On March 22, four days after returning from negotiations with the European Union in Brussels, and two days before the EU's ruling against Microsoft, CEO Steve Ballmer sat down for an interview with InformationWeek editors at Microsoft's Redmond, Wash., campus. Following are some excerpts, which have been lightly edited for clarity and brevity.

The European Union:
InformationWeek: Can you tell us what the sticking point was over in Europe?

Ballmer: We and the commission agreed that we were able to, in our settlement proposals, substantively resolve the concrete issues that the commission had, but the commission was interested in getting something more formulaic in terms of guidance for the future. In the U.S., that's not the framework. In the framework here, there's not a formula that makes perfect sense. What was agreed to in the Consent Decree was a set of disclosures, obligations, and responsibilities, in addition to some other things, to try to ensure that there's both innovation and competition. And there was a set of guidelines articulated by the U.S. Court of Appeals in terms of the reasonableness of additional capabilities that we innovate and integrate into Windows, the reasonableness that the value they bring to some customers outweighs in some sense whatever impact they might have on competitors. We tried to speak to some of the same points in our settlement proposals, but the commissioner seemed to want something more concrete, more formulaic, and we weren't able to do that, even though what we offered in settlement goes well beyond what they'll ask for in remedy this week.

InformationWeek: Does this boil down to the question that's been raised before about what gets included in the operating system and Microsoft's ability to innovate?

Ballmer: In a sense, yes, and in a sense, no. There is now a standard of reason and a standard of contract in place in the United States. The question is, will the standard be different outside the United States than inside the United States? We went through a long and arduous process in the United States, including litigation, hearing from the District Court, the Court of Appeals, the consent decree, the modifications to the consent decree to have most of the states participate. So there is a framework in place in the United States that answers those questions, and we think it's quite an adequate framework. We had hoped to settle this thing with just the European Commission, so we didn't have to revisit some of the issues that have already been put to bed. Looks like we will be back in front of what's called the Court of First Instance, though, on these issues because we have made clear that we will appeal the commission's decision. [The Court of First Instance is an EU court that hears employment disputes and other matters.]

Vertical-Industry Strategy:
InformationWeek: We'd like to talk about Microsoft's strategy as it relates to different vertical industries. How would you rate Microsoft's ability to be a provider of industry-specific solutions? And how is that changing?

Ballmer: For small and medium-sized businesses we're trying to provide more complete applications capability through the work that we're doing in Axapta, Great Plains, and Navision. For that class of customer, where we have a full applications set, which doesn't include the General Motors of the world, we're trying to build up a horizontal base of capabilities that's easily customized for vertical solutions as well as a set of partners who are vertical in their nature. So we have great manufacturing software, we want people to build out the manufacturing software for clothing manufacturers. This is for smaller and medium-sized enterprises, as opposed to the largest of the large. And I think we have a very good base of partners and a good presence at that level.

For the largest set of enterprises, or for enterprises which for whatever reasons are not candidates to become customers through our Axapta, Great Plains, and Navision product lines, what we're really trying to do is reach out to partners to build out vertical capability. We aren't ourselves trying to be the provider of automotive solutions or oil and gas solutions. So the question is, in a sense, how well do I think we're doing with independent software vendors? And the answer there is, by and large, we're doing quite well, but always with opportunity to improve. I can certainly say we're in better shape now than we would have been a couple of years ago. We're more focused in on the verticals. We're more focused in on the ISVs and system integrators in those verticals. .Net has matured as a platform, which makes it more interesting to people. We have more of a marketing engine that knows how to speak to those customers, which is important to the partners that we're trying to address. So I think we've made a huge amount of progress on that dimension.

At the end of the day, we don't provide the vertical capabilities. I'll contrast this first with SAP. There are verticals where SAP has, for large enterprises, deep vertical capability. The process-manufacturing industry is probably the most concrete for SAP. If you look at chemical or oil and gas or some of these other so-called process manufacturing as opposed to discrete manufacturing, they've got a depth of verticalized expertise. We want to have a great partnership with SAP, but the vertical knowledge is really embodied in their applications. IBM's on some weird strategy, in my opinion. Weird in the sense they clearly don't have the vertical capability, but they're trying to suggest that they provide vertical capability. They do in their services, of course, but not in their software. So I think they're neither fish nor fowl. They're not a pure friend to the other ISVs and software integrators, nor are they really themselves trying to be a provider of software that solves these problems. So I think we've made great progress, we have great capability today that we didn't have a couple of years ago, yet I believe there's a whole lot more that we can and need to be doing.

The other thing I'm all hepped up on these days is what I might call the horizontal verticals. You say, what the heck does that mean? Take finance people in companies. A lot of finance people are heavy users of Excel. A lot finance people use SAP and Hyperion. But finance is a function that I don't think has gotten the same kind of verticalization that industries have gotten. Marketing, you could say, 'Isn't that PeopleSoft's job [or] SAP's job?' In a sense, yes, and in a sense, no. Those are more about line-of-business processes, as opposed to: An individual finance person, what would they want? An individual salesperson, what would they want? Individual salespeople mostly see the CRM systems as, shall I say, tools of oppression? Sales management loves them but salespeople don't tend to love them. They're there for somebody other than the front-line seller. And I do think there's going to be more work in a vertical sense working with these functional heads than we've had in the past. It's a different kind of verticalization, but I think it's going to be equally important.

InformationWeek: Would you address that through Microsoft products, or through ISVs?

Ballmer: A little bit of both. We're really taking a look at that now as a key next issue.