Original URL: http://www.theregister.co.uk/2007/07/26/microsoft_ad_services_devices/

Ballmer: Microsoft to become ads and devices powerhouse

'Bold bets' on the way

By Gavin Clarke

Posted in Financial News, 26th July 2007 20:44 GMT

Steve Ballmer has committed Microsoft to becoming an advertising and consumer device powerhouse, intent on sustaining growth via software sales and diversification into online services.

Ballmer told Wall Street it had "no choice" but to accept "big bets" on software plus services as a way of sustaining growth and the industry's "highest" operating income levels.

Kicking off Microsoft's annual financial analysts summit, chief executive Ballmer also told analysts that they need to accept multi-billion-dollar spending - without expecting payback in the next three years.

Re-enforcing the new direction, Microsoft announced that popular news ranking site and web 2.0 meme Digg has dumped Google Ads for Microsoft, and that Microosft has purchased self-proclaimed online advertising exchange AdECN. Microsoft said AdECN extended its aQuantive purchase and adCenter engine, but did not reveal financial terms. Later this year, Microsoft plans to begin franchising adCenter to partners.

Ballmer was speaking at the close of a year that took analysts outside of their Microsoft comfort zone, as the company spent $6bn on ad specialist aQuantative and $6bn on R&D activities related to search and ads. Additionally, Microsoft hired 13,000 new people, with 4,000 in products.

Continuing along these lines, the company has just introduced a new research center dedicated entirely to search and ad technologies.

"We are going to be an ad company and we are going to be a device company," Ballmer promised investors. "Being and ad company means learning about advertising efficiency. Now we don't talk just about ISVs, we talk about publishers... we need to be world class at that," Ballmer said.

"On devices, we need to embrace retail, hardware, hardware design, the telecoms industry... we are betting the same tenacity that's in our DNA in the enterprise into online services and consumer devices."

Success in ads is essential to helping bring Microsoft's consumer devices strategy to fruition. In this new world, Microsoft will have "multiple competences and business models living in the same body [Microsoft]," where success is measured in gross margin, Ballmer promised.

"Operating income is the highest of any company in the world that's not in the financial services or oil business. That puts a lot of pressure on us to make big bets, make a broad set of bets and execute very well on the bets we make."

Addressing skeptics, Ballmer continued: "I get share holders who will hammer me on this point - why do you have to do these new things?"

He answered: "We need to have this business outlet for our software creativity to continue to grow, innovate and be relevant... this is a little bit problematic for most competitors because most have software as a competence have one business model."

He highlighted IBM, SAP, Oracle and Google as companies with a software competency and a single business model.

"One the great misconceptions of success in the tech industry is it happens overnight. This is a though one - a long term investment horizon for many of you might be three years, yet that's a product cycle and a half for us," Ballmer told analysts.

Return on "bold bets, big bold bets, big bold bets" would go "beyond your typical investment horizon." The Windows PC business, mobile, server, and the small and mid market have a $5bn gross margin over the next three years, Ballmer contended.

"The transformation to software plus services is something we need to embrace and are embracing," Ballmer said.®