Ballmer opens up on Microsoft's future

What is Windows' strongest competitor? Will Microsoft expand successfully beyond the PC? Find out what Steve Ballmer thinks

Microsoft chief executive Steve Ballmer hosted a Q&A session for a handful of UK journalists in London on Sunday and ZDNet UK and sister site silicon.com were there. Ballmer opened the session with his thoughts on the future of Microsoft and the software industry.

"I have a fundamental optimism about the future of information technology and the role Microsoft will play in that future," he said. "The two big drivers are Moore's Law and innovation in software -- which is where we come in. I see integrated devices going to many more people. The number of smartphones sold is relatively small -- that number will grow."

On new markets and products he said: "When we're not first our goal is to be the first to get it really right and if not the first two then the first to make any money off it. We have good competition, we're getting back to a rational environment and we have settled many of our legal issues around the world. We trust that [the EC case] will resolve itself."

Below is a summary of the main topics covered in the Q&A including Ballmer's views on Linux and the never-ending security battle.

Q: Doesn't the EC case represent a threat to Microsoft's very business case by potentially restricting your ability to enter new markets by shipping products with Windows?
A: "I don't think there's anything in the case with the EC that discusses our entry into new markets. This was resolved in a satisfactory way in the US. We'll wind up with some kind of a framework. There is competition and there’s always been competition. Maybe it’s easier to understand that today than it was a couple of years ago. [On the appeal to have the EC Media Player sanctions suspended] I don't have much to add beyond what we said in court."

Q: How much progress do you think you have made with the Trustworthy Computing security programme?
"We'll be working on Trustworthy Computing for the rest of my days at Microsoft, which I hope are many. There are bad people out there in cyberspace and they are not going to go away. We are going to have to be vigilant. That's going to last for the duration. The bad guys only have to be right one time and we have to try to be right every time. We have made three years [worth] of progress, if not more. It's not like five or six years ago viruses didn't exist. More damage has been done in other periods of time [than today]. The last 12 months was a better 12 months by a margin. I do believe in the next two to three years we will get good enough and customers' practice of implementation will get good enough."

What about security for all the customers not on XP?
"We can never say to people the answer is to get the most recent version. That's why we talk about the need for isolation. We need to have ways of isolating those systems -- that's some of what we've done with XP SP2. In corporates the number one way people get viruses is in fact with machines that are on their networks sometime and off the network other times. How do you check before you re-introduce someone to the network? Do I want to make sure they have all the patches implemented? It's a form of isolation. [we hope to have it in Windows] certainly by Longhorn but the goal is before Longhorn."

Does the rise in popularity of other browsers such as Firefox and Mozilla reflect user dissatisfaction with the lack of innovation in IE in recent years?
"The focus on security has pushed back some of the innovations. Windows XP Service Pack 2 (SP2) has pushed things out, but in fact SP2 really was a major browser release. It's a funny thing for me to have to defend our strategy. Usually we're saying, 'We¹ve got all this stuff in terms of new features,' and people are saying, 'What about security?'…Do I know that there is list of features as long as your arm that people would like? Sure. But we had to focus on security and reliability."

What are your plans for anti-spam technology now that Sender ID has been knocked back by the rest of the industry?
"We think that technology is a very good technology. We think we're very open in the way we tried to licence the technology, and we were rebuffed. We're doing a little bit of re-thinking but the technology and the way we've done it, we still think is spot on."

Despite digital rights management (DRM) technology, isn't piracy still rampant?
"We've had DRM in Windows for years. What's the most common format of music on an iPod? Stolen. Most people still steal music. The fact that you can buy it and it's protected doesn't affect the fact that most people still steal. I'd love to say all problems have been solved, whether it's iPod or iTunes -- where Apple has done some nice work, no doubt about it -- but the truth of the matter is we can build these technologies, but as long as there's alternate forms of music acquisition, there will still be ways for people to steal music.

"Part of the reason people steal music is money, but some of it is that the DRM stuff out there has not been that easy to use. We are going to continue to improve our DRM, to make it harder to crack, and easier, easier, easier, easier, to use. My 12 year old at home doesn't want to hear that he can't put all the music that he wants in all of the places that he would like it."

Are we close to a tipping point with digital media devices and home entertainment?
"I think we are close to the tipping point, to where we may get a device that can take on critical mass. There will be an explosion in demand. People weren’t really sure where these new devices fitted in. At two hundred bucks, maybe, but at three hundred or four hundred bucks, it was too hard to bootstrap the device type. You mention Apple, and with great respect for Apple, there's no way anything gets to critical mass with Apple, because Apple just doesn't have the volumes. They don't have the volumes anywhere in the world; they don't have the volumes particularly in some countries. The critical mass is going to have to come from the PC, or the next-generation video device."

Are you interested in the cable set-top box market?
"[Not in the cable-top boxes themselves] But Comcast in the US is using our cable set top box software. We're interested in very basic end-to-end IP-based set-top box devices. We’ve seen a surge of interest from the telcos, as everyone is looking for a triple play -- voice, video, data."

Microsoft's smartphone has been a slow seller while Apple and other companies have stolen a lead in portable music player markets. How will Microsoft tackle that?
"Over time most people will carry a phone that has a little hard disk in it that carries lots of music. Mobile phones are about 600 million units a year. How many devices do we want to carry? We have to have a more compelling value proposition. BlackBerry has a niche market position but it's not a very sticky device. It allows you to make bad phone calls but it's a good Exchange client. We will see an explosion of larger keyboard devices."

How long before people recognise Microsoft as a broad software company and not just something on the PC?
"I hope we can accomplish that over the next couple of years."

What is the focus with Xbox?
"[It's got huge market share] It's not making money but that's our problem. If you take a look at market share we're neck and neck with Sony in the US and neck and neck or ahead in the UK. But we're nowhere in Japan."

Are you seeing an upturn in IT budgets and investment?
"Starting in 1998 IT budgets got ramped up for Y2K and then the Internet bubble. Then there was a two-and-a-half year drying out period. We're now in a stable place. IT directors are making good cost/benefit trade-offs. We're seeing good levels of investment in corporate IT. We see lots of growth in the enterprise server software market."

How do you see the threat to your licensing and pricing policy from Linux, piracy, price erosion and selling cheaper versions of cut-down Windows in some developing countries?
"[On the Hindi version of Windows] If we get paid for anything we raise our price. There is no price erosion. Our price in China is exactly the same in the UK. We offer a good product, good value, good price and good total cost. This [cheap version] is designed for poor people in poor countries. Today most people are paying less in emerging markets than in the UK. Why? Because most people pirate."

How much does Microsoft lose to piracy?
"$6bn to $8bn in sales. China alone is multibillions. IP rights are not well enforced. Yes it bothers me. All developed countries should be concerned we have an imbalance here. It's a big issue."

Is Linux more of a marketing than a technology problem?
"Sometimes there is also a political dynamic. Unlike every other competition we've ever been in we were quiet and shy with the facts. Two years ago we were grappling with this mysterious competitor. It feels more like a normal competition nowadays."

Is Linux your number one competitor?
"What is the number one competitor to Windows these days? It's Linux. By numbers we are winning and we have gained market share in the server space -- although so has Linux. People are starting to realise free is not free. This stuff does not have low total cost of ownership. We know what we're doing. We'll continue to gain ground."

Are you disappointed with the delays to Longhorn and will the phased rollout of some features slow down adoption as people wait for the full version?
"Longhorn has a schedule now and it will ship in 2006. If we'd never announced that we will conceptualise it people would still say it’s the biggest best Windows we've ever released. We'll get early adopters and some people will wait."

What are your thoughts on the decision not to buy SAP and are acquisitions still on the agenda?
"Ultimately we did decide to pass. It's funny because we were pretty good on confidentiality on that deal and the world really wouldn't have known about it if it hadn't have been for the Oracle PeopleSoft case. We're always looking at acquisitions but we don't have cash earmarked for acquisitions. Almost all of those [big deals] are done for stock anyway. We'll return the $75bn to shareholders and if we can return even more we will."