Microsoft CEO Steve Ballmer on Wednesday pegged three key areas of focus for Microsoft this year: competing with Linux in the high-end server market, software as a service (SaaS) and Internet advertising.
Speaking at Santa Clara, Calif., event hosted by two Silicon Valley groups, Churchill Club and Commonwealth Club, Ballmer said Microsoft may not be reporting 20 percent growth like the old days but the company has an innovation agenda that "qualifies us as a growth company."
"The greatest competitive threat we face is our own ability to either embrace or compete with alternative business models," Ballmer said.
In the case of open source, Ballmer said Microsoft has made a decision to stick with a more traditional corporate business model vs. going the open source route. He said Linux has been outselling Microsoft in areas such as file services, e-mail security and e-science, and that demonstrates that the Redmond, Wash., software marker needs to innovate.
"We need to have a better high-performance cluster technology that Linux does," he said. "We are hard at work at it. You take a look at what is going on in security appliances, we need better technology. So there are two or three areas where Linux has really developed a position."
Ballmer believes Microsoft can beat open source by ultimately proving lower cost of ownership with its software. "It hard to beat open source on initial cost of procurement; it is not hard to beat open source on total cost of ownership," he said.
Embracing more of the "alternative" business model approach, Ballmer reiterated Microsoft's commitment to Software as a Services (SaaS) for driving both the company's commercial software business and helping in its quest to increase Internet advertising revenue.
Microsoft will pursue SaaS licensing, subscriptions, transactions and advertising. "It is very fair to say that all forms of software will have a very important service component behind them, which brings additional value to the community and new capabilities," he said.
Ballmer said Windows Live is Microsoft's first important foray into Saas. Currently in beta, he said service is on target for an official roll out later this year.
Microsoft is late to the SaaS party, unveiling it's hosted-services game plan last fall.
So far most of Microsoft's planned WIndows Live and Office Live offerings are basically repackaged versions of MSN and hosted Sharepoint. Over time, observers expect the company to roll out an array of hosted business applications as well.
Ballmer acknowledged that Microsoft also is late in its foray into Internet advertising.
Last week, Ballmer and a phalanx of other Microsoft executives took on the whole notion of ad-based revenue and defended their decision to pour money into MSN.
"In a sense we are a "Johnny come lately," he said. "I think we're a little late to the game, but I think we've watched what's going on. We think we have a lot of ideas on that topic."
One idea is to innovate on technologies in "the cloud" that are delivering ad services as well as delivering communities and services where advertising can be placed.
Ballmer also noted that Microsoft's next Windows operating system, Vista, will be priced in line with current versions of the operating system. The Office upgrade, Office 12, also will be priced similarly to current versions, he said, and the SKU for educators and students will be rolled into the home version "and will have lower prices for home users."
Windows Live and Office will not require Vista to run because Microsoft is pushing to reach a wide audience for the software products, he added.
Barbara Darrow contributed to this report.