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6/17/2011
10:42 AM
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Feisty Ballmer Talks Cloud, Office 365, And Big Data

In this Q&A, Microsoft's CEO pushes back, but also provides new insights into the company's cloud computing business, its hardware strategy, and his customers' next big bet.

Next, we tried to determine whether Microsoft stands to make more or less money from customers in the cloud than from those that license its desktop software. We posed the question this way: In terms of revenue, is a seat in the cloud worth the same to you as a seat in the enterprise, is it worth more, or is it worth less?

Ballmer: Well, they are both seats in the enterprise. I'm not following you. The same person who comes to work and wants to use information and collaborate.

So we tried again. Do you make as much money from that seat if it moves to the cloud? It should be less, right, because of the shared model of the cloud? Ballmer refused to answer the question and said that anybody who does is “just BSing you.” He jumped to a whiteboard and sketched out two hypothetical situations, one where the customer made a one-time software transaction, the other where the customer subscribed to Microsoft’s software as a service.

Ballmer: Our value prop on this is cheaper than them doing it themselves, because we take out labor, we take out capital, plus we subsume the software question. You can see our prices on the website for Office 365, and most people have a pretty good guess at what our Office products are like. If this is being renewed all the time, if we're running this as low COGS [cost of goods sold] versus high COGS, it gives you a different view of what profitability looks like. If this customer turns in a month, that's not a very good thing. If this customer turns in a very long time, we're obviously going to be better off, as long as we're running things correctly from a COGS perspective.

So, there's no easy answer. You have different timeframes, different cost structures. There's nothing that's similar about the economic model. The value props are very different. In one case, we're selling software. In one case, we're selling the value of software, labor, and capital. In one case we get our money up front. In the other, the potential for churn before we get there is higher, but the potential for keeping that customer regularly paying us, and working with us, is higher.

That's why it's an unanswerable question. I'm sure when we look back in five years we'll do the post-mortem and we'll say, hmm, we made more money.

We penciled it out. We’ve got these complicated models, big spreadsheets that all say we should make more money if we do it right. But we have to do it right, and there's no good apples and apples comparison.

We wanted to know how Microsoft’s business strategy might change given the expiration in May of the Department of Justice’s Consent Decree, which had imposed restrictions and regulations on the company for the past 10 years. Has the expiration of the Consent Decree changed the way Microsoft now operates?

Ballmer: Operate, no. Do we get to make a set of decisions differently than we might have made before the consent decree, based upon obligations that are no longer there?

There are things that we get to consider, but when you say change the way we work, our people are still going to work every day, they're still transparent and open in our prices with our OEM customers, and the like.

There are certain restrictions that are gone. You can read the decree and say the obligations we had or the things that we were effectively banned from doing are now gone. It doesn't mean we're going to do all of them, but it does mean that there are new approaches that are available to us.

We did have an obligation in the consent decree to have an antitrust compliance committee. We chose to keep it around, not because there's an antitrust issue, but there's a set of issues now that the board meets on and thinks about regularly. We may have renamed the committee, but it does consider a certain class of issues on behalf of the board, and we decided that's worth preserving.

Among Microsoft’s big successes in the past year have been Xbox and Kinect. Microsoft exercises tight control over the design and manufacture of its gaming platforms, in contrast to its approach with Windows PCs, which are available from a wide variety of manufacturers. Does Ballmer take anything away from that experience that might apply in other product areas?

Ballmer: Yes. We're smarter about that. I don't think we want the seam between hardware and software be an innovation barrier for us. It doesn't mean we have to make any particular class of device, but thinking through, end-to-end, how the hardware and software come together, as opposed to artificially boxing the way we think about systems design -- the Xbox and Kinect are good reminders of that.

Perhaps an even better reminder is the work that we've done on so-called chassis specifications for Windows Phone, where there's a base-level hardware we require before you can run Windows phone. For better or worse, we like it. Sometimes OEMs would prefer to do things a little differently, but we decided that that led to a better kind of integrated experience and allowed us to think about our innovation in a different way.

So there is a set of learnings that are valuable. You could say we're in the business of selling devices, whether we build them and price them ourselves or not, we sell phones, PCs, and I'll call them TV companions. It's as much our business as it is HP’s, Dell's, HTC's, or Samsung's. It's only a good day when a lot of Windows PCs sell. So how we continue to invest end-to-end in thinking through those devices is important. And the need to think through systems design, hardware, and software on the back end is as important as it is on the front end.

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