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CEO Forum: Microsoft's Ballmer having a 'great time'

It's a good thing that Microsoft CEO Steve Ballmer has so much energy.
He recently introduced two key products designed to strengthen Microsoft's control of personal computers: the Vista operating system and the Microsoft Office 2007 suite of applications.

Strong starts for each helped fuel a 65% profit surge in the just-ended quarter.

Efforts to expand into other fast-growing markets pose big challenges. The Zune music player has made scant inroads against Apple's iPods. The division that includes its Xbox 360 video game console lost $315 million in the quarter. And MSN Search attracts 10% of online searches, according to Nielsen/NetRatings MegaView Search.

Now Ballmer, 51, must chart a course for Microsoft (MSFT) as Chairman Bill Gates prepares to give up his day-to-day role next year. Ballmer says he's confident his investments will pay off over the long term as rivals such as Google take the early lead in emerging businesses on the Internet.

Ballmer was interviewed by USA TODAY's David Lieberman at the sixth USA TODAY CEO Forum, in conjunction with the University of Washington Business School. The interview took place in front of an audience. These are edited transcripts.

Balmer on becoming the CEO

Q: There's no CEO school. How did you pick up what you needed to know?
A: I'm the only person you'll ever interview who has been the No. 1 or No. 2 guy in (a company that has grown from) 30 people to 77,000 people. Every day, I've had a bigger challenge than I had the day before. I've been at it 27 years. I will say the job of being CEO was more different than I ever could have guessed when Bill asked me to take it.

Q: In what way?
A: Just flipping around from junior partner to senior partner, you really feel a different kind of an accountability, as amazing as that might sound. I never would have believed I could feel more accountable than I already did for Microsoft. And the CEO in a lot of ways becomes the icon for many things in the business. The CEO establishes culture. There's just a set of subtle twists that I really didn't have my mind fully wrapped around until two months or three months or four months after Bill actually asked me to take this job.

Q: But it was trial and error.
A: No, there were some guys from McKinsey & Co. that we were using for some consulting projects; they were trying to be helpful. They said, "We're going to introduce you to three CEOs, and you can learn from them." As it happened, one of them was (former Enron CEO) Jeff Skilling. I'm glad I didn't learn everything I was supposed to learn from him. (Laughter.)

I had lunch yesterday with Jim Donald, who runs Starbucks. You sit there, and you exchange stories, and you learn from other guys' experiences. "How do you do that? How much time do you get? What are you trying to do at your board meeting? What's your strategic planning process look like? What are the cultural issues? What are the PR issues? How does crisis management work? What's the best way that you've found to communicate internally, externally?"

Everything you do adds to the experience.

Q: Are you having fun? It sounds like some of this could be stifling.
A: I have a great time doing what I do. We get a chance to change the world through the kinds of products we build.

I have no excuse; if I don't like my job, I guess because you're the CEO, you should change your job so you like it more. And you go, "OK, well, I'll go add somebody to help me with that; boom, let's go do it." So I do enjoy what I do.

On dealing with the competition

Q: A few years ago, the Justice Department investigated Microsoft and charged it with anti-competitive practices. Now, you're asking the Justice Department to look at Google's deal to pay $3.1 billion for Internet ad company DoubleClick. Do you see at least a little bit of irony here?

A: In all things that are emerging, there are questions to be asked.

If the regulators decide there's an issue there, they'll take a look at it, and if they decide there's not, so be it. I do think that it would be worth the regulators taking the time to understand this market, much the way they took the time to understand other parts of the technology business, because the whole future of media and advertising will move to the Internet.

What we think of as television today, what we think of as newspapers, magazines, you name it — all of those things are going to move to the Internet and be funded by advertising. And so we're talking about a pretty important part of … people's basic lives.

Q: Can you give us some insight into your thinking with DoubleClick? It would have done a lot for MSN, but you let Google outbid you.
A: No, no. You don't know that. You know that they signed a definitive agreement to buy DoubleClick. That is the one factoid that is known. That's the only factoid I'll confirm, what you know. (Laughter.)

Q: Let's broaden this a bit then. What type of future does MSN have? It's in third place, and that's a tough place to be in the search market.
A: Well, in a way it is and in a way it isn't. Online activity is really quite fractured. Microsoft has the most visitors. Yahoo actually has people spending the most total time with them. And Google makes the most money.

The real question is what's going on in the commerce and advertising side. That is not very fragmented. Most websites rely on DoubleClick or Google or Yahoo for our stuff to run.

Q: There's nothing that you have to change to become more competitive?
A: We've got a lot of work to do. Let's just start with the fact that at the end of the day, since this is a business school, people probably will say that the scorecard says, "Who makes the most money?" We don't (make the most money).

There's a whole lot of opportunity to innovate on the end user side, and we're only scratching the surface. Today, a very small percentage of all advertising has moved to be essentially online. As TV experiences, video experiences, radio experiences move online, there's going to be a lot of innovation on the advertising side.

Q: You must have some time frame when you expect MSN to become profitable.
A: Well, we've been profitable. We decided to take the business to be less than zero profit because (we're) making the R&D investments and the sales and marketing investments that we think are necessary for the long term.

Above all, I would say one of the things I believe in that has made Microsoft a great company is we take a long-term view. It took a long time for Windows to reach critical mass. It took a long time for music players — not the iPod, but for music players — to reach critical mass. The guys at Google were at it, what, eight or nine years before they really reached critical mass. And so one of the keys in our business is not to be impatient in the wrong way. I've seen that kill a lot of other companies in our business.

On management

Q: You're a strong personality, and so is Bill Gates.
How do you prevent groupthink from setting in?
A: It's a big problem in any organization of any size. And yet, it's also a big opportunity. If you really want to sail your ship this direction, you want enough groupthink that people actually sail with you, and not so much groupthink that people don't do other things innovative on the path, or that people won't second-guess fundamental assumptions before you set course. But once you really set course, you really don't want a cacophony that prevents progress. I actually think we've had a very good balance. If anything, I think Microsoft tends to err on the side of having less groupthink and more cacophony than most other places.

Q: You don't find you've got a problem with people saying, "Sorry, but I really think you're wrong here"?
A: That happens all the time. From 10 this morning until I came over here, I got more "Steve, that's wrongs" than I got "Steve, that's rights" today. It was two to one, "Steve, that's wrongs." (Laughter.) You asked me, what's our business, and I said horizontal software, but we go to market in four ways. I would tell you that most companies in our business never go to market in more than one way. IBM is an enterprise company. Google is an advertising company. Apple is a hardware company. They're one-trick ponies, because there is a lot of groupthink in all companies. I think we've actually done better in saying we're going to have (more) multiple ways of thinking than any organization in our industry, and I count that as one of our great achievements as a business.

Q: Do you have any formal processes to be sure that you're getting the best ideas from everybody, or is it something you just count on?
A: No, there are many checkpoints. We have four leaders of the business who see it through different eyes. We have a research group that sees things through its own eyes, and the eyes of university professors and academics, because there are eyes and ears out in the academic community. We have the eyes and ears of our finance group, which is out talking to start-up companies, venture capitalists, private equity, alternative business models, what's coming, what's on the horizon. We get our customers' perspective. And you can get that pretty unfettered. It doesn't mean we always do everything right. Really understanding the power of advertising as an Internet business model we came to later than I wish we had. That's the No. 1 thing I regret. We underinvested in some opportunities for a while. So, it doesn't mean we get a perfect outcome at all times, but we certainly have a lot of formal checks and balances in our system that push us along.

Q: One of the interesting things about your career is that you and Bill Gates have really been kind of married all these years.
A: Longer than I have to my wife, that's correct. (Laughter.)

Q: And marriages go through their ups and downs. Have there ever been times when you felt like throttling the guy?
A: Sure, and vice versa; both are true.

Q: How do you deal with it?
A: We were learning to find a pattern of interaction that would let us be partners and be married, but we changed the state of affairs. When I came to Microsoft, I was a friend. We had never worked together. We had a crisis after a month, but because it was important enough and we're dear enough friends, we worked through it.

At the end of the first year, we really had to say: Is this permanent? And there were some things we had to work through. And then for many, many years, Bill was kind of the senior partner and I was the junior partner. He asked me to become CEO in '99, and I said, "Do you really want me to be CEO? If you do, I'll do it. But don't ask me to be CEO if you really still want to be CEO." He says, "No, I still really want you to be CEO." And neither one of us really kind of knew what to do differently. So, he probably tried a little bit too hard to have nothing change, and I probably tried a little bit too hard to have everything change. That was just a transition that we had to go through. But each time, because we love what we do, we love Microsoft, and because we're such good friends — I'd say we're like brothers, as opposed to husband and wife, that analogy works a little bit better. (Laughter.) Brothers stick together; that doesn't mean brothers are always having a simple and easy relationship.

On operating systems

Q: Is Vista the last big operating system that will be introduced that way, as: "Come, buy Vista"?
A: No.

Q: No?
A: No. People like to write that; I don't know why. Nothing we've said should cause people to think that way. There will be a Vista. There will be a Vista plus one. There will be a Vista plus two, plus three.

Q: When is your next operating system coming out?
A: That I won't share with you. Not because we're not hard at work on that; I want to let the team do their job, figure out what the release looks like. I guarantee you it won't be four or five years.

Q: You mean sooner?
A: Yes, absolutely.

Q: Have you learned any lessons from the rollout of Vista that could apply to other products that you sell?
A: A lot of what we did with Vista was very similar to what we've used for some of our other big launch products. It was beneficial for customers to be able to think about new Windows and new Office at the same time. That doesn't mean we'll always do them together. But in a sense, it let customers think about them as one decision.

Q: Google has been rolling out applications that are very similar to Office. Are you concerned about competition from Internet-based applications?
A: They've come out with what I might call — what's the politically correct way of saying it? — they've come out with some of the lowest functionality, lowest capability applications of all time. (Laughter.) If you want to sit and write a paper for school, you're not going to use Google Docs. You can't even put a footnote in. Now, last time I checked, that's still kind of important to give attribution. (Laughter.) There are some basic, basic things that you just don't find.

In the short run, we don't have a lot of competition; in the long run, sure. We always have some competition. We have competition from OpenOffice. We have competition from StarOffice. We're going to have competition from Google. We have competition from IBM. And competition is a very good thing for Google to give us, and for us to give Google.

Q: I use Word, I use Excel. And I don't use half the features they've got. Have you reached a point where, sure, you can keep adding more features, but who needs them?
A: With the new version of Office, you will use a higher percentage of the product than you use today. We have completely redesigned the user interface. The truth is, people may not use things because they don't know how to find them. And in the revamp, we've done to the user interface of Office, everything is more discoverable.

There's a great anecdote. Bill Gates, before we shipped Office, sent the team some mail, "Hey, you know, I really love the user interface in the new Excel, but I didn't know you were going to add so many new features." And he listed a couple things he really liked. And they said, "Bill, those aren't new features." (Laughter.) Bill said, "No, I'm an Excel expert. Those are new features." And they said, "No, they've actually been there for three releases." (Laughter.) So, it had features that even an expert couldn't find, and yet they were very discoverable in the new user interface. That's the first thing I'll say.

The second thing is, everybody uses a very much higher percentage of Word, Excel and PowerPoint than they know. Does anybody ever send you spreadsheets, documents or presentations that are more complicated than you could author?

Q: Sure.
A: I get them all the time. So, you are using the advanced capabilities in the products whether you can be the author or whether you are just a consumer, a viewer, a reader and an annotator.

So, I think you'll find that I can't create many of the spreadsheets I receive for analyzing our financial information, but I need that power and capability to do my job.

On music, gaming

Q: People get passionate when Apple comes out with something new — the iPhone; of course, the iPod. Is that something that you'd want them to feel about Microsoft?
A: It's sort of a funny question. Would I trade 96% of the market for 4% of the market? (Laughter.) I want to have products that appeal to everybody.Now we'll get a chance to go through this again in phones and music players. There's no chance that the iPhone is going to get any significant market share. No chance. It's a $500 subsidized item. They may make a lot of money. But if you actually take a look at the 1.3 billion phones that get sold, I'd prefer to have our software in 60% or 70% or 80% of them, than I would to have 2% or 3%, which is what Apple might get. In the case of music, Apple got out early. They were the first to really recognize that you couldn't just think about the device and all the pieces separately. Bravo. Credit that to Steve (Jobs) and Apple. They did a nice job. But it's not like we're at the end of the line of innovation that's going to come in the way people listen to music, watch videos, etc. I'll bet our ads will be less edgy. But my 85-year-old uncle probably will never own an iPod, and I hope we'll get him to own a Zune.

Q: Would you agree with Steve Jobs that music companies should get rid of the digital rights management that makes it hard to copy songs?
A: I will not either agree or disagree. Every recording artist, in my opinion, is entitled to make their own decision. And I don't think Apple or Microsoft should be imposing its will on folks, because people will have different economic interests, different things to think about. We're a company that makes tools, and we're going to enable people to use those tools and make their own judgments as individual artists.

Q: When can we look forward to a Zune phone?
A: It's not a concept you'll ever get from us. We're in the Windows Mobile business. We wouldn't define our phone experience just by music. A phone is really a general purpose device. You want to make telephone calls, you want to get and receive messages, text, e-mail, whatever your preference is. The phone really is kind of a general purpose device that we need to have clean and easy to use.

Q: With the Xbox, it looks like you're targeting the hard-core gamers. Are there enough to make this a good business?
A: Version one we targeted to hard-core gamers. With Xbox 360, we're broadening the audience. You may notice the color is white with faceplates, not black. It actually rounds out the audience appeal of the product. Now you can customize for the hard-core gamer; you can customize in other ways.

If you look at the game selection: Viva Piñata is targeted at a more female and a younger demographic than anything else we've done. Our arcade games, traditional board games and card games target casual gamers. The audience tends to skew older than the average gamer and tends to skew again more female than the, quote, typical hard-core gamer.

There will be a Halo 3. There will be a Gears of War 2. We're not going to stop that stuff. On the other hand, we're trying to broaden the appeal as opposed to revector it.