Ballmer outlines Microsoft's eight long-term growth bets

While Wall Street doesn't want to talk about anything Microsoft-related other than Redmond's bid to acquire Yahoo, Microsoft has lots of non-Yahoo-specific investments in its future.

Microsoft CEO Steve Ballmer outlined Microsoft's top eight growth targets during his annual "Strategic Update" for Wall Street analysts in New York on February 4. Ballmer repeated several times during the hour-long presentation that "growth will require investment." He noted that his view of what constitutes "long term" is "five to seven to ten years" out -- most likely a lot longer than the typical three-year timeframe typically envisioned by analysts and shareholders.

Ballmer's top growth picks are almost identical to the ones he outlined during last year's Strategic Update. On Ballmer's 2008 list of arenas where Microsoft believes it can sustain three-quarters of a billion dollars or more in new margin growth:

1. Windows on new PCs: It's not the fastest growing part of Microsoft's business percentage-wise, but Windows sales still remain one of the biggest chunks of Microsoft's total revenues. Ballmer played up "emerging markets" in developing countries as the arena likely to grow the fastest, but acknowledged that lower PC prices will reduce the amount Microsoft can earn per copy of Windows on new PCs in developing countries. Microsoft will continue to invest in R&D, marketing, the next version (Windows 7) and "building consumer excitement" here, he said.

2. Corporate desktop value: Ballmer played up th applications and services that Microsoft "upsells" to business users as a continued growth driver. He cited Office 2007, Windows Server (especially in the lower-end of the market), Dynamics ERP and CRM as examples of hot products.

3. Server units: Microsoft is putting a lot of eggs in its server-investment basket in its fiscal 2008 with its Windows Server 2008, SQL Server 2008, Visual Studio 2008 launch on February 27. Ballmer said to expect Microsoft to "democratize virtualization" -- presumably with its Hyper-V virtualization product due to ship in final form later this year. (For the next few months, Hyper-V will be beta code only.)

4. SMB (small/midsize business) wares: Microsoft is continuing to pour money into its online services on both the consumer and business side of the house and is expecting big payoffs, both through online-advertising on these properties, as well as through subscription sales of them. Ballmer said to expect Microsoft to introuce equivalents of Windows Live for businesses, but didn't say more on that front. My guess: Ballmer's talking Forefront Online, Business Intelligence Online and other forthcoming Microsoft-hosted services which the company will unveil in the next 12 months.

5. Portals and search: Sounds like Microsoft still isn't giving up on MSN and Live Search. Ballmer sees them as the cornerstones for online advertising.

6. Online advertising: Microsoft wants to buy Yahoo to grow its online ad business. But in response to an analyst question, Ballmer told Wall Streeters that even if the company is thwarted in its takeover bid, it will continue to invest heavily in its own online-advertising assets, as the online services business is typically advertising funded.

7. Xbox: When Microsoft talks about hardware, it mostly is talking about Xbox. Ballmer said to watch for Microsoft to continue to push for broader Xbox acceptance in markets where it has been less popular, like continental Europe and Japan. Also watch for the company to do more outreach to non-classic gamers in order to continue to build Xbox market share.

8. Windows Mobile: To say Microsoft hasn't cornered a huge piece of the mobile-phone market is an understatement. The Softies have said they know their weak spots and have plans to make Windows Mobile 7 and Windows Mobile 8 more consumer-friendly with features like touch and gesture recognition. Microsoft also is working on more mobile apps and services to make Windows Mobile more compelling. They need to, with Apple's iPhone and Google's Android platforms breathing down their necks.

Ballmer emphasized there are a bunch of other smaller "nascent" markets where Microsoft will continue to invest for the long term, including healthcare, Zune (especially in entertainment/music services for the player and mobile phones) and the Surface multi-touch tabletop. Ballmer said Microsoft is pushing hard to get the Surface technology into consumer products, not just in industrial-strength tabletops.

Interestingly, Ballmer didn't say much about IPTV, that never-ending sink hole into which Microsoft has been pouring money for years. He also didn't talk up Windows Genuine Advantage/DRM and other anti-piracy mechanisms as being a big area of future investment.