Microsoft: Fighting back

...business customers rapidly moving to having us read their email and read every document. I just don't think that's going to happen.

I think that there will be elements of advertising certainly in the Office Live and Windows Live experiences, but I don't see us evolving Windows from a product that gets bundled on hardware to something that gets downloaded, [that] locks you into certain Internet experiences and feeds you ads. But it will be a mixture of these things that will be important.

It seems like the question mark is consumer-packaged software. Will the low end of that market become ad-supported?
Ballmer: There are certainly many things which have been consumer — take games, already. I don't know that a lot of traditional games have gone to be ad-funded, but a lot of gaming now on the PC is done online in ad-funded experiences, and so what it has done is create pressure that the games that do run on PCs and that you pay for be richer [graphically]. It's hard to sell low-end, cheap, not very good PC games when there are ad-funded online experiences. So you get a little bit different mix, in terms of what's going to be charged for traditionally, ad-funded, etc.

Do you see competitors — both upstarts and the Googles of the world — trying to offer ad-funded versions of the kinds of software that you guys have traditionally sold in a packaged way?
Ballmer: Sure.

Gates: Yeah, but in some ways that's a red herring. We compete with truly free software — free software that doesn't stick ads in your face — and we compete extremely effectively by having reliability, innovation and the software that you want to use every day for hours a day. Somebody that's ad-supported is more expensive than just the pure free guys, and we do super well against the pure free guys.

Ballmer: Is Open Office with ads better than Open Office?

Gates: Is it a better competitor once they stick ads in? That's the thing that's so goofy, I don't get it.

Actually, that was one of the few announcements in our industry that was sort of a fraud that actually was unmasked by the press; the first ever was that Sun-Google thing where people were saying, well, what the hell is this?

Ballmer: You could say we've gotten into fighting shape by fighting a worse competitor, i.e., a tougher competitor, true free versus ad-funded.

What about Google?
Ballmer: What's the expression? "To a man with a hammer, everything looks like a nail?" If you know how to sell advertising, everything is going to look like an advertising problem. I think people like to say the same thing about us. We know how to collect money, charge for software, so everything has got to — that's why in answer to your question I was very precise. There will be things where subscriptions make the most sense, there will be things where advertising makes the most sense, and there will be times you just want to own the damn thing.

One thing I will say, we have a big advertising business today. We're over a billion bucks in advertising, and we're going to grow the hell out of our advertising business, and we're going to grow the hell out of our packaged business, and — oh, by the way, subscriptions...

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