Ballmer: Innovation Is Our Competition

SANTA CLARA, Calif. – Microsoft’s CEO, Steve Ballmer, confidently laid out the world’s biggest software company’s agenda and competitive standing in a speech here today. In a follow-up Q&A, he faced questions about how prepared Microsoft is to handle increased competition on multiple fronts.

Ballmer spoke to a crowd of about 200 Silicon Valley executives at a luncheon sponsored by The Churchill Club. He was grilled by Roger McNamee, co-founder of a number of venture firms, his latest being Elevation Partners, where U2 frontman Bono is also a partner.

With Microsoft coming off a bad third quarter, Ballmer was immediately on the hot seat about the company’s fiscal health. He said it would be unreasonable to expect a “$20 billion dollar” company (Microsoft is projecting sales of around $49 billion this fiscal year) to grow at a rate of 20 percent per year, but eight to 10 percent was reasonable.

Asked where that growth would come, Ballmer said he was counting on new areas. “In our case, are we going to be innovating in new areas or are we only going to be innovating in what we’ve grown up with as a company? I’d say our innovation agenda qualifies as a growth agenda.”

Microsoft is an acquisitive company, but it doesn’t make big bites. He pointed out that the company made 22 acquisitions last year, but all were small companies, either in start-up or early stages of launch, because they liked the product, management team or business model.

Microsoft’s trick is its patience. “We have a tenacity and a persistence and patience to stay after it and stay after it and stay after it,” Ballmer said, pounding his fist in his hand for emphasis. He said holding fast is the company’s real secret, since other technology companies have not had the patience to hang in for a desired result. Few have Microsoft’s resources either.

The three areas affecting Microsoft the most, he said, were competing with new business models, including open source, the new advertising business model and the embedded applications business model. In that regard, he’s not looking at individual companies as threats.

“Our biggest competitor is our ability to compete with new business models,” he said, which includes Google .

Ballmer called open source “a good old fashioned engineering competition,” not a religious competition and acknowledged that it’s hard to compete with open source for the initial cost of acquisition, but it’s not hard to compete on the overall cost of ownership. As for online advertising, he hoped to see more of an ecosystem develop around it, just as the growth of Windows spawned the considerable community of software vendors around the operating system.

Interestingly, he wants to see competition in online advertising, unusual given Microsoft’s penchant for crushing opposition. Perhaps that comes from being number three in the online ad sales market. “If there’s only one healthy advertising marketplace, that’s not good,” he said. “We want to make sure there’s good, healthy competition in the advertising marketplace.

Apple, he said, is “absolutely” a competitor, but he said the lack of hardware competition is its shortcoming in the PC market. He gave a modest thumbs up to BitTorrent and YouTube as concepts while wondering how to make money off such ideas. One thing he did not see happening is a proliferation of Web-based applications, such as Web-based word processors.

In an interview with following Ballmer’s talk, McNamee said Microsoft is definitely a company on the defensive because it’s taken on so many challenges.

“How do you compete simultaneously with a million different companies? Microsoft is tangling with Yahoo and Google and Red Hat and Oracle and Sony and IBM all at once, and they aren’t as distracted.

“All those guys are more focused than [Microsoft] are, because they’re all a lot smaller, except for IBM.”

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