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CNET Conversation with Steve Ballmer

On October 1, CNET's Ina Fried and Molly Wood interviewed Microsoft CEO Steve Ballmer. This is a transcript of their conversation.

CNET (Molly Wood): Hi, I'm Molly Wood. Welcome to CNET Conversations. I'm joined today by senior writer Ina Fried from CNET News, who's a longtime Microsoft beat report, and of course Ina is here because we're very excited to be on the Microsoft campus with Microsoft CEO Steve Ballmer. Thank you so much for having us.

Steve Ballmer: Thanks, guys.

CNET (Wood): We're pretty excited about this.

So, you've been recently speaking obviously on a lot of issues. You presided over the launch of Zune HD. Windows 7 is about to go mainstream. And, of course, the economy, you're kind of an expert on all things economical right now.

Most recently, we heard Eric Schmidt say that from where he sits, the worst of the recession is over. I was wondering if we could get your thoughts on that.

Ballmer: Well, I think any sort of forecast at this stage is probably a little bit premature. Thank goodness we haven't fallen off a second cliff, which certainly in some economic times we have, but unemployment rates are still high and growing, so it's a little hard for me to say the worst of the recession is behind us when there's still a lot of families both out of work and more families out of work every day.

So, I don't think things are getting worse, but I don't think they're getting a lot better yet either. And we'll keep our fingers crossed that things can start gradually moving up again.

CNET (Ina Fried): One impact of the economy was for Microsoft as a company; you guys had kind of the first company-wide layoffs. You've cut some jobs in some areas before. I'm curious looking back now, it's been several months, how does Microsoft look different from that point? Were there any elements of the focusing and paring down that were a useful exercise for the company? Obviously you didn't want to let go of employees, but...

Ballmer: Well, you know, what's the expression? Our job in life is to make lemonade out of lemons. And so I think what we said is, look, we do need to adjust our cost structure. Let's use this as an exercise to make sure that we're also razor sharp focused on the things we need to focus in on, that we--not only are we well focused but we're also what I might call right-sized. And you could be focused on the right thing and you could still do it with 10, 15 percent less people, and be perhaps more right-sized to opportunity.

And so we took that--you know, sort of took the opportunity presented in the--by the economy and the economic conditions and the need to get our cost structure right, and so I think it was a healthy exercise for us.

We do periodically readjust group sizes based upon what we hope to do in new releases versus old, et cetera, and this was just a chance to do that kind of in a more structural way.

CNET (Fried): You've talked a lot about kind of the role that technology can play as a growth engine for the economy, and talking about how IT is creating jobs and growing jobs, but certainly Microsoft itself as a company isn't adding a lot of jobs. When I talk to IT departments, they're not seeing their budgets growing. How is it that IT is going to add jobs to the economy?

Ballmer: Well, first of all, looking in any one window, if time is probably, you know, a short--particularly a short period of time, we've gotten a lot of jobs over the last five years. Maybe that's even why we had to do a little right-sizing. But we're 95,000 people roughly. I guarantee you that's a lot more than we were three, four, five years ago.

But, you know, economic growth--and I focus in on economic growth more than job creation, although the two should go hand-in-hand--economic growth comes from productivity increases in the economy and from innovation, which is kind of an accelerated form, if you will, or a magical form of productivity enhancement. You invent a new form of travel or a way to do something completely differently, that leads to productivity improvements.

Productivity improvements in this economy have come in large measure over the course of the last 20 years by using information in new and powerful ways. The service economy is largely based on information, and the service economy has grown relative to the manufacturing and agriculture economy dramatically. And the ability to use information technologies to streamline and make more efficient the processing of information in the service industries has been amazing, let alone what IT has brought for improved supply chains and design chains in other businesses.

As we look forward, just take science. People like to talk about productivity improvements and innovation that we need to see in the health industry, that we need to see in the energy industry. That's going to come from science, and that science actually is going to be in larger measure than ever before powered by modeling the physical world in the virtual world. That's going to speed up the pace of science like nothing that's come before it.

So, I think in terms of productivity and innovation, IT has delivered and it will deliver. Whether that leads to direct growth in jobs actually in IT or in other fields is yet another question. I'm not sure what you call the folks who write large geophysical models to help with exploration in oil and gas. You may not even call them IT people. But the strength and backbone of what's powering that work, it's definitely things that have been written as pieces of software.

CNET (Wood): It's information.

So, I want to move on to Windows 7, obviously your next big product release, and not just the next big, but the big one.

One question that a lot of people have had, including myself, is, can you explain the rationale behind the multiple versions of Windows 7? That seems to be something that consumers feel confused by, commentators feel kind of negative about, and yet there it is. Is there a good reason?

Ballmer: There's really three versions.

CNET (Wood): Right.

Ballmer: OK, let's just be clear. There's a Starter version, a Home version, and a Professional version.

CNET (Wood): Has it been sort of exaggerated? Because I think, you know, I've heard people describe the versions as seven different...

CNET (Fried): Well, there's Ultimate, there's Enterprise. I mean...

Ballmer: No, no, there's really three versions that you'll find on any--you know, if you walk into a computer store, a computer store most likely will come with either Starter or Home, and the computer will be configured so that if you want to upgrade in place, you can do that to the Professional version. Certainly people who are using the PC in the work environment will, in my opinion, most likely want the Professional version.

But you don't know when the box ships out whether it's going to somebody at work or somebody at home or somebody buying it at a computer store and using it for work, so it's important that we have that.

But for people who use these machines professionally, Professional is the right choice. For people who want a very low-end machine at a very low cost with a very small screen, we wanted to have a version of Windows that did the job. That's called Starter Edition. And for everybody else, there's Home. And it's not really that much more complicated. And if IT departments want to add on increased manageability and security, they have a way to do upgrades; that's the Enterprise edition, and they can go ahead and do that if they want to. And there will be a few folks who just want everything you can get, even though they're at home: we have a thing called Ultimate.

But really the bread and butter is Starter for low-end Netbooks, but you could use Home or Pro on those, too, but if you just want the lowest end, Starter Edition. Home will be the bread and butter for people who use these machines just personally, and people using professionally and personally, it's Pro.

CNET (Fried): You've talked about Netbooks. You've said, you know, Windows 7 obviously you can run any version of Windows 7 on a Netbook. So, that really gets you back in the game. Obviously you were selling XP on a lot of Netbooks. Are you guys going to do anything to make it easier for all those millions of Netbooks that have sold in the last couple of years running XP to move to Windows 7? Because really for Netbooks and all computers it's kind of tough to get from XP to Windows 7.

Ballmer: We have no simple upgrade. Of course, you can always wipe--backup, wipe an XP machine, and then install Windows 7, which is not the simplest of processes, but it's what we have available, and it's all we'll have available for XP-based Netbooks as well.

CNET (Fried): You've talked for a long time about the idea that, you know, Google is a significant competitor and more of a broad-based competitor than you guys had seen in the past, but we're now at a point where they're actually talking about--you know, they're going after you guys on Office, they've talked about an operating system. What do you make of their moves into these core spaces for Microsoft, the operating system and Office?

Ballmer: I mean, you know, competition is competition. I'm sure they welcome us into the search space, and glad to be there, and that's kind of the way capitalism works.

You know, so far we've done exceedingly well, I would say, competing against Google's applications. They've been in market two years, three years. And yet at the end of the day outside of free usage of Gmail, we've seen almost no uptake of their stuff, and I think the statistics verify that.

I don't know what they're doing in operating systems. They launched one, and then before it had any momentum they launched another. So, we'll have to wait and see. I don't even know what their operating system strategy is at this point.

CNET (Fried): So, when you see them on the Office side, is it more of when businesses talk about Google Docs, is it more just a bargaining chip? I mean, I know, for example, the City of LA is talking about using Google Docs.

Ballmer: I mean, look, I assume any time a customer talks to us about it, it's genuine competition. It doesn't mean that we don't do well. We've had a lot of people that were genuine competitors that we've done well against. We gain market--Linux is a genuine competitor, and yet we've built market share against Linux on the server, up to about 75 percent market share. Open Office, Star Office have been genuine competitors, and yet we've done pretty well.

So, we have another genuine competitor. This one is not any better than the ones that have preceded them. I mean, I've not seen anything from Google that makes them look better than the other guys we've competed with. But we take all competitors seriously. They're better funded. You know, they're making money hand over fist in the search business, so they can afford to, you know, foray, and even if they're not successful, they're well funded.

CNET (Wood): Moving on to hardware, are you prepared to exclusively tell CNET that the Courier Tablet is real and it's coming out in, say, June 2010?

Ballmer: No.

CNET (Wood): We've seen video, and it looks pretty amazing. I think people are getting really excited about this possibility.

Ballmer: Huh. No, I'm not prepared to tell CNET anything. (Laughter.)

CNET (Wood): Do you have any thoughts or comments on the possibility?

Ballmer: No, I really don't. I really don't. (Laughter.)

CNET (Wood): You don't have to give us an exclusive. You can comment in general.

CNET (Fried): Tablets and pen computers, obviously, you know, you guys...

Ballmer: We pioneered them with our partners, absolutely.

CNET (Fried): A lot of people have, you know--in the battle of the unannounced products a lot of people are talking about the Apple tablet. And I talked with some folks that, you know, basically the idea that Apple would eventually be the one to make money off a tablet computer, I think there's a fair number of folks in Redmond that would want to do themselves harm if that's the case. I mean, do you see a renewed market for pen-based computing and tablet computing?

Ballmer: Oh, there's definitely a market for computers that you can mark on. And if you take a look at the laptops, quote laptops, tablets, take a look at the machines that are coming out this Christmas, you'll find a number of machines which--most of which have a keyboard, but you can also--they're convertibles, you can flip them around, you can write on them, they're pretty nice. And we still have OEMs who make what we call slates. A slate is a tablet essentially without a keyboard. It's a non-convertible. We have people who make them. They're popular in certain application types.

So, I don't see that market going away, and certainly Apple--I'm sure Apple will bring a unique point of view. They tend to bring unique points of view to things. And yet we've got great people doing great stuff, and let's see what the competition has.

CNET (Fried): Obviously we're asking questions on the Kindle. You know, what about this e-book notion? Is that something that's interesting? Again, that's a market you guys were in. You had Microsoft Reader and protected books for compact devices a long time ago. Is it a market that you think is serious? What's the best device for it?

Ballmer: Obviously the number one reading device on the planet is the PC. The PC has passed print I would say probably. You know, for books probably people still more read on paper. For the things formerly known as newspapers, magazines, people primarily read documents, work documents, homework. People do a lot of reading on the PC screen. And we need to continue to improve the PC as a place to read, including making sure that content types, which are still primarily read on paper, can be read on the PC. And I think we'll see a number of the players who are doing dedicated devices take that as an interesting opportunity.

CNET (Fried): Obviously the most important mobile device is the phone. It's the one that sells in the largest volume.

Ballmer: No, that's not really true. I mean, just for the record at least smart device, the PC is the most popular smart mobile device today. But I'd agree the phone will be, the smartphone will be. Today's smartphone is still relatively smaller than the mobile PC market.

CNET (Fried): I mean, it's an area you guys again have been in for a long time, but I think you said as much to a group of venture capitalists, you guys have not moved as quickly in the last few years in the phone business as you would have liked. What does Microsoft need to do to get back into the phone business? Where would you like to be a year from now that you're not right now in phones?

Ballmer: It's all about, you know, shipping good products. I love our Windows Mobile 6.5 offer. We're launching the first batch of Windows phones with Windows Mobile 6.5. I think that's going to be a big step forward.

We're just going to keep (coming out with) new releases, new releases, new releases. At the end of the day, I think the model of a software company partnering with a lot of handset vendors is powerful. It's powerful relative to what you see from folks like Palm and Blackberry and Apple. I think it's a way to see a lot of variety and innovation, flexibility of form factors, prices, et cetera. Certainly we're competing with LiMo and Android in that realm. I think we've got the best offer of that crowd, and I think we've got the model right. So, we've just got to deliver against that.

CNET (Wood): So, can you help us understand the mobile strategy a little bit? I think most reviewers seem to agree that the Zune HD is superior hardware, hands down, against the iPod Touch. But there's a lot of concern that there's not an app ecosystem, and it's a little unclear whether there will be, whether Windows Mobile Marketplace will come to the Zune, and whether users of Windows Mobile 6.1 will be able to get the apps that are eventually developed for the 6.5 marketplace. I was wondering what your thoughts are on kind of that concept of whether now you need an app store ecosystem to really support an Internet device, and whether we can hope to see some crossover I guess between those app development ecosystems.

CNET (Fried): On the flip side, a lot of people say, wow, the Zune HD is a good device, you know, why don't the phones look as nice as the Zune HD?

Ballmer: We've got two primary focuses, Windows Mobile, Windows phones, and Windows PCs. Windows PCs have got a pretty healthy app ecosystem around them. You know, it's possible at some point it will make sense, quote, to make an app store, but nobody has any trouble getting apps. The whole Internet is designed basically for the Windows PC. That is the design point for the Internet. Part of the reason why you need so many apps in a mobile app store is to remap Web sites that were written for the PC to look good on a mobile phone, even though there's decent browsers now in products like the iPhone and our Windows phones, et cetera.

So, we do need to do a lot to encourage and facilitate an app ecosystem on our phones and on our PCs, and we will do that. You'll see that with Windows Mobile 6.5 and then continuing, and obviously there's a healthy ecosystem for the PC, and we want to take that forward.

What is Zune HD? Zune HD is a couple of things. Number one, Zune HD is a music player with a nice music service. By the way, the same software will be available on Windows phones and Windows PCs. You have that today on the PC. You'll see that in our phone environment as well, which is great.

And it's a nice piece of hardware. At least that's the general reaction. And I think it serves as a model for what our OEM partners can do with Windows phones.

It's not our plan to make a phone out of that piece of hardware.

CNET (Wood): Is the Zune HD meant to be a more far-reaching mobile Internet device or do you really see it as a portable media player that doesn't need to have e-mail and GPS and, you know, the flashlight app?

Ballmer: It's a nice entertainment device, and probably we will keep it positioned as a nice entertainment device, but, you know, you'll have to wait and see what we do with the next release.

CNET (Fried): Windows 7 is coming out. Microsoft has notably increased its Windows advertising in the last year. But you've had a lot of different messages from the Seinfeld stuff to "I'm a PC," Kylie. It seems like Apple still gets the benefit of owning the message by sticking with "we're cool, we're simple, we're safe." Can you talk a little bit about your marketing strategy, and like just personally, you know, what's your reaction when you see them constantly just beating you guys over the head?

Ballmer: What do you want me to say? They've done a very good job of marketing to their 3.5 percent of the market. I think they do a great job for their 3.5 percent, and I'm glad we're doing a great job with the other 96.5 percent.

I mean, at the end of the day the proof is in the pudding. We've got whatever the number is, 96, 95, take your pick, and they've got 3, 4, 5. Those are about the right numbers. And they advertise basically to that small niche of people who want their machines. And I don't take it away from them; they make a very good business doing it. And they're selling something like 10 or 11 million PCs a year, 10 or 11 million Macs a year, and we're selling about 300 million PCs a year.

So, we need to have messages that are appropriate to the vast majority of people, and it's fine. There may be 3 percent of people who sort of appreciate their approach.

CNET (Wood): And that seems to be part of the strategy is that there's a sense that you sort of pulled away from advertising in tech-specific arenas and gone to that much more mainstream approach. So, then is it OK that the tech crowd might find the ads a little bit funny or that's not the plan?

Ballmer: You mean the Apple ads? Apple is in charge of the Apple ads; we're not. I mean, our job is to make sure we keep a very healthy ecosystem, high volumes with Windows, tell our story. I think we're telling our story. If you want to be counterculture, you'll see to a counterculture market share or whatever they're trying to do in their ads. I think their ads have gotten--you know, they were I'll admit one could say cute when they first came out. Now I think they've just gotten kind of edgy silly myself, but, you know, I'm not unbiased on the issue.

CNET (Fried): You are taking one page from their playbook, and opening some Microsoft stores. Can you tell us a little bit more about what to expect from those? They're opening I think within a month or so?

Ballmer: Mm-hmm. The first store will open later on in October, and then I think another one within a week or two thereafter, and then we'll keep going from there. We want to have--you know, I think what we have found is particularly the way over the last four or five years the retailing of electronics in general has evolved in this country and in every other country. We're basically down to Apple and one large electronics retailer.

And it means it's hard sometimes to see cool Windows PCs in-store, because the large electronic retailer was Best Buy in this country, who's fantastic, or maybe a Markt in Germany or Dixons in the U.K. They have to keep a mainline set of inventory. And then the Apple store will carry, of course, the Apple inventory for that 3, 4, 5 percent, 6 percent of the market, whatever it is in a given country.

And we want to show Windows users the kind of selection and variety that may be important and may be mainstream-able, but may not be mainstream on day one. But it doesn't mean we're not going to have mainstream inventory as well, and it gives us a chance to tell the story, to tell the story of the PC, of the home that has devices that support three screens and a cloud, and we'll see. Two stores is the first two stores, and then we'll have the next two, and the two after that, and, you know, keep getting better.

CNET (Wood): So, let's ask a quick question about Bing. It's been fairly well received, and you've seen a slight uptick in Bing market share. What does it need to do to really make a dent in Google's position, or is that your plan? Are you kind of going to have slow and steady growth and see what happens?

Ballmer: Well, you've got to make a dint. I mean, Google has got--what does Google have, 85, 90 percent market share or something like that, at least of the revenue side of the market. They may have a little less of the query share, but pretty good--I mean, globally they have at least 80, 85 percent. So, yeah, we need to--we're going to need to gain share against Google.

In order to do that, we're going to need to continue to work on what I would call the basics. It's something that Google does well. That's really what they were built on. I think we have a chance to innovate and do some interesting work in user interface, and I think that's primarily what's marked the arrival of Bing so far and gotten the buzz and the small market share increases that we've gotten, but we're happy to have that happen.

And then we're going to continue to work on kind of more disruptive ideas on how technology and business will continue to shift in this arena. I mean, I think it's probably fair to say search has been one of the least innovative areas in the tech landscape over the last five or six years. It's worked well, but things work pretty much the way they worked five or six years ago. A few new content types have been added, to the market leader's credit, but that's about it.

CNET (Wood): Well, let's end with a very specific user question. I think a lot of people basically had the same question, and that is generally what's the plan? You've got all these great products, there's the Zune, Windows Mobile, Bing, Xbox 360, MSN, Online Office, and they're wondering, you know, when can we see these products be really integrated in a very seamless way so that people can live the M life, the Microsoft life?

Ballmer: Yeah, I'm not really sure what question you're asking. I mean, the products work in some cases quite well together. There's always seams that can be taken away. I'm not sure if it's a brand statement so people can say they can lead the M life or whether it's, you know, real issues. There are things. We need to have Zune across all the devices.

We're working to get that done. We need to make sure that the store works in a consistent way across the important devices. That's important. So, there's a set of things I think we need to get done and we're hard at work against.

I don't expect massive brand convergence anytime soon, because I think there are--you know, people do buy things for different reasons, and we're trying to support that. I mean, if we had called the Xbox the Windows gaming machine, it would have worked better for your question, but it might not have worked better in the marketing.

CNET (Fried): I think it's less...

CNET (Wood): A couple of years ago there was a great demo of the possibility of the Zune really integrating well with the Xbox Live, with the gamer tag, and so that you could sort of be doing updating.

Ballmer: It works.

CNET (Wood): And you've got all of that integration down, and now...

Ballmer: A lot of that works very nicely.

CNET (Fried): I mean, I think the user questions and sort of the sense of people watching is, you know, on the entertainment side nobody plays in as many places as Microsoft. You have stuff in the car, in the living room, on the go, the phone, the desktop, and yet sometimes the best integrated experience isn't from you guys, even though you play in all those spaces.

And I think for folks that want to see Microsoft succeed, that want that, there's sort of the "you guys are making all this stuff, why doesn't it work better together?"

Ballmer: Always an opportunity to improve. I mean, I'm not going to deny that there are opportunities for improvement. We'll get after them for sure.

CNET (Wood): Well, with that, we'll wrap it up and let you go. Thank you so much again, Microsoft CEO Steve Ballmer.

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