Does Microsoft have what it takes to operate a consumer electrics company? And how do you balance that with your traditional OEM strategy? Well, I think the thing you have to do is you have to look at each product and category differently. From a balanced perspective there are categories where were not going to do devices. We dont do phones. We dont have plans to do phones. Because we dont think it fits for the category. And weve got great support from our operators and from the handset manufacturers.There are other places like Zune where because of Apples success, and frankly because of the uneven experience we were able to deliver just by being the platform provider, we decided we had to do it ourselves. I have no desire to do hardware. I have a desire to produce a great end-to-end experience for consumers. If I can do that just with software and services, thats easier for me honestly. If I need to do hardware, I am building the expertise hands down to be able to do that when I have to.Xbox is the hardest piece of consumer electronics hardware to produce in the world, no debate. It just taxes way more of anything you could possibly want to do. Zune technically speaking is dramatically easier. Almost any other device you could describe to me would be dramatically easier than producing what we did in Xbox. And so by becoming experts at doing that, we are building core skill sets that we can leverage other places if we think the business requires it. But its not a hardware first model. We believe the experience has to be great, and then we decide which pieces of that we have to add value to based on the category. You touched on this earlier, and it was something that I would ask a few people here. The thing that Ive always liked about Microsoft is the fact that you guys always wanted to win, compete hard, win, not at all costs so much but just win. But in your area there are so many areas that you have to compete in, how do you decide where to put the emphasis? Well, the interesting thing is some places we have uphill battles, some places we have downhill battles. So...we picked four areas that we think are critical. We believe in connected entertainment. I believe people are going to want an entertainment experience thats always connected regardless of the device and the location theyre in. If I want to do that, Ive got to be great at video, Ive got to be great in music, Ive got to be great in games, and I have to be great at communications. Those are the building blocks. Without those things, if I dont have music, Im missing something. Apple, because they dont have games, is missing something, and they dont frankly really have video yet, and theyre just barely getting under the surface of communications. Theyve got music in spades, Ill absolutely submit to that. So, the challenge for us is building scale in each of those spaces. Forget the competitive thing for a second. I dont actually think, hey, gosh, lets go into that category because there was a competitor that looks like theyll be tough to beat, and I like to compete. I actually think more of we have to be strong in video to do connected entertainment. OK, who does that mean I have to compete with? Frankly, in the video space right now its not exactly clear who, because that whole market is going through such dramatic change. The gaming space its quite clear who we have to compete with, in the phone space its quite clear who we have to compete with, in the music space its absolutely clear who we have to compete with. So were going to go do that. And youre right, we are competitive. I like to think of myself as a nice guy. I hate losing. Losing sucks...Im not in the business to be kind of a nice second. We want to win. We want to do it the right way. We want to be a company people respect. But we do want to win. And we dont go into a category if we dont think we can win. Click here to read Part 3 of the interview, including Bachs thoughts on the competition. Check out eWEEK.coms for Microsoft and Windows news, views and analysis.