?
Ballmer: In this process, you've never been through one until you've been through one. Everybody prepares you and tells you about all the different stuff that goes on. If there's news, I'm sure you guys will be the first to know.

Are you surprised that it's taken this long?
Ballmer: No. Many acquisitions take this long.

Apple said today that they're going to have some iPhone stuff, including some more enterprise connections. I'm curious, are they partnering with you guys at all to bring Exchange connectivity?
Ballmer: We continue, under our new interoperability principles, to license both the trade secret information and the patent information that anybody needs to interface with either Outlook or Exchange. So Apple--we don't comment specifically about whether they're a licensee, but certainly it would be consistent with our interoperability principles to enable Apple to do that work.

What's the biggest benefit to Microsoft from Windows Server 2008? Is it improved competitive position versus Linux? Better virtualization software? Something else?
Ballmer: Yes (laughter). What is virtualization all about? It's really about management, superior management. We get to bring what we've already done with System Center in high-quality management tools together with great underlying support for Windows Server, virtualization support, interoperable virtualization. So we can run Linux, we can run Windows.

We don't think virtualization is an island--maybe VMware does; at least that's their current strategy. We think it's a big step forward.

I think in a virtualization-slash-management perspective, we take a little different perspective on that. We don't think virtualization is an island--maybe VMware does; at least that's their current strategy. We think it's a big step forward.

In terms of the workloads, if you look and say where in the server market are we weaker, we'd be certainly weaker in Web applications than we are in most other (areas, such as) Web and high-performance computing with IIS-7, with the improvements in Visual Studio, with the hardening we've done in server core that makes it easier to put up our rugged Windows Server. We think we've done a lot of work that's going to help us drive share against Linux, particularly in the Web workload (area).

A lot has been made about the consumer side of Web services, but Microsoft's enterprise business is undergoing a pretty radical transformation as well, with a move to support a mix of Web-based services and on-premise software. On the enterprise side of things, do you see the services world being as good a business, as profitable as the on-premise-only world was?
Ballmer: I think it's better. I mean, if you do it right, it's better. If we do it right, it should be better. My basic thesis, and what I tell our folks--and it's got to be proven in the market--is if we add more value for our customers, it ought to allow us to make at least as much money as we make today, if not more.

We can have service-based offerings that essentially line up with our information worker infrastructure products--Exchange and SharePoint, Office Communications Server--if we have instances that sort of line up to what people do, development and deployment applications, database applications, etc. That is more value. We can help people reduce management costs, deployment costs, operations costs, data center costs...Somehow, if we can help our customers avoid cost and complexity that they have and give them all the value we give them today, there ought to be a trade in there where we get to make a little bit more money and our customers get a lot more value.

How quickly is that transition happening? Are there specific areas where people are really clamoring for a high-services component, and are there some you can point to where it's going to remain on-premise as far as the eye can see?
Ballmer: Well, in the enterprise, I think the stuff that we might expect to see actually move most quickly is probably some aspects of the desktop infrastructure, for lack of a better term. We've announced some customers--I don't know who's public and who's not public, though. But we've announced some customers for our Microsoft online offerings for Exchange, for Office Communications Server, for SharePoint, and I certainly show a lot of demand there. That's probably where the offer is clearest and the demand is highest.

Somebody might say, well, what about CRM? You see some (CRM), but you see it more in pockets. You see it more departmentally. It's not quite the same, enterprise-driven demand that we're seeing for some of the information worker productivity infrastructure.

Any that you see just pure on-premise as far as you can see?
Ballmer: No. No. (Though) some I think will take longer. You know, when will trading applications--proprietary trading applications on Wall Street--run on the Internet cloud? Probably not tomorrow. Might take a little bit longer than some of the other things we're talking about.

You mentioned today that a resurgence of rich client applications is in the offing. From the average consumer side, we really haven't necessarily seen that. Even when Vista was released, we didn't see applications that really pulled us away from the browser.

Ballmer: I don't think that's true. Would you say that the applications you're seeing are richer and richer? Whether they happen to run in the browser or not, applications are getting richer.

Ballmer: That is certainly resurgent, whether it's Ajax or it happens to be Silverlight or Flash, AdobeScript, you know, Windows Presentation Foundation. I think what we see is that there's a lot of technical approaches people are using to do rich user experience. Rich user experience is, let me just say, a big deal in terms of differentiation for Web sites you take a look at. You know, they're mostly rich client applications.

Whether they run in the browser or not, that's sort of a deployment question. I don't even know if you call it a deployment question. Do Flash applications run in the browser? I don't know. Sort of they don't because you have to download Flash. So the deployment is not all browser-based, but I think the interest of developers and users in rich client applications is high. Some of those will be native Windows applications, some of those will be Silverlight or Flash applications, some of those will be Ajax applications, some of those will be terminal services-style rich presentation.

Rich user experience is, let me just say, a big deal in terms of differentiation for Web sites you take a look at.

There are a lot of different ways--some of them will be software-style application virtualization approaches. There are all sorts of ways to do the development deployment of various applications. I think simple HTML is a low-level kind of experience.

Maybe I was misunderstanding, then, but do you foresee a resurgence of Windows client applications coming along with?
Ballmer: No, I see Windows applications staying strong. That doesn't mean other applications aren't also strong. Certainly browser-deployed applications, Ajax, Silverlight, many forms are also important. But you know, certainly there are things that people want Windows applications for. People are still moving forward for every high-end kind of design, creation analysis application--those are rich client applications. And yet, a lot more of what people are doing percentage-wise also just involves consumption, reading, consumption of information.

And many of those applications are browser-deployed, not HTML, but they're browser-deployed. Even the Kindle--if you take a look at the Kindle device from Amazon, it's a rich user experience application.

What are you hearing from IT customers these days? Has there been a renewed focus on things that are going to save money, given the economy?
Ballmer: Well, we haven't really seen a shift back to cost. Cost was always important, cost got a little less important during the dot-com bubble. Cost got a little more important right after the dot-com bubble. Cost remains important...People haven't seen enough of this so-called economic downturn that we've really seen it re-emerge as anything other than a very significant issue.

Mostly what we hear about are new applications, how to get new market, new value, unlocking the information in their system so people can use it. It's a pretty consistent dialogue with what has been on people's minds the last three or four years. A lot of focus (is) on driving top-line in the business and taking cost out, not just in IT, but in other places across the cluster.

Has Google at all emerged on the business side of things in your conversations with customers? Or is it more you can just connect the dots of where they're going and know that they will be a player in some of those markets?
Ballmer: I think it's more the latter. They (Google) don't really have much concretely that's valuable to sell. Google's a big player in our business and there's a lot of fascination and interest among our customers in what all the big players are doing, and people kind of try to draw the dots and expect stuff to come, and certainly people are glad to bring up Google Apps anytime we're having a price discussion and we think we have a very good value. But by and large, not a big factor yet.

A couple of years ago you reiterated that IBM was Microsoft's biggest competitor and you said not just on the business side, but overall. If I ask you who is Microsoft's biggest competitor now, who would it be?
Ballmer: Open...Linux. I don't want to say open source. Linux, certainly have to go with that. Perhaps Google on that layer, although frankly speaking, most of what we have there is upside. We're small and they're big. (With) most things, we're big and the other guy is small, so we have more to lose than gain. In this case, we have more to gain than to lose with Google.

Would Apple would be on the list?
Ballmer: Apple--yeah, they've done nice work. They're really a competitor in many ways. And then there's other guys, like IBM, that are hard not to put at the top tier. But we have 5-year-old businesses at Microsoft and--you ask the leader of each business, they'd give you a different name.

Right. (Entertainment and Devices division head) Robbie Bach wouldn't say Sony?
Ballmer: Robbie...well, I don't know. I think Robbie would be more likely to say Apple probably than anything. Now if you ask Kevin Johnson (president of Platforms and Services), he'd probably say Google. You ask (Servers and Tools unit head) Bob Muglia, he'd probably say Linux or Oracle, maybe IBM. If you ask Steve Elop (president of Microsoft's Business Division), who replaces Jeff Raikes, I just think he would say Open Office, potentially Google. And certainly Kevin Johnson (might add) Apple and Linux.