Microsoft CEO Steve Ballmer is sorta like the New York Yankees. When Toronto visits happen, they’re cause for significant fanfare. The globe-trotting Ballmer breezed into Toronto in late October for a whirlwind schedule of meetings and rah-rah sessions with local Microsoft staffers on the eve of the global launch of Windows 7. A focal point of his two-day agenda was a posh get-together for key clients and agencies, presented at the tony Carlu. Marketing was invited to participate as the exclusive media partner, and I was asked to lead an onstage Q&A session with Ballmer.
As fascinating as interviewing one of the industry’s pre-eminent movers and shakers was, it was equally interesting to observe the behind-the-scenes machinations. Team Microsoft was in top form, armed with clipboards, schedules and walkie-talkies, demanding the sort of spit-and-polish precision expected for a visiting head of state (which, in a way, Ballmer can be considered). His arrival in the backstage waiting area was, indeed, treated like that of an Obama or Sarkozy. The energy level in the room was noticeably lifted by his larger-than-life presence. Yet, despite all the attendant pomp and circumstance, Ballmer is an affable, down-to-earth guy. Before the event, we had the chance to chat for about 20 minutes as he multi-tasked with various executives and assistants. Though naturally loquacious, he is, like all great leaders, also a good listener. Interestingly, his data device of choice seems to be a battered envelope, continuously withdrawn from his suit-jacket pocket and crammed with written notes, ideas and reminders. Onstage, Ballmer proved equally open and invigorated, speaking candidly about Microsoft’s ad battle with Apple, the future of all media and his renewed search engine war with Google. A condensed version of the Q&A ran in the Nov. 9 issue of Marketing, with the complete transcript from the interview now presented here.
–Christopher Loudon,
editor-in-chief & executive publisher
Christopher Loudon: The “I’m a PC” campaign is the first major brand marketing the company has had in its new iteration. Why now? Was it a response to the Mac versus PC ads?
Steve Ballmer: Nobody should ever respond to competition. That would be a wrong-minded thing. After basically 20-odd years of Windows, during which we had only run one TV campaign for the launch of our Window 95 product, we thought it was important that somebody stand up and talk about the value of the PC, the unique merits, the diversity. Ninety-six times out of 100, the customer buys a PC versus a Macintosh. While Mac doesn’t take that issue on directly, we felt that was what we needed to do. We wanted to talk about the reasons why people pick PCs. It’s not so much about Windows as it is about Windows PCs, which is our primary delivery vehicle. By all statistical measures, the campaign has been a success in terms of awareness, what it has done to get people to stop and reflect and remember the benefits of PCs as opposed to other alternatives.
CL: Technology has changed the way that people engage with brands forever. Can you talk about the role Microsoft has in this transformation? And what is getting you excited about the next one, two or five years?
SB: Number one, we’re one of the core companies building the tech that people are going to use to participate in the world of communication, messaging, advertising and publishing. The PC is certainly a participant in that. The television of the future is going to have a bunch of software running in it, around it or somehow powering it. The phone of the future is another smart device and we participate in that. Number two, we build the set of tools to build great websites. It’s true for all advertisers and marketers that the potential to go directly to your customer has never been higher. Number three, we’re investing in tools and platforms for advertising. I think everybody is frustrated with how hard it is to buy online. What you’d really like to do is buy [across] the Internet as opposed to buying 5,000 properties. Last, but not least, we’re investing in a bunch of experiences ourselves that will offer advertising opportunities. Probably the most important in some sense will be our search product, Bing, but certainly our MSN offering and our Windows Live offering [are significant], with perhaps as much as 40% of Canadians participating in the online world.
At some point before I retire from Microsoft, figure that’s about 10 years or less, I’ll think I’ll be sitting watching television. I could ask Owen [Sagness, vice-president and general manager, consumer and online, MSN/Microsoft Canada ] if he saw Tiger Woods make that putt. Owen, of course, will be watching the hockey game instead. I’ll flip Owen to exactly what I was watching when I said it, he’ll watch the putt and say ‘We should buy those golf balls ourselves.’ We’ll be able to point at the golf ball, do an Internet search, and figure out its the new Nike golf ball. It’ll take us to the website. Owen will put in an order. Those technologies are in the pipeline. In our XBox system today you can get the social interaction I just described. We have to bring it to TV.
CL: The importance of digital media is unquestionable, yet advertisers are still challenged by its complexities. What is Microsoft doing to smooth the media buying process?
SB: The most important digital media investment you will make is investing in your own website. If your websites are not engaging, not providing some important information or content experience to your users, all else is lost. We’ll help you buy more banners and search, but your website better be what you want it to be. Once you get there, the real question is, regardless of whether it’s a direct response campaign or a branding campaign, how do you find the place where you want to intersect with your users? The Holy Grail for us right now is to invest in technologies that don’t just let you buy our websites. The real question, if you’re in sports equipment for example, is how you reach people who are into cycling. We need to be able to give you that ability across the web. The only people who are going to invest in those technologies are us and Google. The race is on.
CL: You’ve travelled all over the world and have seen many markets first hand. How do you see the media landscape evolving after the downturn?
SB: If you look at the amount of video content people are consuming, TV still dominates. But in 10 years, that will be an interactive experience. The whole media industry will change. In 10 years, you won’t be able to answer these questions: “What’s a magazine?” “What’s a newspaper?” “What’s a TV show?” Everything will be mixed together. It will be more interesting, powerful and convenient. People will have digital interactive screens [as thin as paper] in 10 years. There is no return to traditional media, but that’s independent of the recession. There’s been a march down this path. So what happens to the traditional media business? There are two aspects to that: What content are people willing to pay for, and what content will be strictly advertising funded?
In the online world, people’s tolerance for unwanted, irrelevant interjections into their experiences seem to be less than they are in the offline world. Particularly in TV, where in the United States 16 minutes of every [programing hour] is advertising. I guarantee you that’s not going to work in the interactive world. My favourite show is Lost. I can watch it on ABC.com and I’m upset with two minutes of commercial interruption out of 44. You’re going to get a lot of small content producers with no fixed cost. Call them bloggers if you want, but they can make a nice life. They might make $50,000 to $100,000, but they can’t support a big media company’s cost structure. Mid-sized media is likely to be hollowed out, and yet the amount of money that gets spent on media [will be] less in 10 years... Still, the amount of marketing you do is going to increase. You’re going to do it yourself, directly with your own customers. The reset in the economy just accelerated that trend in the media business.
CL: I want to ask about your new search tool, Bing. I’m guessing the ultimate desire is for “Bing” to become a verb, like “I binged Steve Ballmer.” Where did the name come from?
SB: We said the name can be no more than six letters, because people don’t like to type more than six letters. We need a short URL [because] the brand is the URL. It has to be pronounceable globally, and it can’t mean the wrong thing anywhere. It has to be obvious, when you say it, what you would type to get to the website. We had another name the marketing people were enthusiastic about, Kumo. But if you say that, people are not sure how to spell that, with a C or K? And if you see it written, you’re not sure how you pronounce it. So we discarded that.
CL: Are you happy with Bing’s launch?
SB: We have a long way to go. I don’t know if you’ve read The Little Engine That Could. Bing’s going to have to be that engine. It’s seven to 10% of the market share here in Canada. There’s been so little innovation in search in the last five years–same user interface, same business model. We’ve had a good initial reaction in terms of reviews, but there’s no question we have a long way to go.
CL: In Cannes, you were recognized as Media Person of the Year. What did that feel like personally, and what did that mean to Microsoft Advertising?
SB: Frankly, I was little surprised. But it is a big deal. It recognized that our company and our business is changing. We sell about US$2 billion per year in advertising. If you stack us up with other American companies, we’d be the 10th largest seller. I actually got to see the presentation of various awards to advertisers and agencies [in Cannes], and the work they’d done online. It only reinforced to me the importance of telling our clients to get their websites right. The most clever stuff that was awarded wasn’t just in online advertising, but creating viral connections between brands and their consumers. It was a good learning experience.
CL: More and more you are becoming the face of the company. Can you talk about your role not just as the head of the company, but the PR spokesperson of the company? Is it something you enjoy?
SB: We were born with PR as our number one marketing tool. In the tech industry in the ’80s, other forms of marketing weren’t that important. One thing everyone did was talk to one another. PR was important. I married the first employee of our PR agency. We got to know the PR folks pretty darn well. We live in a world in which PR is more important than ever before, but even PR has changed. My wife, who’s been out of the business for more than 10 years, had techniques that we were comfortable with back then and aren’t as important now. If I want to do a PR event today, I can bring in a bunch of journalists, fly to Canada, or I can sit in my office and do a webcast. I can reach directly to people as long as the webcast is properly posted, the search engines find it, et cetera. There are aspects of it I enjoy a lot. There are aspects of it that are painful. Nobody likes getting the negative reports, which now you can get in so many more places. It’s not just five newspapers anymore. You can read the bulletin boards about your stock prices if you like. You can go read what the bloggers have to say. There are just so many more people who get to have an opinion. That’s good and bad, but what’s important is that it’s effective. For a company that already has an established name, more and more customers are interested in hearing from us directly. There’s more chance to do that than ever before.
CL: Let me ask about Canada specifically. This market is sometimes part of America, sometimes we are counted as “international,” but we don’t often get to stand on our own, especially with the multinationals. What opportunities are there here that you’re excited about?
SB: Canada is one of the biggest markets in the world for information technology. These days, it would be top five in the world. It’s a really important market in our business. We too have struggled on who we group Canada with. Never seemed part of Europe, so we never tried that. Putting it with the U.S. always has the downside that it never gets enough attention. Putting it with the Americas is a grab bag where the only thing that’s consistent is a set of time zones. I think we even had Canada in a group that included Australia–a set of English language countries that weren’t the U.S. That probably made for a fun job for that person who had to commute between Toronto, Sydney and Hong Kong.
I think the important thing is how you manage Canada. It’s got its own characteristics. Online usage in Canada exceeds that of many other countries, but online commerce is less than in a lot of places, per user. Why is that? How do we understand that? The fact that it’s English and French means most understand the English part and then form hypothesis to compare it to the U.K. and the U.S.
It’s easier to run lab experiments, if you will, if Canada is regarded as a meaningful, important place. The fact that Canada is so physically distributed brings a whole different set of challenges in online. There are more remote parts of Canada, therefore there are more places where the Internet has a different kind of impact than in a country like the U.K. I find is fascinating. We’ve learned a lot from the work our folks have done up here. We continue to invest. This year, in order of magnitude, I think we said 6 million computers sold in Canada. Not bad, makes it one of the top 10 markets in the world, but its IT market would be bigger still.
CL: Microsoft has many other verticals it dominates, like operating systems and video games. Why continue to invest in search with Google as such a dominant category leader? What will it take to take the lead?
SB: Search is a pretty fundamental experience in terms of computer usage. If you’re as big and successful as we are, passing on one of the most important experiences that people do with technology doesn’t seem like a very good option. Ceding the market so that there’s no competition in one of the most important parts [of online] doesn’t seem very smart to us. People don’t cede to us any of the business in which we’re strong. If we want to continue to grow, we’ve got to be in other markets that are big and profitable. Search is big and profitable, at least for the market leader. Frankly, it’s the only online advertising funded business that’s super profitable today. There’s a tremendous drop in productivity, efficiency and profitability from Google to us and Yahoo, which is the second tier, to Facebook, which is the third tier, to the companies that do media country by country, whether that’s The New York Times or the press in Canada. It’s an area that will have innovation and, therefore, somebody is going to make some progress other than the current leader. We’ve got to be there. We don’t set out to be number two in anything. When you have 7% share, the first thing you want to do is get 15, then 20 and 25. It may be a while before we get top share, but we’re going to make sure we show the same kind of patience and long-term approach to investing in search that was required for us to succeed in a lot of other things.
CL: Tomorrow [Oct. 21] marks the beginning for Widows 7. What’s the wow factor? Give a preview.
SB: I was in an e-mail dialogue with a guy who runs our Windows team. He sent me something that came from, surprise surprise, a blogger. The blogger wrote a long piece and concludes ‘What is the number one feature of Windows 7?’ He concludes it’s ‘quality.’ And that’s above a working-through-the-bugs sense. It’s a way things feel. It feels easier, simpler to use. Windows machines feel snappier and more responsive. And by the way, when you go beyond that, there are literally hundreds of new features in Windows 7. People fall in love with one or two. Sam Ballmer, my oldest son, loves the Home Group. Steve Ballmer, the road warrior, I love the wireless networking. It’s a goofy feature, but [it’s good] if you’re docking and undocking as much as I do. When I was landing here in Toronto, I know you’re supposed to have your laptop off, but still at 10,000 feet you can see a bunch of people’s home networks. You just can’t fail to find what you’re looking for. Each individual thing won’t compel any one person. Speed, responsiveness, simplicity will grab everybody. The product then reveals itself to everybody in a way that’s kind of personal and special.
CL: We want to get to audience questions, so I’ll start off with one submitted during the event registration. ‘What do you think it will take to get advertisers to begin moving greater total spend to online, and as that share shifts, where will it come from–TV, radio or print?’
SB: Let me be provocative and say the number one thing it will take to get ad shift is more quality supply of advertising online. There’s plenty of opportunities online and everyone knows it. It’s not all high quality inventory that lets you deliver a message to the consumer that you’re trying to reach in the environment you’re trying to reach them in. We’re glad to tell you [Microsoft] has great supply; I’m not trying to sell Owen [Sagness] out. But I do think we need a greater supply of the right kind of places to land at. You see these contextual ads with Google and AdSense, and they work, they make a little bit of money. They’re not a great vehicle for delivering the right kind of messages to people. I was in Germany and met with the publisher of a large publishing group. They run a daily newspaper, and he was giving me a hard time, saying we don’t spend enough advertising with him. I said ‘We don’t love offline, we like online,’ so we looked at his sites. He runs some of the biggest computer publications offline and online and the content was bad, and the advertising opportunities were worse. I could have bought every ad opportunity on the site and it wouldn’t give me a lot of reach. Let’s really work on what the content looks like and the opportunity to land messages. The content industry is going to have to evolve and provide more high quality opportunities.
We’re also going to have to learn how to sell in a way that you want to buy. You want to buy the Internet, not just individual properties. In the offline world, you know exactly when your ad is going to appear. There’s a comfort factor to that. In the online world, we’re putting ads out all the time and that makes the online world feel more uncertain.
The big online move will occur when the big move of TV money occurs. I still don’t think we’ve got the video formula figured out at all on the Internet. Google with YouTube has the biggest incentive, but they’ve had it for four years and they haven’t figured it out yet.
AUDIENCE: We’re facing problems with some customers wanting digital brochures and others wanting printed brochures. How long before you think we will see a full transition from print to digital product.
SB: I think we can argue that there’s a class of consumer who’s perfectly fine not getting a printed brochure, and a class of consumer who’s not. And there’s a class of product where it’s acceptable to view everything digitally. I think about automotive brochures that people send out where you want them lush, beautiful and colourful. We can do that justice on the digital screen sometimes. If you think about a data sheet as a different kind of brochure, we can do that perfectly (online) every time. The market is there and over the next five or seven years, you’ll get an aging-out of certain consumers and it will become less and less economic to print.
With all that said, I had a fascinating visit to Hewlett-Packard in San Diego on Friday. I saw their division that makes printers. They’re so excited about the movement to online. I asked them how they could be excited because fewer things will get printed. They said most of the things that get printed–magazines, brochures, newspapers–don’t get done digitally anyway. The whole world can worry about putting things online, but there’s still going to be times you want to see things in print. They want to make sure they have great printing technology that will let you do a print easily, where you can look at it online, but then print that digital brochure right away in a way that’s rich, colourful and expressive. They’re working on a whole set of technologies that go from “bits to atoms,” as they say.
If there’s a dealer who’s not quite ready to give up the old ways, tell them to go buy the right printer and print them off themselves. I think we’re going to have accept the fact that there’s going to be a little bit of diversity of interest for a while.
AUDIENCE: In terms of PR, is there anything we can learn about Microsoft’s recent problems with the Sidekick in the U.S.
Microsoft recently lost nearly all user data for the Sidekick, a smart phone for which it provides services through T-Mobile. After more than a month, full user data had yet to be restored.
SB: It’s the product of a company we bought, which is no excuse, but it proves to me a few things. You want to do few things super-well in the digital world. You want to have [services] be customizable, but as for the degree to which you want to have a thousand flowers bloom, you want to be careful as you think that through. You want marketers to have freedom, but you don’t want the technologists behind them to have the same freedom. We’re going to have to work hard. We’re recovering the customers’ data. It’s important for all of us to understand that there’s a different set of standards of quality and service that people are going to hold us to. Some companies in this room deliver their products as bits, not atoms–the banks, the insurance companies, the telcos and media companies. They’re what I call bit businesses rather than atom businesses. We’re a bit business, and it puts the pressure on us to make sure we have first-time, every-time delivery.
AUDIENCE: In the next 10 years, who or what do you fear most?
SB: There are so many good things to be afraid of. I choose to be paranoid and not afraid, which is different in my mind. I think you want to be vigilant, but the day you’re afraid is the day you shouldn’t be the leader of a company.
In our case, there are a lot of big competitors–IBM, Oracle, Google, Apple. We have to be vigilant. In a sense, the bigger issue for us is what some call ‘de-monetization.’ Just as there are bloggers demolishing the media business, you have open source people writing software for free. All of us in the bit businesses have to watch this. The Internet allows us to operate as never before, and it’s re-crafting and reformulating our value proposition.
AUDIENCE: Microsoft partners with big portals and large-scale companies. What’s your responsibility to local content, which is threatened by the content shift to online?
SB: Is there really less local content? I think there’s a lot more, it’s just not written by the same people. It may be de-monetized, but it exists. We can talk about whether it’s right or wrong, good or bad, but it’s inevitable. Local information isn’t going to go away, I just think you’re not going to get it from the same media companies unless those companies transform themselves into cost structures that are more appropriate in this day and age. Or, it will be a combination of people with low cost structures, like bloggers, getting found by search engines like Bing. I don’t think the problem is that there’s insufficient content.
We recently closed a business, which we don’t do very easily, but the story is relevant to your question. Back when I started at Microsoft, everybody wanted to by encyclopaedias for their family. They cost thousands of dollars and came in big books. We came out with at thing called Encarta that came on a CD. It wiped out the encyclopaedia market in every country where we brought it. We shut down Encarta because the voluntary, de-monetized, un-curated authoring of content that goes on in Wikipedia has shut that down. I’ll tell you that the Wikipedia article on me is not right and I refuse to change it. I could. I know people count on the community to make that right, and it works in some areas and not in others.
You might ask if it’s a problem to have curated local content. I think that probably is true, but the consumer is going to vote whether they’re willing to pay for local content. Maybe they’re not willing to pay as much people think. I think maybe the local television stations have a leg up because what people will look for is a mix of photos, video and text. They’re out there investing in the fixed costs of taking video. For the people who are left, even if they look more like bloggers, we have to have the tools that facilitate them doing their job. For those who want to reach consumers, we have to have the tools that let you by these more narrow, less curated sites.
AUDIENCE: Just as you are chasing Google in some markets, Apple has been chasing you for two decades. Do you have anything to learn from Apple?
SB: I’ll say we have nothing to learn. That’s a brand statement and a strategy. I mean, we have plenty we can learn from Apple. But in this particular context, Apple doesn’t need high market share to have high success. They charge a lot of money for their product. They actually make money with a 4% share. They can live on that. Their differentiator is, in part, if you want to be unlike everybody else, come over to our side. It wouldn’t help them to have too high a market share relative to some of the things they do in their positioning.
With search, we still aspire to have a mainstream position. I don’t aspire to be 7% and profitable in search. We want higher share. Some day, in the distant future, maybe we’ll have the highest share. So I’m not saying there aren’t things to learn from Apple, but I am saying that what we’re trying to do business-wise is quite a bit different. If you can charge the right premium [like Apple does] it’s a pretty good opportunity. In the search business, I don’t think there’s a niche opportunity because of the investment that’s required to just open the doors. Whether its 7% or 50% shares, they’re not that dissimilar. You got to have the same number of engineers and a couple of private copies of the Internet on which to experiment to determine what’s relevant to show people. We need a high share play. Apple has a model that’s decent and makes a lot of money for them even though it’s only a 4% share.
I think we want to learn from Apple in terms of being different in search. We can see that with Bing… We’re going to be a little different, try to innovate. In that sense, we’re going to try to do what people say Apple tries to do to us. On the other hand, the business model has to scale to a bigger market share.
AUDIENCE: Can you talk about where gaming is going in the future and what innovation we might see?
SB: Gaming is going to expand in terms of importance and popularity. Defining what is “gaming” versus what is “socializing” or what is “TV” or other recorded entertainment will be a fuzzier line in the future. Right now the console gaming market is heavily male and heavily young. If you want to be less male and young, you have to broaden out to different categories, different classes of games and models of interactivity. We’re doing this with a new technology called Natal for XBox, which is the camera that lets you interact with the system. You don’t need a controller with six buttons and the manual dexterity of 14-year old to use it. We’re trying to open up the possibilities in a variety of ways.
Gaming will become more [visually] realistic, more causal. [Casual gaming] is a business that will be de-monetized in many cases. But there will still be big expensive games like our Halo franchise, which costs tens of millions of dollars to produce a new version. The market will bifurcate to those two poles. In this economy, that’s one thing we’ve seen. People are buying fewer games per console than ever before, but they’re buying as many the same number of high-quality games, and then getting the ones that look free as opposed to the mid-range games. There are problems for us in those economics, but the market will continue to grow and become more important.
Today, if you come to the Ballmer household, you’ll find myself and three boys who think [the XBox] is a great machine and should be on every TV in the house. My wife tends to think brand XBox means no homework gets done, must nag the kids to come and have dinner, and general disruption in the family. I trust we will have a brand that will sit next to the TV that my wife will see bringing experiences–gaming and non-gaming–that we do want associated with every big screen in the household.
Note: While some questions were paraphrased for length, Steve Ballmer’s responses are printed in full wherever possible.
