CES Q&A: Ballmer and Gates on Vista, Windows Live

New operating system called 'catalyst' for growth in digital lifestyle

LAS VEGAS -- Shortly before Microsoft Corp. Chairman and Chief Software Architect Bill Gates gave the opening keynote address at the 2006 International Consumer Electronics Show yesterday, he and CEO Steve Ballmer met with the IDG News Service to discuss how the software company's new emphasis on Internet services, particularly via Windows Live, plays in the consumer market. Gates reviewed aspects of the company's Vista pitch to corporate IT.

The following is an edited version of the conversation.

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I thought we'd take this opportunity to give a global update to our readers about what Microsoft is doing in the "digital lifestyle" realm. The Gates-Ozzie (Microsoft Chief Technology Officer Ray Ozzie) memo that leaked out in November, on Web 2.0 services and Live, was widely examined in regard to the business realm but not so much on the entertainment and consumer side. Ballmer: On the consumer front, the end-user front, the digital lifestyle front, I actually think we are in the early phase of the most significant inflection point in many years. It's an inflection point where I'd say really early adopters have lived the full digital lifestyle but we really haven't gotten to mass market.

I think we're at a point where in the next 12 to 24 months we go from being early adopter to literally an explosion. In some senses, I told a group of retailers today that it's a little bit like 1995, when the PC went from being early adopter to mainstream, with Windows 95 as a catalyst. I happen to think that Vista is an important part of the catalyst, to go from early adopter to mainstream digital lifestyle. An important part of that, of course, is the PC. But also important parts of that are the gaming system, the TV system, the phone -- and the unifying factor almost across all of these experiences, frankly, is the service infrastructure.

I think a lot of what we're trying to do with Live is support this transition of the world to what we call a mainstream digital lifestyle.

Is it almost wishful thinking on your part to think that the digital lifestyle explosion has not happened already? Look at iTunes and Google. Ballmer: No, no, many things have certainly taken off. Don't get me wrong, the Internet isn't just taking off today, but digital music is still in its infancy. People like to talk about iTunes, but it's still in its infancy -- more people don't have digital music as a fundamental mode of operation than do today. That's why I say we've had a surge in early adoption, [but] in some cases, we haven't even had a surge. Take HD -- we're still under 10% penetration in the U.S. of high-definition video.

It's not wishful thinking, really, because it's an industry phenomenon: It applies to us, it applies to Apple, it applies to Google, it applies to Yahoo, it applies to Samsung, Toshiba -- you name it.

I'd like to get a sense of how important the consumer arena is for Microsoft's growth. Can you quantify it? Ballmer: It's very hard to attribute revenue to segments. When we sell a Windows machine, I can't tell you whether it's being used for consumer purposes or [other] purposes. Probably a pretty fair guess is that something like 30% to 40% of our business is consumer, very small-business related, and maybe 60% of our business is business-related.

How do you see that changing over time? Ballmer: Probably in the next year or two we'll see pretty good escalation on the business side because of the work we're doing with Office 12 and some of our servers. At the same time, with Xbox and IPTV and what we're doing with Live and MSN, I expect to see a rapid acceleration also on the consumer side. In a few years, hard to say, my guess is the consumer side will grow as a percentage.

Innovation is a hot topic, especially with people in the U.S. seeing more competition from Asia. And also within that realm, Microsoft is a challenger in many aspects in the consumer arena. What are you doing as CEO to drive innovation? Ballmer: I think what we're really trying to do is to first make sure our people understand that at our roots, we are a consumer company. Our strength has always been winning the hearts and minds of end users and developers. I say end users are at work and end users are at home and a lot of places, and that we're committed to that base and we want to make sure we innovate for that base.

We've had to say to ourselves we need to continue to enhance our skill sets on the consumer side. Certainly one of the big things I think we've accomplished with Xbox is that we've built out our capacity on the design-sensibility side, we've built out our capacity on the consumer marketing side.

The Windows Media Center edition is positioned as the hub for the digital home, but Xbox has enough processing power and connectivity to also act as a hub. Do you see a sort of convergence between the two devices? Ballmer: Look, in a lot of homes Xbox will have an important role, in a lot of homes Media Center will have an important role, and in a lot of homes both will have an appropriate role.

We don't make PCs. We do make Xboxes. They are very different business models, so it's hard to say they'll converge. Does that mean that the PC will continue to run a new, and different and broader set of games? And new and different content, the kind of stuff we featured in our online spotlight with Media Center? At the same time, Xbox is going to continue to pick up additional capabilities that people will think of as PC-like and maybe even some day run more and more PC-style applications.

I see them as complementary, and I think that in various homes for various reasons one or the other will be a little bit more central. And there are certain kinds of things you do from a two-foot interface, with a keyboard, with a mouse, that you just aren't going to do from a 10-foot user interface. And so, in a sense, I think that the more logical ubercontroller is the one you can get up close and personal with.

During the holiday season, there were various reports of shortages of the Xbox. Was the shortage a marketing effort to create some buzz, or was it a sort of logistical glitch or miscalculation? Ballmer: Neither one. We knew all along that if we wanted to launch this holiday, we'd only get a certain number of processors and graphics chips. We guessed it would be a lot but probably not enough to fill demand, and we said despite that fact, we think can get enough to justify going ahead and launching it for this Christmas. So -- not a marketing ploy. But it's also not like there was some glitch. It was enough to go ahead.

One thing you're talking about here at CES is partnerships, and it's widely known that Microsoft talked to Time Warner about AOL. Now there are reports you offered to buy Yahoo. Did you, in fact? Ballmer: I haven't seen the rumor. It's not true, but I haven't seen it. I mean we had discussions eight years ago about whether we should get together [with Yahoo]. But it's probably been eight years since we had a discussion like that.

What would you be looking for in an expanded relationship with Yahoo or another search and services portal? Ballmer: We're in the business of trying to satisfy end-user interests to connect with information and people online. We think we have full capability to go do that, and we're in the business of trying to monetize that through advertising and subscriptions. But in each case, we'll ask ourselves where would working with other parties [help].

To go back to Ray Ozzie's memo and the Web 2.0 discussion, what are you doing to sell the developer community on the idea that you're embracing Web 2.0 and to overcome a perception some people in the developer community have that Microsoft is a bit inflexible when it comes to tools that can be used to develop on your platform. Ballmer: That's not an issue I've heard at all. People think we have the best tools for developing Web-style applications in the world. And certainly with the stuff we brought to market with our Visual Studio release this year, I think people just say that our visual Web development tool has taken further steps forward in a pretty dramatic way.

I think that what people are saying to us is, "What is the full complement of service capabilities that you'll make available to us as developers up on the Web? How does that let you integrate with important applications offerings that you have, Microsoft? How does it let us do our own service offerings, whether it's the stuff that we're doing with mapping or calendars or identity or mail or IM and presence?" There's a whole bunch of these services, and people are really saying to us, not how flexible, but how quickly are you going to let us add in, and what's that going to look like -- and we're moving as fast as we can.

At CES, you're going to unveil the first phones that can make Internet-based calls using your Internet-based chat software. Microsoft is making progress on the telephone front, but you have a pretty hearty competitor in Java and in Linux. How are you confronting that competition? Ballmer: First, there's two classes of mobile phones. There's the stuff we're announcing here with Uniden and Philips, which are not cellular phones. They are cordless phones that work in the home and connect in VoIP style with our instant messenger, Live Messenger software. And there's really no Java/Linux competition [there].

The second area is mobile phones that work on a cellular network where really the competitors today are, No. 1, dumb phones. Dumb phones basically don't run anything; they don't run Linux, they don't run Java.

And then I'd say there's a few contenders above that. Some people will do Linux phones with the Java APIs; there's the Nokia stack, there's the Microsoft stack, and somebody might say there'll be a Palm stack. And there's the BREW stack -- that's important. And a lot of the guys we talk to, the people that make these devices as well as the operators, see a lot of virtue to what we have to offer. I think we're going to do really quite well, but we're still in the middle of a dogfight. I don't feel like we have any disadvantages.

You are going to be giving a new demo of Vista in an hour or so, and among the new features you're going to be talking about is how people can organize and share digital photos. Gates: Yeah, people will get to see more of the media player and the photo capabilities, and some of the general UI than they've seen before. Of course we're still refining this stuff. We're getting good feedback -- [we] should get that all right, before we have to totally lock it down. But you're going to see Sidebar, you're going to see a new version of that.

Is this part of a broader effort on your part to allow for what people are calling the social or interactive Web -- for example, the type of thing Yahoo is doing with Flickr, for sharing and organizing photos over the Web? Gates: Well, it's complicated. Everything you do you want to be able to project out onto the Web, and if you change it, you want to be able to put notifications out onto the Web. Some of this stuff we have in Windows Live, where you can take and publish and do spaces, and Office Live is where you can do SharePoint.

Some of it is just built into Windows itself. The big thing in Windows is organizing the local library and setting that up, and then Windows Live gives you a way of replicating that to other machines and sharing it that we're actually not showing tonight and that actually comes out as a Windows Live feature even before Vista comes out. But then it works particularly well with Vista when that comes out.

When you talked with Jon Udell from InfoWorld a few months ago, you mentioned that Vista is going to have the fastest IT adoption curve of any Microsoft operating system yet. Why is that? Is it because of management and security features? A lot of the presentation, communications and WinFS stuff has been detached from Vista and made backward compatible with XP, so what do you think will be the reason for the fast deployment of Vista? Gates: We have a ton of features that are IT-specific. Take for example the issue of how many Windows images do you have to have, where you have some different device drivers and some different BIOSes and things like that.

Vista's the first one, where you can effectively have one image and then it binds to the other pieces. Before, you had to quit all these different Windows images, and having the machine associate to the right one was really very hard. And the whole way that when you get a new machine in, a corporation can put the image that it wants on the new machine is just dramatically better.

Listen to an InfoWorld audio interview with Gates.

Copyright © 2006 IDG Communications, Inc.

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