Q&A: Ballmer's Tough Talk On Surface, Apple And Partners

Microsoft CEO Steve Ballmer has worked at Microsoft for 32 years since he was hired as the company’s 30th employee by Microsoft co-founder and Chairman Bill Gates. Since taking the helm of Microsoft 12 years ago, Ballmer has been forced to navigate seismic shifts from the dot.com bust to the worldwide economic meltdown. After addressing some 16,000 partners at the company’s Worldwide Partners Conference, Ballmer spoke with CRN Editor News Steven Burke about Microsoft’s Surface tablet , Apple and the future ahead for Microsoft and its partners. Here are excerpts from the interview.

We did a little research with our readers in anticipation of the interview. We polled our guys before the Surface tablet on the Windows 8 tablet opportunity, and we polled them afterward. The number of solution providers rating Windows 8 tablet as an outstanding or good sales opportunity nearly doubled from 34 to 64 percent after the Surface launch. What is your response to those partners? They are excited, Steve, about the Surface sales opportunity. They want to know if they are going to have the opportunity to sell it.

Look, let’s just say this is new for us. We have announced that initial distribution would be off Microsoft.com as well as through Microsoft physical stores. So is there an opportunity? Is there some big distribution? Not initially. Look we just got to get [it] out the door.

But, if a partner says, "Hey look, I want to sell some of these things. I want to put them in a solution." They can order some off Microsoft.com and sell them. There is nothing that gets in the way of that. But, we have not set up what I would call industrial distribution as sort of a first element. We may get there. But, if a partner wants to order some and put them in as a solution [for] a customer, we’ll be excited to see that happen.

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Why didn’t you give these guys a chance to sell it out of the gate, especially now? Apple is out there in the channel now. They are recruiting a lot of guys to sell the Apple tablet, granted low margin. But, why did you make the decision not to give these guys the product?

We didn’t make that decision. We didn’t.

We made a decision to get into the market in a way where we know we’ll have a perfect experience to get started, and then we can always do more -- go broader.

We had no idea what kind of a reaction we were going to get to the product, to the concept of us doing Surface. None of that. So we took our first step. It doesn’t mean we can’t take other steps.

We get to decide. Right now we are focused on executing well this first phase, which is to ship the Surface RT along with Windows 8 in October. We said it would be about 90 days later before we would have the Surface [for Windows] 8 [Pro], and those will just be in limited distribution to start.

Because we love our partners. But, just because we want to start out in a, let’s say, one foot in front of the other way.

It sounds like there is going to be only very limited product availability between now and the end of the year.

Limited availability is all a question of supply versus demand. So, we have got to see what kind of demand we have. We’ll make what we can.

I think [Microsoft President Windows and Windows Live Division] Steven [Sinofsky] actually showed a picture of our factory, which is set up, getting geared up for production in China. So, we’ll see what happens.

Who is building that?

I think the speculation is that Pegatron is -- I wouldn’t say building it -- is doing the transformation is the word they like to use; that is the final sort of integration.

NEXT: Ballmer Says The Gloves Are Off With Windows 8

It feels different being here. I have known you for 30 years, watched Microsoft for 30 years and with this Surface thing, it really feels different. It really feels like you guys have taken off the gloves and are going on offensive rather than defense. It is more in the Ballmer style. Talk about how Surface has changed the character of the company.

I am mostly going to just sort of note your reaction. I think it is Windows 8 that really is the catalyst for sort of stepping out.

Look, we needed to reimagine Windows. We really did need to reimagine Windows in order to take the next steps with our customers and take the next steps in competition. Whether it is new silicon support, new form factor, new UI, embracive touch and stylus, all of that stuff had to come with the new version of the operating system. So, of course you see, what should I say, stepped up competitive energy and vigor and the like. Surface is a part of that because we wanted to have the device that was designed for Windows 8 and only Windows 8, and a design that really would make it absolutely clear that you could have a device without compromise that was both a tablet and a PC. And, we think we have done that.

But, we also think our partners, our OEMs, there will be a number of OEMs who have great devices along that road. So with Windows 8, yeah, I think you could say it is a new era. Gloves are off. Let’s go Baby! Bring it!

But, there is not only going to be Surface tablets, which I am very excited about. But, we have partners who are doing tablet designs, x86 tablet designs, Intel SOC tablet designs, Nvidia, Qualcomm. I mean you are going to see an explosion of a number of Windows tablets. I happen to have a personal fondness for the work we are doing with Surface. But, you are going to see a range. You saw that Lenovo Yoga device that Tami showed today. Is that a tablet or a PC? I don’t know. I don’t know what to call that. I think most people call it a notebook. And yet, it looked pretty tabletish to me, too.

With Surface this ability for you guys to act as a vertically integrated hardware software supplier really changes the game. Can any of these OEMs really match what you guys are going to bring to the table when you guys have the secret software sauce?

Look we have been very good about supporting our OEMs. Very good. Our OEMs there is nothing that we can build that our OEMs can’t build I mean with their own energy, innovation and the like. There will be 375 million PCs sold (this year). I think it is probably fair to say that we are not going to sell a super high percentage of the 375 (million). So it is not us alone. It is us and our partners, It remains us and our OEM partners, not just our solution provider partners. But it is us and our OEM partners.

Surface will be a very important thing. And I am really excited about it. But we are also going to see great work from HP and Dell and Samsung and a bunch of other guys.

Don’t you think this will push the OEMs to do more innovative products?

I don’t think it is going to hurt in terms of stretching innovation. It is the time. Windows 8 is a unique opportunity not just for us, but for everybody who builds applications, for everybody who builds computers. Windows 8 is a unique opportunity. And if Surface galvanizes people around the opportunity to do hardware innovation (so be it).

Because in a sense we had ceded, our ecosystem had ceded some of the boundary between hardware and software innovation to the other guys, the guys I don’t like. And I think with Windows 8, with the work we are doing with the OEMs, with the work we are doing with Surface. Heck with the work we are doing now with the PPI acquisition. PPI is powered with a PC that comes from our partners. But that board shows you what you can do with hardware and software innovation. We are going to drive that awfully hard.

What are you going to do to assure that hardware OEMs have a level playing field. When you have talked to them what is your message to those guys?

There is really two things. Number one do we license them everything (in Windows) that we use in our own Surface? And the answer to that question is: yes. Number 2: they will say hey look ’essentially do you charge yourself some kind of a royalty so that we’re on equal footing from a price perspective? ’ The answer is: we handle things so that things are appropriate in that dimension. And then the third question they ask is when they give us their confidential information do we protect that from our Surface team. And the answer is of course we’ll do that.

So there will be confidentiality and a level playing field in terms of royalties

I didn’t say it quite that way. You should read precisely what we said at the Surface launch because I think that speaks to (it). There were a couple of sentences where we are trying to be very precise so that our OEMs know absolutely that there is opportunity here despite Surface.

NEXT: Ballmer Says Partners Can Order Surface From Microsoft.com

The number one thing guys want to know is this Surface thing. Your message to those guys is they can’t sell it out of the gate.

I didn’t say that. They can order it from us and they can’t order from their normal distribution. They can order it off Microsoft.com. And they can do what they want off Microsoft.com. But we are not setting up what I would call a typical distribution chain. What our partners choose to do is up to our partners. In terms of all of the classic machinery not out of the gate. We are not doing that.

A lot of these guys are going to be working deals. They are excited.What do you tell them?

Great! Go for it! Go for it! Great! Love ya. Love ya. Go for it. If Surface makes sense to your customers, yo go for it! Yo Merrily! We Love Ya!

Was it simply a margin issue in terms of not letting the channel sell it?

One step in front of the other. One foot in front of the other.

Do you think next year they will get it?

(Ballmer laughs). One foot in front of the other.

This whole battle with Apple changes with your ability to do the hardware software integration, talk about what it does for you? Now all of a sudden Microsoft is controlling the hardware and software. What does that mean to the partners and for the whole ecosystem out there? It’s a new world all of a sudden. Things changed dramatically.

I think we are trying to make absolutely clear we are not going to leave any space uncovered to Apple. Okay. We are not. No space uncovered that is Apple’s. We have our advantages in productivity. We have our advantages in terms of enterprise management and manageability. We have got our advantages in terms of when you plug into server infrastructure in the enterprise.

But we are not going to let annyyyyyyyyyyyyy piece of this. Not the consumer cloud. Not hardware software innovation. We are not leaving annnnnny of that to Apple by itself. Not going to happen! Not on our watch! Now we’re bringing our partners with us, our hardware vendor partners. But you know we are not going to leave any space.

We do feel empowered to innovate everywhere and bring our partners with us. We are just not going to leave any – what’s the expression people like to use- We’re not going to leave any stone unturned so to speak as we pursue that.

How about the ability for Microsoft to do its own iPhone like competitor. Come on, you did the Surface. How about your own phone?

Right now we are working real hard on the Surface. That’s the focus. That’s our core.

Look we’ll see what happens. We have good partners with Nokia, HTC in the phone space. I love what we got going on with the Surface. We are going to focus on Surface and our other Windows 8 Tablet partners and see if we can go make something happen.

Business wise how does Surface change the balance sheet and how you look at Microsoft as a company, managing it as a CEO?

It depends on how many we wind up selling versus how much you know our partners (sell). If our partners get galvanized.

We’ll have a decent size business. There is no question in Surface. Whether we have a decent size business or better than that will depend on kind of how galvanized our partners really get around the Windows 8 opportunity.

Talk about what factors led to that decision (to build Surface). How you made the call and then pulled it altogether.

I think what I said earlier, what we said at the launch sort of speaks to all of it, which is we just as we brought Windows 8 to market we made a decision that we just were not going to leave any seam exposed to Apple in terms of an innovation boundary.

We were going to think about things holistically. We were going to make sure that this particular form factor that was all the best of a PC and all of the best of a Tablet got all of the best innovation we could bring and not leave that exposed to potential vagaries that may come out of our ecosystem while it is getting galvanized. And we made that decision and moved forward down that path.

So who made the final call and when did you make it?

I know there is a desire to paint things dramatically. But of course there is many decisions. There is the decision to start. There is decisions to proceed. There is decisions to make commitments to hardware partners, to suppliers. There is the decision to make an announcement. There are various people involved.

Obviously starting was a big thing. Starting was a big thing. But the Windows team – the Surface team- we had got kind of ’A’ people involved. It has been a small team relatively that has been involved. Obviously we ran the program with a lot of kind of privacy and secrecy in order to really have a chance to do it right. So not a lot of people involved really. The Surface guys themselves. Steven Sinofsky. The Windows team basically was mostly in the dark with just a couple of exceptions. Me. The board obviously knew what we were doing.

When did they start developing it? It was a while ago. I don’t think I want to go through that. Three to six months ago? A year ago? A long time ago?

It takes a while to do stuff. I am not going to say anything more than that. It takes a while.

How does it (the Surface) feel?

Not surprising (the great feel of the product) by the way. For guys with good keyboard technology it was sort of a fun thing for those guys to do because we have been working on keyboard technology you know for 10 plus years. Keyboards and mice.

You could say what we have done with the Touch cover and the Type cover is just kind of the ultimate keyboard technology.

Well, talk about that. That is really interesting the reaction that came from people. People seem to really love the keyboard and are really excited about getting their hands on it.

Hey, we are the world’s experts at keyboards Baby!! (Laughing)

Talk about that. How important is that?

It is important. Of course it is important. We have had keyboards in market for what 10 plus years and so we have had webcams, keyboards, mice. It is not like this is the first time that we have done technology that was fundamental in a system. But for Windows 8 there was a way to express those technologies which is what you see in Surface that I think is pretty good powerful.

NEXT: Ballmer Talks About How Microsoft Is Leveraging

Licensing In Its Battle Against Apple I want to talk about VDI licensing that is going to affect Apple. This is a big thing. If someone wants to use an Apple iPad in a Microsoft environment they are going to have pay a license for it. Talk about how big a competitive weapon that is going to be in this age of consumerization of IT in the battle against Apple. Now you are going head to head.

We are in a battle. I don’t particularly want to get into sort of the pricing distinctions. Our partners will figure that out and they will find the best value for the customer. I think that between the hardware we provide, the software solutions we provide and the kind of way things work together, let alone what ever people see in terms of advantages and value, we have got a pretty compelling story for people with the consumerization of IT whether it is with the Surface or with some of the other form factors like the Lenovo Yoga and some of the new Samsung devices, the new Asus device that people are bringing to market.

But this ability to use licensing (as a weapon). Leveraging your licensing is that going to help you?

I think we will put things together in a more comfortable package than competition because it is where our bread is buttered. Obviously if you don’t own a Microsoft device but if you want to buy a Windows license for it we are always glad to sell you one. And we do have customers who will buy Windows licenses effectively whether it is through VDI or people who just install Windows on a Mac. There are people who want Windows. And I think there are going to be more people who want new Windows. So we’ll see where it goes.

You mentioned Windows 8 as an epic opportunity. Talk about what you are doing to get the partners ramped up. We did a survey that asked these guys about the Windows 8 desktop Product opportunity and the Services Opportunity. To tell you the truth the results weren’t as good as I thought they would be. I think it is this whole issue of how tough it is for these guys to get their hands on doing the upgrades and selling the desktop. So 75 percent of the partners rated the Windows 8 desktop product opportunity as low margin or average margin, 68 percent rated ithe Windows 8 Services opportunity as low margin or average margin. What are you guys doing to make sure these guys are moving their customers lock stock and barrel with financial incentives to Windows 8?

What I would say is the way you ask the question you get a certain answer. You sort of pointed to margin. Look if you wanted to do something high margin do custom app development for a low volume operating system. I am not being perjorative, but that is the highest margin thing you can do. The truth of the matter is we have a lot of great partners and they compete pretty hard with one another which is really the nature. I think what we give our partners with Windows 8- and you saw that here at the partner conference - is their ability to help their customers do things that they couldn’t do before. Whether the margin is X percent or Y percent the real opportunity is to sell X or 2X or 3X or 5X, the ability to galvanize the customer base on new scenarios, new opportunities and really drive overall volume. Yeah, margin will come with it. But I think it is pretty powerful.

You know the Windows PC market may grow a little bit, a lot. It is hard to predict how Windows 8 will affect it. But the opportunity for our partners is going to grow a ton. Just think of the new scenarios for people.

You saw the PPI board. When we get the price of that down to something semi –reasonable, just installing those, putting those into conferences (rooms), setting up the conference software, getting it all (done). Just that one scenario is huge. Getting people on to a next generation machine with digital reading and digital ink.

I don’t carry paper. I look at you. You bring in four recorders, a phone I don’t like, paper. I have got it all right here babe. My recorder is here. My ink is here. My phone is here. It is all here. It is all right here. Surface is the issue .My whole life. I can find anything in my life right here.

Which one is that (tablet)?

This is the Samsung 7 Series from last year running Windows 8. I probably shouldn’t be showing this because it is also running the new version of Office. But it is my life. Everything I need is right here. It is unbelievable. I am not attached to the network here unfortunately. But you know the way search works. The way you find things. The way you access information. The way BI works. It is just different. It is just different. And all of that is Windows 8 enabled opportunities for our partners.

Apps in the App Store. You could say hey, a lot of what our partners have done is to provide deployment services. Well if deployment gets a little simpler but App Development gets to be a much easier and bigger business. I just think it is tremendous.

Stan Shih, the Acer founder, came out and basically called the Surface almost a publicity stunt and that he was hoping you guys would pull back on that. What is your response to that?

Well it is not a publicity stunt. When we have got a lot of work to do to finish Surface 8 and Surface RT.We are working ahead.

But It is not a publicity stunt. I mean it is a real piece of hardware that real blood, sweat and tears (went into) and engineering excellence and innovation and creativity and capital. We are in. We are also in with our partners. But we are in!

How big an investment was this Surface thing?

You can ask. I won’t tell you . Nice try though.

NEXT: Ballmer Talks About How Cloud Will Change The Solution Provider Business

One of things I want to get at here is how you view the partner ecosystem. What percent of your partners have the right business model?

There is one big theme of change in our industry that our channel will embrace. I hope our channel embraces it all at the right time. But it is an important change.It is a change we are in. And that is really the change to the cloud. The change on the device side makes a difference. But the change on the cloud side makes a bigger difference. If you look at the mix of people whose business is deployment and services, infrastructure services, hosting. There will be a shift.

In general I think if you go out 10 years the channel will be more focused in on App Development and Business Application Value and a little less focused in on infrastructure than it is today and deployment. I think that shift will happen. I am not trying to tell anybody it has to happen yesterday. It will happen at its pace.

But I do think that partner conference- what year are we in 2012- 2022 that partner conference will have a different kind of a makeup. And it may happen before that. And that can be sometimes disquieting to people, uncomfortable. But that is an inevitable shift. It is an inevitable shift. And it is a shift not just to private cloud. But it really is a net shift. Because private cloud is let me say data center servers done right. That is really what we are doing with Hyper V , with virtualization, with Windows Server. And that is a big opportunity. I am not going to try to take anything away from it over the next two or three years, but more things will move to the public cloud over that period of time which will be more of the value that gets created in the channel will be created on doing things that are unique and valuable that the business users see as opposed to just that the IT department sees.

So to that point what these guys want Steve is the ability to sell everything from Microsoft A to Z. A Microsoft phone. A Microsoft Tablet and white label it.

In a world of devices and services I think we took a big step forward with the partners today with Office 365 Open. Big step forward.

What it lets them do actually is say okay we know how to offer an integrated package of our value without us really doing the management, the deployment and everything else. It really I think will be a trigger point for letting the channel, the partners really embrace 365. And you are pointing out some other places where our partners would like to see us open things up. If we came from a world of software we are moving now to a world in which software gets embedded in hardware and in cloud services and we are going to continue to be the company that is most channel friendly if you will in embracing that. Good feedback. But I think Office 365 represents a big step in that direction on the cloud side.

Will these guys be able to bill it themselves with services like Yammer, Skype. You did it with 365. Are we going to see more of it?

I think we understand what our partners want to be able to do. What we are trying to do is two things: we want to enable our partners to do what they want to do and we want to enable our customers to do what they want to do. Sometimes those things can come in the short run a little bit into conflict. Customers are more eager to embrace something where we haven’t fully evolved the business model. But we are going where our customers want to go and we understand and will continue to evolve how our partners can plug into it. Because we know the only way to sell at the scale we want to sell is through this community of partners.

Thirty years on. Going into your 12th year as CEO. How does it feel and what do you want your legacy to be when you move on?How do you feel going into the new fiscal year.

Look, I am not a legacy guy and I am not a fiscal year guy. I’m neither one of those. But I am a guy who understands sort of timing and big moments. This is an epic time! Look I can honestly say: the founding of Microsoft, the launch of the PC, Windows 95 and Windows 8 are the four big moments in Microsoft history. I can say that. And if you asked me to pick I can honestly tell you a reasonable case could be made for all of them. The founding was really the dawn of software as a business. The PC really kicked off the mainstreaming of information technology. Windows 95 is really what brought computing to the masses. And Windows 8 is really what takes us into the whole new world of mobile solutions and the cloud.

I know you are focused a lot on products. I know Jon (Roskill, vice president of the worldwide partner group) is the partner advocate. But on the senior management team Steve who is the guy fighting for partners.

Kevin Turner. My guy.

Can I ask you what does it say about the channel that your top solution provider advocate in the senior management team is a 20 year Walmart guy. It seems like everything is filtered through that Walmart view of we are going to go direct (and) sell at thin margin.

Oh, Come on. Steve. Please. Please.Don’t lay that on Turner. Man. Do Not.

Let me say something. With Surface we said we are not going to leave any ground open, no seam that Apple fills that we don’t fill. Some of the things we have had to do in the cloud, we started out by saying let’s get it right ourselves and then bring our partners into it as opposed to we could have designed Surface a different way. We could have just said hey to our OEM hardware partners here just take some technology and we’ll see what you get. We could do the same thing on the cloud. We think we have got to get it right for the customer and involve the partner. We are doing that with the hardware. We are doing that with the cloud. We love our partners. They don’t have to worry about any lack of advocacy from Kevin and from me. Not at all. We are all in. We are all in as the world gets to be a world of devices and services powered by software. We are all in with the channel.