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Ballmer Casts a Pall on Vista Sales Expectations
Published: February 21, 2007
by Alex Woodie
Microsoft CEO Steve Ballmer isn't normally one to throw cold water on a good time. The man is the living, breathing epitome of excitability as it pertains to IT. That's why what he said to a group of financial analysts last week--that perhaps they were counting just a smidgen too much on Windows Vista to drive revenue growth over the next year--was so uncharacteristic and stunning.
Ballmer and CFO Chris Liddell were in New York City Thursday to give a briefing to a group of financial analysts. It had been a very good year for Microsoft, as measured on Wall Street, as the company's stock recently hit a 52-week high. The company is also riding high with the recent launches of new versions Windows and Office, the company's two biggest products, which have generated hundreds of billions of dollars in profit for shareholders over the last decade.
The big man, Ballmer, started out by outlining five important areas that Microsoft has been focusing on over the last year, and will continue to make a priority. Those five things included recruiting talent, innovation, broad-based development, Web-based applications, and long-term strategy.
Google has emerged as a key competitor for talent, Ballmer said, adding that "we compete very, very well versus Google." On the innovation front, Ballmer did his best to turn a recent failure into a challenge. "We won't go five years again, I promise, between big Windows releases," he said. The broad-based development, or Microsoft's "multi-core" strategy as Ballmer calls it, is another "pillar" of the company's strategy. "We have elected certainly to invest in a broader portfolio of business opportunities . . . than I think anybody has ever tried certainly in the technology business," he said.
Microsoft's Web strategy, which it calls "Live," is another pillar. "We will evolve our business models from transactions to in some cases subscription, in some cases hosting, in some cases advertising, in some cases we'll continue on the transaction model, but our business models will evolve," Ballmer said. As far as a long-term strategy, Ballmer said Microsoft should emulate IBM, of all companies, but with this one, interesting caveat: "I think IBM would have done better to stick with the position they had in routers and storage and PCs. I think those should be assets that they'd maintain."
"I've looked at some of the models and reports, et cetera, about our business and what people think it looks like, and I'm really excited on how enthusiastic everybody is about Vista. I, too, am very enthusiastic about Vista," Ballmer said. "But I think sometimes the enthusiasm about this great product and the excitement and the launch, people have to understand our revenue models because I think some of the revenue forecasts I've seen out there for Windows Vista in fiscal year '08 are overly aggressive."
Ballmer went on to explain that software piracy, particularly in emerging markets, will be one of the major reasons why he thinks certain analysts' forecasts of Windows Vista revenue in 2008 are too high.
"We will have strong growth in the Windows business in emerging markets: China, India, Brazil, Russia, and many others," he said. "But that's strong growth on quite a low base of revenue. Those markets are very high piracy. In some cases we also have much lower pricing in some of those markets with our Starter Edition."
Microsoft is taking steps to reduce software piracy in Windows Vista with its Windows Genuine Advantage (WGA) and Software Protection Platform (SPP) programs. Microsoft could take even more steps to enforce licensing to thwart pirates, but Ballmer realizes it's not worth the risk of alienating users. "Piracy reduction can be a source of Windows revenue growth, and I think we'll make some piracy improvements this year," he said. "I still don't count on it to be a huge thing on the scale of this business as we really ferret through how far we can dial it up, and what that means for customer experience and customer satisfaction."
The damper on the sales bonfire that would have been Windows Vista in the workplace has been further shut thanks to long-term contractual obligations that Microsoft must honor. "We already sold a lot of Vista corporate upgrades. That's built into a lot of our Enterprise Agreements that have previously been signed," Ballmer said.
The big question on everybody's minds seems to be: Can Microsoft dial it up a notch, and take it to 11? Ballmer seemed to think not. "We're driving it hard, but I think some people have gotten a little overexcited," he said. "I think this is an area where perhaps people are somewhat too bullish."
"My basic assumption is we'll see a small surge," he continued. "[But] I don't think that much new money is going to race out of the consumers' pockets into PCs." (Although that would open up interesting new revenue stream possibilities, if you could somehow get users to insert their money directly into machines.)
It wasn't all bear and no bull from Ballmer. For example, the future is very bright for delivering television and other forms of copyrighted entertainment into the home over the Internet, and Microsoft has a socket or two in its multi-core engine dedicated to IPTV. "Many of these things are still very nascent, and we have a fairly comprehensive agenda of things that we will invest in," he said.
The future of collaboration is also wide open, and Microsoft intends to leverage its leading position to take its share of the coming revenue, although it's yet to be seen if smaller, more nimble players will drive innovation in these areas. "There's certainly much more that we can do to improve the way people communicate with one another: online meetings, the way videoconferencing works, the way IP networks are used to process and handle voice, and let you unify all the things that you do," he said.
While the next generate of home entertainment and collaboration could--or could not--be a boon to Microsoft in the next decade, there are smaller, more attainable ways Microsoft can improve its business in the next three years. In fact, Ballmer has whittled the list down to nine items, each of which could grow revenues by a half a billion dollars.
So here's Ballmer's Bullish Nine (in descending order of value, all neat and tidy, just the way analysts like it):
- growth among OEMSs
- growth in the corporate data center
- charging more for desktop software and services
- growing sales of Windows Server and other business technologies
- growth in amount desktop software sales
- growing advertising revenue
- growing the Xbox video game business
- selling more Office to consumers and small businesses
- growing the Windows Mobile business
"I feel pretty good about this," Ballmer said. "I love having a list of these nine things where it's fairly clear, we know what to do. We just need to get out and execute against it."
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