Microsoft's Ballmer: More investments coming

Software giant's CEO on the eight core areas vital to the future of Microsoft

Microsoft CEO Steve Ballmer said Monday future growth for the company hinges on continued investment that matches the company's multi-billion dollar revenue and operating income, and that the company will be very active in pumping money into eight core areas.

Those areas are: Windows on new PCs; corporate desktops; server units; small/midsize business (SMB) and consumer markets; online advertising; Xbox; Windows Mobile; and other opportunities including Zune and Surface computing devices.

Ballmer said each area could return US$750 million or more in real dollars over the next three years.

Ballmer made his comments during Microsoft's annual strategic update to financial analysts in New York and just a few days after Microsoft made a bid to acquire Yahoo for US$44.6 billion.

Ballmer said the Yahoo bid was an effort to build momentum for what he characterized as a gateway to future growth around desktops, enterprise software, online services and entertainment.

"Software is a funny thing," he said. "It does not wear out and it never gets used up. So to drive even flat performance requires innovation and investment, but to drive growth requires even more investment for the long term. We see big opportunities, but we need to make big investments, certainly on the scale of this revenue and this operating income to drive superior results."

Ballmer was referring to Microsoft's doubling of both revenue (US$51.1 billion in fiscal 2007) and operating income (US$19.7 billion, fiscal 2007) over the past five years. Ballmer said long term for him means five to 10 years out, and he contrasted that with the three years he said shareholders consider long term.

He then broke down Microsoft's eight biggest opportunities, outlining the company's strategy, investment areas and the impact from its software-plus-services initiative.

"Each of these opportunities, if we do our job right, has the potential to deliver three-quarters of a billion dollars or more of incremental contribution margin dollars over the next three years," he said. Contribution margin is the percentage of each sale that remains after variable costs are subtracted.

"And when we talk about the transformation to a world of software-plus-services, we talk about everything we do transforming to [that world]," Ballmer said. "What is the future of Windows and corporate desktop value? Each and every one of these businesses on top of a consistent platform transitions to have additional revenue and profit opportunities based on this transformation to the cloud."

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Here is how Ballmer highlighted each area of opportunity:

-- With Windows for PCs, Ballmer said it was not the fastest growing area (by percentage), but remains one of the most lucrative in terms of absolute dollars. He noted emerging markets, where Microsoft does not get as much per copy of Windows as it does in established markets, will fuel growth and he said Microsoft is investing in R&D, marketing, the next version of Windows and will invest in building "consumer excitement" around Windows. He said the growth prospect with Windows Live services would be advertising.

-- For corporate desktops, Ballmer said the focus would be on providing more value per desktop and highlighted Office 2007 as the current driver in larger companies. He highlighted enterprise search, using the recent acquisition of Fast, and expanding the corporate sales force as investment areas. He said providing online services to large companies, especially around platforms such as Exchange and SharePoint via Microsoft Managed Services, would be another priority.

-- In terms of server units, Ballmer said the company would "democratize virtualization." He said, "You can read that as saying our prices are going to be lower than other people's prices." He added that investments will be needed in management, high-performance computing and Web servers, as well as sales, marketing and technology around various server workloads, including security where he admitted weakness. On the services side, he said the opportunity would be in subscription-based services around deploying servers and data center infrastructure.

-- For SMBs and consumers, Ballmer said Microsoft would focus on expanding Office to the Web via Office Live and continue to invest in Dynamics CRM and ERP. He said the Dynamics Live service would grow via subscriptions and advertising.

-- In terms of online advertising, Ballmer highlighted R&D investment and building out scale for both the Web search and advertising platform.

-- For Xbox, he said the investments would focus on expanding into weak sales areas such as continental Europe and Japan and to extend the appeal of Xbox beyond traditional gamers. The growth opportunities, he said, would be around subscriptions, advertising and transactions.

-- In Windows mobile, investments will come around additional applications that run the platform, which Ballmer said would start to appear in the next 12 months. He said the growth prospects would be around Windows Live Mobile and advertising.

-- In other areas of investment opportunity, Ballmer mentioned healthcare and education, Zune, sales force in emerging markets, and commercializing the cloud platform. Ballmer also said Microsoft's Surface computing platform would get a consumer makeover. "We have had more push back to get a consumer version of Surface to market than you can shake a stick at. So we will follow our nose in terms of customer interest and make a set of investments to try to take some steps toward making Surface a consumer product.