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SANTA CLARA—Alternative business models, like that of Linux and open source and Googles advertising model, pose the greatest competitive challenge to Microsoft, CEO Steve Ballmer said May 11.
Addressing an audience of several hundred members at an event jointly hosted here by the Churchill Club and the Commonwealth Club, Ballmer said the Redmond, Wash.-based software giant faces many competitors across the many different parts of its business.
But there are two big phenomena going on: the new open-source and advertising business models.
Open source is more about whether that is a business model that delivers superior innovation than a commercial company can deliver.
“So, there is competition with this new business model; there was also competition with the new advertising business model [embraced by Yahoo and Google],” he said.
While Microsoft cant embrace the open-source business model, it has embraced the new advertising one and wants to grow to the No. 1 market position in that space from its current No. 3 spot.
“The greatest competitive threat we face is our own ability to either embrace or compete with alternative business models,” Ballmer said.
When asked by moderator Roger McNamee, the co-founder of Elevation Partners, to choose between IBM or open source as the threat he most worries about, Ballmer quipped that IBM is then no longer in the game.
Open source is a good-old fashioned engineering competitive threat, he said, and has managed to dominate in several markets.
Microsoft needs a better high-performance clustering product than Linux, and is working hard in this regard, with “a better product and a total cost of ownership being the key,” he said.
“While it is hard to beat open source on the initial procurement side, it is easy to compete on the total cost of ownership front,” he said.
Next Page: Tenacity and patience.
Tenacity and Patience
With regard to the advertising market, Ballmer said that while Microsoft does not like being in third spot in any market, “I think we have shown we have the tenacity and patience and innovation to succeed,” he said.
“People said we wouldnt succeed in the browser market, with Windows, or against Novell. I think we have shown that we have the innovation and patience to succeed here as well,” he said.
Ballmer also did not totally discount IBM as a competitive threat, especially with its services-based business model, but noted that others like Oracle have the same business model as Microsoft, which is outselling both Oracle and IBM on the database front, he said.
Asked about Google and the threat it poses, Ballmer said it is one of the two companies ahead of it in the advertising revenue front, so that does indeed make them a competitor.
“The question I asked around this is whether we have done everything we need to do to embrace the advertising business model and provide the tools that drive this,” he said, adding that Microsoft has an incredible amount of focus in this space as it is key to the future of other Microsoft businesses.
The way advertising got bought and sold will be fundamentally different going forward.
Microsoft will create its own services like Windows Live, enter into partnerships with others, and do acquisitions to help it bootstrap the advertising market, Ballmer said.
While Microsofts online environment is where people spend a lot of time, that does not mean that environment is where they spend the most, he said, adding that its Hotmail, Instant Messaging and MSN assets have a lot of traction, particularly outside of the United States.
“But we are still hard at work on our own services, but with the user in control. Windows Live will allow a customized, personalized view, with Microsoft creating an ecosystem around search that would allow the user to be in control,” Ballmer said.
Embracing Change
Ballmer said he was very excited about the future, adding that while the world is changing, that change needs to be embraced, he said, pointing to the companys Xbox Live site as an example of how Microsoft is meeting these changing needs.
Apple remains a threat on the desktop market front, as it is very competitive and innovative, he said.
But Microsoft has a bigger partner and third-party ecosystem and focus than Apples more narrow end-to-end focus, he said.
Asked why anyone should upgrade to its upcoming Windows Vista release, Ballmer said that while the company has made it a lot easier for people to upgrade, the top reason for doing so is the security and privacy enhancements it brings.
The new visuals and user interface, as well as the integration of new desktop search features into the operating system, are also compelling, he said.
On the security front, Ballmer said that with Vista, Microsoft will have eliminated the known vectors through which people attacked it today, but added that there would be new attack vectors that would be a lot more insidious and not just disruptive, but also about stealing peoples identity and other insidious intents.
With reference to Sun chairman Scott McNealy, who was his good friend “again,” Ballmer said that when they first started to reconnect, the first piece of mail that McNealy sent him ended up in Ballmers junk mail as it met the current criteria for spam.
“It was short, a one-liner, so there are still challenges with identifying what is spam and what is not,” he said.
Asked about his view on startups, Ballmer said Microsoft had acquired 22 companies over the past year, many of which could be characterized as startups.
“I also now, three times a year, spend a day in a different part of the world doing nothing but meeting with startups,” he said
With regard to his views on BitTorrent, Ballmer said it is “interesting, but Im not actually sure where it goes with that technology,” while Facebook is “fascinating, and I have spent a lot of time looking at it.”