QandA: Ballmer Bites Back

Security woes and search setbacks. MBS foibles and EU meddling. Product delays and rival upstarts--all legitimate explanations why Microsoft could be blue. But it's not. There is, however, something that's got the company's normally irrepressible CEO, Steve Ballmer, a little more than agitated.

That's a new threat from search leader Google, which was one of the subjects at the center of a contentious discussion with top lieutenants. (The meeting was so rambunctious that this editor was asked to move away from the room where the gathering was taking place for fear that shouts and screams would spill over to the adjacent foyer.)

On that day in late May, Ballmer, who was 30 minutes late for a one-on-one interview in his own office with VARBusiness, was in no mood for easy banter. Despite posting record profits throughout fiscal 2005, driving SharePoint and Small Business Server to new heights, and growing its share price by nearly 25 percent, things have been tense on Microsoft's campus. There's still a new version of SQL to get out the door, a product set for Longhorn to sort out and a mountain of other challenges, too. Despite progress in security, for example, everyone at Microsoft realizes the company remains only a mouse click away from a virus that could cost customers billions from putting their faith in Microsoft technology.

Amid that backdrop, VARBusiness sat down with Ballmer in his spartan office in building 34 on the company's sprawling worldwide headquarters in Redmond, Wash. Normally a gracious host with an insatiable appetite for talking about his business, Ballmer offered neither his usual lengthy answers nor a complementary bottle of water despite taking two for himself. Told at the onset that Ballmer was late for a meeting with Microsoft co-founder and chief software architect Bill Gates, this reporter tried to give Ballmer something to bite on. Instead, he took chunks out of everything. He argued over Apple's influence in business, dismissed Google as nothing more than a search company and refused to accept that customers have grown wary of major software upgrades. He also rejected the notion that his company would build a bigger global services arm or the suggestion that Salesforce.com is revolutionizing software delivery. In sum, Ballmer bit back at nearly every question posed to him by VARBusiness. In doing so, he revealed volumes about the pressure he is under and the challenges before the company.

VARBusiness: In the past two years, there seemed to be more anxiety here regarding open source. It's obviously still a concern to you guys, but one senses less anxiety than before. A lot less. With the commercialization of Linux in Red Hat and Novell, it feels as though you are competing against other competitors again and not a movement. Has Microsoft successfully contained the open-source threat?

Ballmer: Well, we are successfully competing--reasonably successfully competing--every day with Linux. We've grown market share in the server business this year. We continue to have a nice position on the client. So we have done well competitively. But Linux has done well competitively, too. Linux has also gained some share this year, actually gained a little bit more than we have. But we both have gained share. And I think we understand how to compete with Linux. I think we know what it means to have better products. As you point to the commercialization of Linux, which is going on, we are not competing typically versus "free." We are competing much more often with something else that has a positive price. So we are in a more normal competition.

VB: We are coming up on the 10-year anniversary of the launch of Windows 95. That, of course, kick-started one of the most successful upgrades in the history of the business, but as we near the anniversary, it seems that the big-release phenomenon no longer works as it once did. Is the era of the blockbuster upgrade over?

Ballmer: Oh, I don't think so. I think things go in waves. Blockbuster products are very much a part of this industry. Hey, iPod was a blockbuster product in one of its releases. So, I think the blockbuster product is still alive and well. And I think we will have [some]. Our Office upgrades tend to be blockbuster releases, maybe not at the scale that Windows 95 was, but there have been no blockbusters with the scale of Windows 95. It was not only a great product, but from a market condition, market timing standpoint, it was almost perfect.

VB: Soon you'll take center stage at your partner event in Minneapolis. What message do you want them to walk away with this year, and will you tell the crowd that Microsoft will bump the partner budget up by another $200 million like you did last year?

Ballmer: I think the key message I want them to take away is that we have a range of innovation coming to market, and those innovations are going to drive incredible opportunities for them. You know we have stuff coming in BI, real-time communication. We have stuff coming, of course, with Wigby and Yukon. We have new things coming with SharePoint. We have new things coming in security. I want them to mostly understand that we are innovating, and that innovation is good for customers and creates a lot of partner opportunity.

VB: You have a plethora of products for customers to choose from and plenty of innovation, and they are clearly going in that direction. But, what about the millions of customers that sit with older versions of Windows and Office despite all the innovation that you guys bring to market? Why don't more customers upgrade?

Ballmer: Customers do upgrade. They all upgrade. Everyone. The only question is, "What's the speed?" It's an important topic, in fact...

VB: Is the better question, "How do you close that gap?"

Ballmer: You can say, "How do you cause more people to upgrade more quickly?" People do upgrade. The only question is, are those cycle times lengthening or not.? In the enterprise, I think those times have actually stayed about the same. It has lengthened for desktop users, and it has shortened for mobile users. That's basically the case. People change the machines, the operating systems, the applications much more quickly on the laptops than they do on the desktops. That's partly the nature of the user community, partly the nature of the hardware--it's the nature of a lot of things. In the consumer space, what we are really seeing happening is a phenomena of people having multiple machines. A new machine has all the new software, and the older-machine people tend not to touch them as often. So I do think we get some lengthening of the cycle, but mostly because people have more computers, and they are using them for a broader set of purposes. Do I think those cycle times can come down again? Yeah, I think they can. Can we get the cycle times on software to be faster than the cycle times on hardware? I think that's the biggest issue, and I think we are attacking that certainly with a bunch of innovations that make it much easier to upgrade and deploy new software on new machines, whether that's the operating system or the applications on top of them.

VB: Does Salesforce.com make you rethink anything? Upstage or accelerate anything?

Ballmer: Sure. Yeah. I mean, it's another interesting data point. It's not like they are not adding that many new customers. In the CRM space, it looks like a lot of customers. But relative to everything else that is going on in computing, they don't have that many customers. I mean, what are they adding--700, 800 new customers a quarter?

VB: Security threats--fewer megaviruses, but every day brings more rogue code into customers' mailboxes. Are you winning the war? Give me an assessment as to how you think you're doing.

Ballmer: The day you say, "You are winning the war," is not a very good day. It's fair to observe the facts. The facts are the world has been relatively safer, cybersafer, over the past 12 months. Some of that has to do with some of the work we have done, some of that, probably, has to do with what's going on in the hacker community. But the world has certainly been relatively safer in a cybersense over the past 12 to 18 months.

VB: Similarly, assess Microsoft's stewardship of MBS to this point. Has the deal worked out as planned? Why is it not perceived to be as successful as you might argue?

Ballmer: Well, I thought we would have had greater acceleration at this stage than we do. Relative to market, we are doing fine. Relative to initial aspiration? We have opportunity when you say it that way. You don't know what you don't know when you buy something. And we didn't find things in the company, but we have learned a lot about the market. I spent the last two days just with out MBS guys, first in Fargo, talking about stuff internally, then out in the field. And I am really bullish. I think we have done a fantastic job. I think we have a great product lineup. I think we have a wonderful concept of how to make our product strategy strong relative to vertical industries, which I think is important. I think we have our sales force purring. I think our partner model is in the right place and in the right shape. And we are driving along, and I think it's going to be a great year in terms of business acceleration.

VB: Google--Obviously, the growing competition or perceived competition between you two guys that takes up more and more of your time. Why is this company giving you guys such fits?

Ballmer: I think they got off to a good start. Hey, lot of reasons for that. 20/20 hindsight, wouldn't do it again, of course. But, I'm confident. We just had a long meeting--the meeting I was late for you with, unfortunately--in which we were talking about some of the big options. We love what we are doing, and our portfolio, and we just have to crunch it out.

VB: Where is their vulnerability?

Ballmer: Look, they still do only one thing: search. Nothing else they have done is all that successful. And their search experience has gotten worse in the past 12 months, not better.

VB: How so? The paid, the whole phenomenon? The complexity of what they are trying to get their arms around?

Ballmer: Their relevancy as measured objectively in the past 12 months is down. I'm not saving they just [caved]. But they haven't gotten better. And at the end of the day, that's what people are paying...or using the service for. And we have made big strides, and I know we will continue to make big strides.