Microsoft's chairman explains how the company plans to build on Zune to fulfill a grander vision, and why changes in Office 2007 are 'such a big deal'

Bill Gates knows that when it comes to the Zune, Microsoft has some catching up to do.

The success of the iPod has been described as "phenomenal, unbelievable, fantastic". And that was just Gates talking about it on Wednesday.

But despite catching up, Gates thinks that Microsoft can win some pocket share for its own media player, over time. While today's music players are largely islands, the Microsoft chairman paints a picture of a future in which all manner of devices — from cars to music players to digital cameras — all share data.

And as Gates told a crowd at Stanford University this week, Microsoft has no intention of being number two at anything for too long.

"We want to either be number one or on our way to being number one," he told the crowd.

In the first part of a two-part interview, Gates talks about the Zune and some of the things that its wireless connection makes possible, as well as about the sweeping changes Microsoft is making with Office 2007, the revamp of the ubiquitous software package.

Q: The Zune went on sale on Tuesday, and people weren't exactly lining up at midnight to get them. Was the reaction, both in terms of sales and critical acclaim, something that's a concern?
A: No. It turns out the stores weren't open at midnight, so we're glad that they waited to come in. The Zune is something we've done a really great job on the manufacturing piece, so there isn't this need to say, "Boy, I've got to get it", because we actually have quite a bit of volume.

We expect to do quite well this holiday season. The orders from the retailers have been great. And then, well, who knows what the regularity will be? But, certainly at least every year, you can do more, including things that work on the existing hardware, and then new hardware as well.

Apple has built a pretty big lead with the iPod. Why is it a market that's important to go after? Why develop the Zune at all?
You're going to have entertainment capability built into the car, and we're working on that with the car manufacturers. You're going to have it in the new-generation set-top box. You're going to have it in your phone, you're going to have it in your PC, and you're going to have some dedicated devices — dedicated media devices.

We thought to really fulfill our vision of connected entertainment that we wanted to have a device that had the wireless connection. Obviously, the iPod doesn't let you do third-party software, doesn't have a wireless connection — so, the connected entertainment vision, we can build on Zune and do some new things.

Looking at Office — big changes this time around. The user interface is really different. There's clearly some risks in that, and some investment required by companies when you change the way things look and feel. Why is it worth it to change Office so much?
Well, first of all, there's no effect on companies really. It's just as an individual, when you fire up Word 2007 you go, "Wow, those options are right there. You know — all the familiar stuff that you use regularly is just there. It's pretty obvious what we've done, but you'll probably take the first half-hour getting used to those things.

We have over a million users on the thing now, we understand the usability quite well. People adjust very quickly. In fact, within a few days, people do not want to go back to the [old] version because the ribbon [feature] takes advantage of the idea that screens are bare now, and instead of burying things in a two-level menu, just [has] them out there.

It was a very risky thing to do, and Julie Larson-Green and the team who internally championed that, I love what they did. It's been less controversial than we expected. You know, the world's most-used application, as you say, hundreds of millions of people who know...

...just without thinking, you know, fifth menu, seventh item, they're going to have to look at that ribbon, but they'll find what they want. It's not like you need to go to a training session. You just need to sit there and look at the screen.

Remember part of the reason we took this leap is that some of the great things we've done in Office people would say, "Hey, why don't you have a feature to do this?" And we'd say, "Well, that's interesting, we do have a feature to do that."

And I, myself, PowerPoint is an example. Excel and Word, I kind of know most of it, and I know where it all is. PowerPoint, I'm not the heavy user. Animations, I've just never used them. Now it's pretty easy for me. I'm [in favour of] the risk that was taken, because it's very important to have a culture that's willing to take that kind of risk.

Similar thing on file formats. Again, people are used to those formats the way they are. Why go with new XML file formats?
Gates: Well, to be clear, we support the old file formats, totally and completely. If you [have Office] 2003, we have these add-ons that just come down over the internet that can even read the new format in the old version, which is an amazing thing that we haven't done before. In Office 2003, we put in a future-proof converter architecture that could find on the internet the things for any future format.

The simplest thing, of course, is to upgrade to 2007, but if your company standard won't let you or whatever, fine.

The XML format is there for a very important reason. XML has become — starting with work we and others did in 1996 — it's become the way that you can exchange rich data. Whenever you want to read and write data outside documents, in the past, you had to understand the structure of our application and the command structure, and you could even become very version-dependent on that. Now all you do is say, "Hey, here's a named XML range, read out the data."

So we put a big investment in the XML format documents. People can set the thing to save in the old format only, if they choose to do that, or they can save in the new format. But you're right, that's a new thing. And we had to think hard about, "Yes, this is important to do." And then we went and documented the formats in a standards way.

Looking out, what are some of the tasks that workers don't do from their desks today that are the information worker tasks of the future?
The big emerging activities are, number one, real-time communication. [He points to a traditional desk phone.] In terms of how you conference, you can't screen-share, you can't see who called you while you were gone. That phone, you'll laugh at that. That's worse than the typewriter. We've started this with Office Communicator. It gives you the video, gives you the integration with voicemail, email, all those things. So I'd put that number one.

I'd put collaboration number two, and that's where SharePoint comes in in a deep way. I'd put business intelligence number three, a very deep thing, I'd put aids to buying and selling tasks that you do as a consumer or as you do as a business. There's a lot of horizontal things we see ourselves doing there that will be pretty important.

So, you know, it's a fun time for us, because Office 2007 is such a big deal. Now we get to step back and think, "OK — where do we go from here?"

And those areas I touched on. Well, the relationship to the mobile phone, I'd add that as well. That Office works super well with Windows Mobile. There's a ton more we can do in scenarios that span mobile phone and Office and lead in that.

Copyright © 1995-2010 CBS Interactive Limited. All rights reserved
ZDNET is a registered service mark of CBS Interactive Limited. ZDNET Logo is a service mark of CBS Interactive Limited.