CRN Interview: Steve Ballmer, CEO, Microsoft

Ballmer discusses Microsoft's channel organization and leadership changes, new licensing program, competition, business growth and market conditions in an interview at the software giant's Redmond, Wash., headquarters with CRN Senior Writer Paula Rooney, CRN Industry Editor Barbara Darrow and CMP Media Technology Solutions Group President Robert Faletra.

CRN: At Microsoft, it seems like there's now more of a push to get the company thinking about partners in a more pervasive way. There also seems to be more measurement of partner and customer satisfaction. Is that true? What's the thought process at Microsoft right now?

BALLMER: The real key is to try to get the guys who build the products to think much more about how they get taken to market, all the way to the customer through partners. There really are lots of decisions to make in terms of the engineering, packaging, positioning, pricing, etc. Let me take one example that we're working on--the evolution of Software Assurance [Microsoft's software licensing program. That's something where if you don't get the guys engineering the products to think about it, you actually miss the whole thing. So we have to re-engineer Software Assurance. As we do that, there is a very big question: What is the role of the channel in Software Assurance as we go forward? We know we need a channel, but what is the value we want the channel to add? And is it consistent with the value the channel adds today?

When we signed the consent decree [in the antitrust case, there was a set of things in it about standard terms, license conditions, etc. All of that goes all the way back to the product, the way it's engineered and the flexibility we give our downstream participants to customize change. We want our engineers to have a much more holistic view of how the channel plays and how the customer plays. The fact of the matter is, it's an imperfect system because, in a certain sense, most of our products go through most of our channels to most of our customers. It's not like these products only go here, and those products only go there. In some cases, we've asked one or another of our business divisions to take the lead. That's the highest-level change.

And what about satisfaction metrics? If we're going to do a good job bringing things to market, we have to do a good job all the way across the value chain. If we think we've engineered something well for the customer but blow it with the partner and it never sees the light of day at the customer end, we've screwed that up. For many customers, the partner is the customer. I've had that view for years and years. In the small-business space, people don't really make these IT decisions themselves. The partner essentially [acts as their outsourced IT department. It's been that way for years. But when you think about how to make the customer happy, if his IT department is really a value-added provider, [the provider is the customer, for all intents and purposes, and that person had better be happy. If that person is not happy, the end customer is not happy, and vice versa. We've absolutely told people we want to measure customer and partner satisfaction.

CRN: How is that being handled within the company?

BALLMER: It depends on the partner type. Some partners don't want to be pigeonholed; they do a couple of different things. But we need to get some degree of parallelism. If you put on a continuum Cap Gemini Ernst and Young and the small VAR, it is clear that what it takes to satisfy [them is radically different.

CRN: So this is still an organizational work in progress?

BALLMER: I know how I think it's going to work right now. We've made the key decisions. The question is in the execution, drawing up a framework. There's engineering, strategy, go-to-market execution. . . . Wouldn't it be nice to have everything in one organization? But the truth is, it doesn't work in an organization of this size.

If we have made an error in the last several years, it is that we have let too much talent in our company migrate out of the SMB area and into the enterprise area. One of the key goals in the next year or two is to make sure we have strong talent on both sides of the fence. We've had a little bit of a brain drain over to the enterprise side of the business. We're about 50-50 in revenue with SMB vs. enterprise in the typical Microsoft subsidiary.

CRN: Is this realignment a pretty radical change from when Microsoft had one channel champion, who was Sam Jadallah?

BALLMER: We haven't had one channel champion for a hundred years. We have one channel champion today as much as we had one six years ago. It depends on what you call the channel. If there's a class of partner that's the sweet spot of [CRN's reader base--and I may be wrong about this--I'd say that it's certified SPs, affiliates and maybe some ISVs and systems builders. And if the question is, 'Is there a channel champion for all this?' the answer is yes. Rosa [Garcia had it. Allison [Watson has it now. [Editor's Note: Watson will succeed Garcia as Microsoft's vice president of worldwide partner sales on Aug. 1, when Garcia will become general manager of Microsoft Spain. But we're not asking them to worry about SAP or handle how we go to market with the new HP. The go-to-market with the big enterprise partners is quite different.

CRN: Earlier this year, Microsoft named IBM Global Services veteran Mike Sinneck to head its consulting arm as worldwide vice president of services. What led to that choice?

BALLMER: Why Mike Sinneck? Mike is a smart, hard-working, energetic, aggressive, caring and passionate type of person. If you read the [company memo, as half the Western world did, he fits what we want in our people. He has the experience that's relevant--he has run product support and services organizations--and I think he's a great addition to our management team. No, we're not trying to add our own IBM Global Services, but we need someone who understands how end customers want to be served.

CRN: What partnering insight does he bring to Microsoft?

BALLMER: We all have a chance to learn. There's not the same number of people here who understand partnering very well and how to manage the kind of support and services business that we have the same way that Mike understands it. If you bring in people from the outside, you bring in different expertise, something you don't [already have. If you want someone who knows what you already know, you're better off promoting someone from the inside.

By the first or second week from Mike's midyear review, he understood that we screwed a few things up with how our services policies and goals interacted with our partner network. Within one week, he laid down the law for services people: 'Thou shalt not go crosswise with your partners in the following ways, and here are some of the things we did that made you subconsciously take the wrong action.' We had some of the wrong measures and goals in place, and we hadn't responded well enough to change in the economic climate. We had too many people. And when you have too many people, guess what [happens? Because they still needed to keep billing, they ended up competing for business they shouldn't compete for. Mike said, 'Don't do it, even though it will make you miss some metrics. Here's how we get out of the jam, and priority No. 1 is to make sure we're executing consistently on our partner strategy. Mike laid down the law in a very positive way with our folks.

CRN: One of the problems Microsoft has had is that the product engineers never thought about the channel. Will this realignment correct that?

BALLMER: Yes. It will happen, or there will be new product [engineers. That part is for sure. The only question is how long [it will take. As soon as we told these guys, 'Look, you're now responsible for thinking end to end about your business,' people's attention just dialed way up--believe me. We just finished our business plan reviews, and everyone's saying, 'Wow, now we have to think about all this stuff.'

I just came from a meeting about the future of BizTalk Server. We had two parts to the meeting. The first was basic positioning and packaging, and the second was how we'd go to market with our SMB customer channel. BizTalk Server has higher-end positioning--not the kind of thing the average Microsoft channel partner will have the [resources to deal with. We needed different packaging, strategy and positioning. We had to do some things differently, and it has to start all the way back at the engineering level. If this had been a year ago, it would have been all about the enterprise. Then they walked through what it will look like, how we will package it and how the channel will deliver it.

CRN: Can you address how Microsoft makes software licensing changes, specifically with regard to the Licensing 6.0 program?

BALLMER: We worked on 6.0 for a long time, with a lot of discussion and a lot of involvement from Microsoft's geographies. At the end of the day, with assent and approval from me, we implemented. We're now quite a bit smarter than we were at that time. It turns out that when you get very far down the pike, you can't just say, 'We made a mistake. Let's just roll back time.' Where do you go next? You give people a lot more time. If you look at the changes we made, it doesn't correct the fact that we blew it. On the other hand, it was a very significant change. We pushed back the start of the program nine to 10 months from September. We gave all the customers who had already signed up an additional set of months on maintenance on our nickel, because they had done what we said. We're much better placed than we were. There are still some hard issues and some things we're thinking through. But rolling back to where we were is not an option. So the question is, how do we make where we are work?

I actually like a lot of things now so much better, and I think customers will when we can address the issues they still have. Our old licensing program was very complicated, let's face it. Now it's complicated because people are mixing the old and the new programs. There are still some issues we have to be smart about thinking through, making sure they work better for customers and that prices look reasonable.

CRN: Could you be more specific?

BALLMER: I think there are still some customers who think the stuff is going to cost too much. For a lot of customers, we've solved that issue. But for some other customers, we haven't solved that issue. We have to figure out, in the context of the new structure, how we can have a reasonable [licensing path for more people and give them a set of new options. I think we have a reasonable path for a lot of people. At the end of the day, people will just buy packaged product if we don't come up with a different solution. The release valve is the packaged product; we haven't changed its price, licensing or anything about it. I'm not trying to imply that there's another shoe to drop, because there isn't. We've thought about this. We are where we are, and the new licensing becomes effective in [about six weeks [Aug. 1.

CRN: Will the slow economy have any effect on Microsoft's licensing program shift?

BALLMER: At this stage, we've given people a lot of time to plan. Delaying is a formula for more chaos. If we need to address issues around cost, we will. We never had a goal--and this will sound funny, given all the debate--to jack up prices and jack up revenue. The goal was to simplify licensing.

CRN: And have a more predictable revenue stream?

BALLMER: Right. But we weren't trying to increase [prices. The problem is further complicated by the fact that many customers probably were paying us more than they needed to under the old licensing system. In the old system, you could buy an upgrade or a full package. Some customers didn't do a very good job of keeping track of what licenses they owned. Instead of buying upgrades, they were buying full packages--paying more than they should have. I always felt bad about that. You don't want customers 'overbuying' in any sense. There's no chance for that under the new [licensing scheme. If you're under Software Assurance, we keep track of it. And if you're not, you always buy the same thing: the full license. It's clean.

CRN: What will Microsoft do about customers that are slow to comply with the new licensing program?

BALLMER: Come Aug. 1, they will buy or they won't. You can keep using software you have today. We can't take away any rights to your own software. If you're using it, you bought it. It's yours. You own it. It's not about complying. That's the wrong word. You own your software, and you can keep owning it. If you want to put it under Software Assurance, you can. If you choose not to, you can buy a new license. Everyone's perfectly compliant. It's just a question of entering Software Assurance now, later or never, or of continuing to buy individual licenses from us. It's up to the customer to choose.

CRN: Do you expect a tremendous amount of business in THE next month or so because of the licensing deadline?

BALLMER: No. It's summer, and this is a long-delayed time frame. I think that if people were going to make those [licensing decisions, they probably would have made them by now. I hope they've made them. I wouldn't expect any last-minute surge. It doesn't affect us financially because we don't recognize the revenue all at once if they sign up. It's recognized over a period of time.

CRN: How much of a priority is Microsoft's Knowledge Worker effort? You guys made fun of Lotus when they talked about the idea of 'knowledge workers.'

BALLMER: No, we made fun of them when they started talking about 'knowledge' and would do so if they did it again. I would if we did. Basically, anybody who works with information--particularly information delivered electronically--as an important part of what they do is a knowledge worker. It would probably be hard to call the guys who put in the new pipes underneath our lawn 'knowledge workers.' Journalists, financial professionals, nurses, pilots. . . . They all deal fundamentally with information. The question is, how do we give them better tools to manage, analyze, communicate and present those ideas? You could ask, 'What's the mission for [Microsoft Office?' The mission for Office is to be everything knowledge workers need--not to be just a spreadsheet, a word processor and a presentation package, but a definitive tool for them.

CRN: Is this [Microsoft Group Vice President Jeff Raikes' baby?

BALLMER: Yes. Jeff runs the Knowledge Worker business.

CRN: So it's a fairly high priority?

BALLMER: Office is our biggest business. So, yeah, it's a pretty big priority. What else could it be? It's one of the best businesses in the history of the world, and our whole job is to make it more and more valuable to people.

CRN: Is that an indication that the upgrades aren't as strong as you'd like them to be?

BALLMER: No. Our job is to [make it better and better. If we don't innovate and do new things, we're not going to get people to upgrade. And if people don't upgrade over time, guess what? We have no business. If we're going to sell the next package, people have to see an ongoing stream of innovation--not just innovation, but innovation that they value. Our job is to say, 'How do we expand that? How do we grow that? How do we maintain that?' One could argue that even maintaining [a popular product is a tough thing.

CRN: How would you characterize Office XP and Windows XP sales through 2002?

BALLMER: Our numbers are public. Beauty is in the eye of the beholder. Compared to almost anything else in the IT market? It looks pretty good. Compared to security products, no. I tell you, it's happy days at Network Associates and Symantec. . . . compared to what's going on at Sun.

I don't quite know what to say. The Office and Windows businesses aren't going to grow 20 percent a year. The only way to get to 20 percent is [if there was a major increase in piracy. But 20 percent is an amazing number. Twenty percent of our Office sales is bigger than sales at any other software company in the world, except for IBM. We'd have to grow a whole Oracle database business in a year to get 20 percent. These are just very large numbers. It doesn't mean we won't do a good job, get new franchises and get new growth. But people's benchmarks cannot be 20 percent or 25 percent. It's just not realistic.

CRN: Solution providers expected a bigger kick with Office XP.

BALLMER: Well, that's a little bit of a different question. Office XP didn't have a big surge with the upgrade. There hasn't been a huge surge of upgrades since Office 95. People do upgrade. But the question is, do they upgrade in the first 60 days or the first two years of the new release? More and more, this is not a surge business. If you look at the [upgrade surge of Office 2000, it's very small--$40 million worldwide. That's a drop in the bucket relative to the total size of the Office business. Windows upgrades have more of that [surge characteristic [because they're more consumer-oriented.

CRN: Do you see any signs of economic recovery or big deals in the pipeline?

BALLMER: There's no particularly better news here than you would get anywhere else.

CRN: What has to happen for IT spending to increase? If you take out expenditures on commercial and private buildings, IT accounts for about 45 percent of all equipment outlays. That's a pretty big number.

BALLMER: It [technology is 50 percent of all capital spending in the U.S.

CRN: Could it get to 60 percent?

BALLMER: I don't think so, but it could. But going from 50 percent to 51 percent is a huge increase. There's a rising tide of capital spending, and it all adds up to some pretty big numbers. I do not expect infinite expansion. But as our industry and our company comes up with new and exciting ideas, we should be able to grow our business. I don't have any lack of confidence that there's growth potential out there. If some young person asked me, 'Where's the future?'--like in "The Graduate," when the father says 'plastics' to Dustin Hoffman--I'd still tell him pharmaceuticals or software. The industry is still rife with opportunity, but it does not mean it will come back to 20 percent to 25 percent growth rates. It does not mean we'll go through another round of easy money, like in the dot-com era.

CRN: Microsoft has a wad of cash. What will you do with that money? Great Plains was a good acquisition, but not on scale of what HP and Compaq just did. At some point, don't you have to show investors some return? Or why not offer a dividend?

BALLMER: The board continuously considers all options. Right now, there's a lot of risk in our business, particularly on the litigation front. Between the normal cash needs of the business, some expansion plans from time to time and the [current level of risk, we think we're managing the balance sheet wisely and prudently.

CRN: Couldn't Microsoft pay dividends, buy back stock, acquire companies or make minority investments?

BALLMER: I think you should expect to see us engage in a number of those activities. And we're sensitive to what shareholders want.

CRN: How would you rank Microsoft's chief competitive threats compared with those a year ago? Is AOL still there? Who's up, and who's down?

BALLMER: AOL is still there. AOL is a strong, strong company. Sure, the market had them overvalued. It's fun to see the other guy hiccuping. They're hiccuping, but they're also adding customers. They don't have their broadband act together. They still have the franchise in the U.S. but are hemorrhaging money building the franchise outside the country. But if you ask people in this country how they connect to the Internet, more people are going to respond 'AOL' than anyone else. I think we've made some good progress [on the Internet front. MSN 7