Microsoft CEO Steve Ballmer On "Moving The Needle"

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Last week we showed the highlights and 10+ minutes of video footage of an exclusive hour-long TechCrunch interview with Microsoft CEO Steve Ballmer.

Now for the rest of that interview. The video was just a teaser. I spoke with Ballmer for another 50 minutes on the record, doing a deeper dive into five key areas of Microsoft’s product strategy: Big Opportunities, Operating Systems/Browsers, Mobile, Search and Developers.

This post is about big opportunities at Microsoft beyond their dual cash cows of Windows and Office. Microsoft generates around $20 billion a year in pre-tax profit, and spends nearly $10 billion on research and development. When Microsoft thinks about increasing (or sustaining) those profits, they have to think big. And they have to think long term.

Ballmer says he thinks about new business opportunities in three buckets: expanding current businesses (short run), building things from scratch (long run), and big aquisitions (short cuts).

First Bucket (short term): The bulk of new business opportunities in the short term are going to come from things that Microsoft is already working on. Says Ballmer: “Most of what we’re going to move the needle in the next five years relative to 20 billion is going to come from things that we’re already in.”

Second Bucket (long term): It just isn’t realistic, he says, to build new businesses from scratch to big profits (the kind that make a company the size of Microsoft blink) in five years or so. Ten years is a more appropriate horizon for new ideas: “You would be hard pressed to name a start-up company that generated an interesting amount of profit in five years relative to 20 billion. Even the most successful. Google in its first five years, Facebook in its five years.”

Third Bucket (aquisition short cuts): Despite the fact that in the initial interview Ballmer said that total acquisitions of around 15 companies per year would remain roughly steady, he says not to expect any big “needle changing” acquisitions in the near future: “And the only other wild card you can weigh on top that, which we just don’t do much, is large acquisition. So, we have nothing to announce, there’s nothing we’re thinking about, so I’ll put the third bucket aside.”

Ballmer also specifically highlighted seven businesses that he hopes to dramatically build and/or expand over the next few years: PC innovation, Communication/Productivity Tools, Phones, TV, Search, Enterprise Infrastructure and Servers. He also says to expect an explosion of application development over the next five years:

It’s going to come on innovation and growth in the PC market having the number of PCs that are sold continue to grow. That’s important. We can drive that. It’s going to come from innovation in the tools and technologies both at home and at work to help people communicate, collaborate, to be productive. It’s going to come from phones. It’s going to come from the intelligence that powers TVs. That could happen. It probably doesn’t explode unless we can manage to make the device that does that, the PC, that’s the way to get short-term explosion. We’re focused in on that.

Search, we have real opportunity in search in the next five years.

Biggest opportunity that we never talked about is enterprise infrastructure. Most of that goes to the database and mainframe vendors today who are in the business. We’ve got four billion in revenue and yet we’re a small marketshare player.

Servers, there are going to be more new applications written in the next five years than any five-year period of time.

So, I take a look and, I’d like to say we’ve got seven big opportunities and everyone of those seven opportunities is going to have to do its fair share to move the needle over the next five years on the 20 billion. We have some other things that in aggregate may not themselves be a large percentage of the 20. But those have to perform, and we’ve got to be investing in some things that can explode in years 5 to 10. I hope I answered your question.

What about new technologies like Azure, Mesh, etc? Ballmer says they’re “dislocators to technology” that overlay all of these opportunities:

I don’t list the cloud because the cloud has kind of overlaid all of those opportunities. We have opportunities by offering cloud infrastructure to enhance the margins we make in our server business, in our communications and collaboration and productivity business, and that’s where things like exchange online, SharePoint online, Windows Azure, they’re not really new value propositions, but they are new potential margin streams and dislocators to technology shifters and some of the existing kind of customer propositions that we invest in.

Ballmer also broke down that huge $9.5 billion/year Microsoft R&D budget. Just $250 million to 300 million per year is invested in pure research, he says. The bulk of it goes into Microsoft’s five key business areas. They have 5,000 people just researching search, for example. Health IT, robotics and energy also have a share of the budget:

Well, if you look at the R&D budget itself, let me break it into four pieces: pure research, that was misreported I think in Business Week recently. But our pure research budget is about $250 to 300 million or something like that. We have what I call an incubations budget – incubations and explorations. These are things we’re not sure turn into products and don’t yet fit in any one of the existing business groups necessarily. Mostly managed by guys like Craig Mundie and Ray Ozzie. That’s another several hundreds of million dollars.

We have new businesses, put health for example, we have a fairly significant investment in health IT. There’s some stuff going into robotics, energy. That would be another few hundred million. And then the bulk of our key money is going into our five big business groups that are investing in the kinds of stuff that we talked about. Just take search, order of magnitude, we have 5,000 people working in R&D and search order of magnitude.

Five thousand people, you pay a person fully burdened let’s say 200,000 plus. That’s kind of what the tech industry looks like and you get a billion dollars to spend. But we got five of those things, and so – or bigger than a billion. Not many of them are too much smaller than a billion. You put them all together and then add to the first billion and a half I described and then say get the 9.5 billion bucks. So, the bulk, eight of the 9.5 is invested in the core businesses including the incubations that are going on inside the businesses.

Ballmer ends this portion of the interview by talking about Microsoft’s biggest single research focus – communications collaboration and productivity. He says “And you know, the biggest investment area for us is in communications collaboration and productivity. That would be the single biggest investment area for us.”

The full transcript of this portion of the interview is below.

Transcript:

Mr. ARRINGTON: Last year you generated about $20 billion in pre tax profits.

Mr. BALLMER: That’s right.

Mr. ARRINGTON: It takes a lot to move a needle with Microsoft where you find new businesses in areas you want to expand. What are the new business opportunities that excite you?

Mr. BALLMER: I want to start with my excitement about our existing opportunities.

Mr. ARRINGTON: OK.

Mr. BALLMER: I really do because, if you’re going to – if you want to move the needle for us, there’s two things we have to do. Most of what we’re going to move the needle in the next five years relative to 20 billion is going to come from things that we’re already in. Most of where we’re going to move the needle maybe five to 10 years from now is going to come from things that are new, that we have to go invest in from scratch.

And the only other wild card you can weigh on top that, which we just don’t do much, is large acquisition. So, we have nothing to announce, there’s nothing we’re thinking about, so I’ll put the third bucket aside. But you would be hard pressed to name a start-up company that generated an interesting amount of profit in five years relative to 20 billion. Even the most successful. Google in its first five years, Facebook in its five years. So, there are things we have to be investing for kind of the five to 10 timeframe. But if you look at where things are going to happen and they’re interesting relative to 20 billion you’d mentioned, it’s not at our existing businesses.

It’s going to come on innovation and growth in the PC market having the number of PCs that are sold continue to grow. That’s important. We can drive that. It’s going to come from innovation in the tools and technologies both at home and at work to help people communicate, collaborate, to be productive. It’s going to come from phones. It’s going to come from the intelligence that powers TVs. That could happen. It probably doesn’t explode unless we can manage to make the device that does that, the PC, that’s the way to get short-term explosion. We’re focused in on that.

Search, we have real opportunity in search in the next five years.

Biggest opportunity that we never talked about is enterprise infrastructure. Most of that goes to the database and mainframe vendors today who are in the business. We’ve got four billion revenues and yet we’re a small share player.

Servers, there are going to be more new applications written in the next five years than any five-year period of time.

I don’t list the cloud because the cloud has kind of overlaid all of those opportunities. We have opportunities by offering cloud infrastructure to enhance the margins we make in our server business, in our communications and collaboration and productivity business, and that’s where things like exchange online, SharePoint online, Windows Azure, they’re not really new value propositions, but they are new potential margin streams and dislocators to technology shifters and some of the existing kind of customer propositions that we invest in.

So, I take a look and, I’d like to say we’ve got seven big opportunities and everyone of those seven opportunities is going to have to do its fair share to move the needle over the next five years on the 20 billion. We have some other things that in aggregate may not themselves be a large percentage of the 20. But those have to perform, and we’ve got to be investing in some things that can explode in years 5 to 10. I hope I answered your question.

Mr. ARRINGTON: Oh, yeah, you did. Things sure have changed since your initial mission statement – the computer in every home, every desk running Microsoft software. You’ve moved way beyond that.

Mr. BALLMER: Yes.

Mr. ARRINGTON: Your R&D budget is $10 billion a year, roughly.

Mr. BALLMER: Nine and a half.

Mr. ARRINGTON: $9.5 billion…What do you spend that on?

Mr. BALLMER: Well, if you look at the R&D budget itself, let me break it into four pieces: pure research, that was misreported I think in Business Week recently. But our pure research budget is about $250 to 300 million or something like that. We have what I call an incubations budget – incubations and explorations. These are things we’re not sure turn into products and don’t yet fit in any one of the existing business groups necessarily. Mostly managed by guys like Craig Mundie and Ray Ozzie. That’s another several hundreds of million dollars. We have new businesses, put health for example, we have a fairly significant investment in health IT. There’s some stuff going into robotics, energy. That would be another few hundred million. And then the bulk of our key money is going into our five big business groups that are investing in the kinds of stuff that we talked about. Just take search, order of magnitude, we have 5,000 people working in R&D and search order of magnitude.

Five thousand people, you pay a person fully burdened let’s say 200,000 plus. That’s kind of what the tech industry looks like and you get a billion dollars to spend. But we got five of those things, and so – or bigger than a billion. Not many of them are too much smaller than a billion. You put them all together and then add to the first billion and a half I described and then say get the 9.5 billion bucks. So, the bulk, eight of the 9.5 is invested in the core businesses including the incubations that are going on inside the businesses.

Mr. ARRINGTON: Ok.

Mr. BALLMER: And you know, the biggest investment area for us is in communications collaboration and productivity. That would be the single biggest investment area for us.

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