Beyond Binary

PALO ALTO, Calif.--While trailing Google badly in search has lots of disadvantages, it also opens some doors, says Steve Ballmer. And, he said, it's time Microsoft starts walking through more of those doors.

"We are going to have to be more disruptive," Microsoft's CEO said in response to a question at the end of a speech at Stanford. He pointed to Live Search Cashback as one example and hinted of changes to come in terms of the search user interface and new types of partnerships with content creators.

Google has the economies of scale and the money to invest in more areas than Microsoft can afford to, he noted.

"We're not just a No. 2 or 3 player," Ballmer said. "The No. 1 player is a lot bigger than us."

Ballmer said Microsoft can't afford to outspend Google in the search business or participate in each facet of the business.

At the same time, he said, Microsoft has less revenue to protect and can afford to take more risks.

"There are some things we have an opportunity to do precisely because we are not the market leader," he said. "We can experiment with new business models. We have less to lose than the market leader does."

Not everything will work, though, he said.

"We'll try some new products that are going to be a disaster," he said, pointing to Microsoft Bob as the canonical example from the company's past. "It wasn't terrible...it flopped miserably, but I am glad we did it."

He was also asked about Yahoo, with which the company had unsuccessful acquisition talks and with which Microsoft has continued to have on-and-off negotiations over some sort of a search partnership.

"I still think there exists an opp to have a better search product by having more customers," Ballmer said. "That may or may not at some time happen. There may or may not be appropriate discussions (happening now). I choose not to comment."

Microsoft CEO Steve Ballmer speaks to a crowd at Stanford University on Wednesday.

(Credit: Ina Fried/CNET)

PALO ALTO, Calif.--Microsoft CEO Steve Ballmer began his talk at Stanford University by offering a quick course in economics.

Explaining the economic crisis that has slowed business worldwide and caused Microsoft to have its first companywide layoffs, Ballmer told the crowd at the school's packed Memorial Auditorium, "The world borrowed too much money."

Then he went back to his obligatory chat about the early days at Microsoft, including when he dropped out of Stanford's business school to join the software maker. He noted that he knew how to read a balance sheet, but not much else.

"All I'd ever done is interview for jobs and market brownie bits," he said, a reference to his days at Proctor and Gamble.

His decision to drop out was not well received at home, Ballmer noted. "My dad said 'What the heck is software?' and my mom said 'Why the heck would anyone want a computer?'"

The problem with software wasn't that people didn't want computers, though. The challenge, Ballmer said later in his chat, is that software doesn't wear out, meaning companies have to do something new and different to get people to upgrade.

At the same time, he said, software products are only as good as their last couple of versions. "Windows is only as good as its last release or two," Ballmer said, laughing and acknowledging his own backhanded dig at Windows Vista.

I'll be updating this post during the chat, but for those that want even more coverage, it seems like everyone in the room is tweeting the speech.

Ballmer has had memorable appearances at Stanford in recent years.

In 2007, he used his to label Google's growth plans as "insane" and called the company a one-trick pony. Back in 2005, he noted that, had he not gone into software, he probably would have landed in the insurance business. He also said he would probably retire around 2017.

Update at 5:45 p.m. PDT:

Ballmer moved on to questions.

He was asked about the company's browser strategy. Ballmer said the company's goal is to create a platform where more capable applications can be built. That said, the need for standards acts as a gate on the speed of change.

He also noted there is value in integrating search and other technologies into the browser but noted that because Internet Explorer is part of Windows it will also be separate in some ways from search and other Internet products. Rivals, he said, may "wire in" their search into the browser.

"That can't be our approach," Ballmer said.

Asked about his role in shaping Microsoft's culture, he said that he thinks he has had a big role. "I've shaped Microsoft culture a lot, for better and for worse," Ballmer said.

Ballmer said he and Bill Gates shaped each other and the company.

"We kind of, in a sense, grew up together," Ballmer said. "The ultimate test is if you are able to get done what you want to get done." Ballmer was also pressed on a comment he made that fewer bad ideas will be funded in the current economy. Ballmer said that, in general, truly bad ideas don't get funded, but that the number of companies does scale up with the availability of money. If there was four times as much venture capital funding, he said, "you'd have four times as many companies, but I am not sure you would have four times as much innovation."

As promised, I've posted a pretty complete transcript of my interview on Tuesday with Microsoft Chairman Bill Gates.

As noted earlier, some of his most interesting comments dealt with Yahoo as well as the natural interface options that are planned for Windows 7.

But I was also intrigued by some of his other answers, including something that hits close to home--the future of journalism.

"I hope that readers will be willing to pay subscriptions or watch ads or things that will keep the high quality and breadth of journalism alive and (make it) even better than it is today," Gates said. "In some ways, we have better journalism today... (With) in-depth, certain kinds of journalism...there's still a question of how that gets funded."

And if you really can't get enough, you can watch my video interview or listen to Wednesday's podcast, in which I discuss Gates' speech with News.com's Charlie Cooper. Then you should really get outside, get some fresh air. It's a beautiful day (well, at least here in San Francisco).

PALO ALTO, Calif.--I still don't know much about what Windows 7 will do or what it will look like, but I can tell you that you won't have to rely on a keyboard and mouse to use it.

After decades of investing in things like speech technology and handwriting recognition, Microsoft Chairman Bill Gates said that users appear ready for new ways of interacting with machines. And, he said, advances in those areas and in touch-based gestures will find their way into the next version of Windows, known as Windows 7.

"The version after Vista is a big step forward in terms of speech," Gates said in an interview following his speech at Stanford University. "It's a big step forward in terms of ink. It's a big step forward in terms of touch."

Microsoft has already hinted that iPhone-like gestures are a part of the next Windows, and Gates said that touch-screen is likely to be the most broadly appealing of the new interfaces.

"The likelihood is that touch will become mainstream on certain form factors very quickly because we are working hand-in-hand with the hardware companies," Gates told CNET News.com "Speech and ink it's a little harder to say."

Gates has been a tireless proponent of the Tablet PC concept and made it clear he is not giving up on that dream, despite the fact that such machines remain a small fraction of notebooks nearly half a decade after their introduction.

"I'm a big ink lover," he said, adding that he hopes with Windows 7 more students decide to go with a Windows notebook that can use pen input. "I would vote yes, but I have a known bias."

Microsoft has not said when to expect Windows 7. Some have said it may not be until 2010, while others predict Microsoft will try to get a release out the door next year following a lackluster reception for Vista and growing competition from Apple.

In addition to Windows 7, Gates talked about a number of other topics, including why he thinks Yahoo is worth so much money to Microsoft. I'll post a more detailed transcript of the interview Wednesday or click here to see the video part of the interview.

PALO ALTO, Calif.--Bill Gates is willing to pay a lot for engineering talent.

Asked what makes Yahoo worth more than $40 billion, Gates pointed not to the company's products, its huge base of advertisers, or its market share, but rather to Yahoo's engineers. Those people, he said, are what Microsoft needs to go after Google.

In an interview after his speech at Stanford University, Gates said that it turns out it takes a lot of manpower to build tools for advertisers, mobile, and video products as well as improving its core search algorithm and building an infrastructure for cloud computing. "The amount of computer science it is taking to do that is phenomenal," he said. "As you get more scale of engineering you can just pursue that agenda more rapidly. Yes, the advertisers and the number of end users is good, but we'd put the people and the engineering as the key thing."

Of course, that's also what makes the Yahoo deal so risky. A nightmare scenario for the company would be if it succeeds in its bid to acquire Yahoo, only to see its top talent move to new ventures. Gates played down the notion of cultural differences between the two companies.

"Yahoo wants to do breakthrough software," Gates told CNET News.com. "The engineers there want to compete very effectively against Google or any other thing that comes along, so I don't think there is really a different culture."

But, he hinted that the company might have made itself less attractive had it continued down the path championed by former CEO Terry Semel.

"If Yahoo had gone the direction of just being a media company and not said that software innovation was important to them then no, there wouldn't be that intersection because we're about breakthrough software," Gates said. "Jerry Yang to his credit has kept a lot of very top engineers that have been just doing their work and improving those things. That's why we see the combination as so powerful."

Gates was quoted in the last 24 hours as saying Microsoft wasn't looking to hike its bid for Yahoo, but he sounded very much like a man committed to the deal in his comments Tuesday. He didn't say whether Microsoft would move ahead with a plan to wage a proxy battle, but that appears to be a real possibility if Yahoo does not come to the table.

The Microsoft chairman also indicated that Microsoft has a plan for taking on Google with or without Yahoo, but acknowledged Microsoft's plans can move faster if it succeeds in the acquisition than if it has to go it alone.

"It involves breakthrough engineering," he said. "We think the combination with Yahoo would accelerate things in a very exciting way because they do have great engineers and they have done a lot of great work."

Gates had plenty more to say about other things besides Yahoo. In a little bit, I'll post another blog on some interesting things Gates said about Windows 7 and a more complete transcript of my interview should be ready tomorrow. Click here to see the video part of the interview.

PALO ALTO, Calif.--Bill Gates began his address to students on Tuesday by playing to the home crowd.

He noted that CEO Steve Ballmer attended the school, though Gates convinced his buddy to drop out of the Stanford MBA program to join Microsoft. Other notable Stanford alumni are Microsoft research head Rick Rashid and Windows Live executive Chris Jones.

"We owe a lot to the school," Gates said. In a further attempt to warm up the crowd, Gates played an updated version of the humorous video he showed at the Consumer Electronics Show spoofing what his last day might be like. Gates plans to step away from full-time work at Microsoft at the end of June, putting the bulk of his time toward his charitable endeavors.

The ostensible purpose of Gates' visit was to talk about the company's program to give away developer tools, though many in the audience were eager to hear about other topics, including the company's $40 billion-plus offer for Yahoo. Microsoft, meanwhile, visits both Stanford and its rival UC Berkeley frequently as part of its efforts to stay front of mind to the students it hopes to one day recruit.

I'd be surprised if Gates offers more than a passing mention of Yahoo, but a student question-and-answer session should hopefully provide an opportunity for more on that front.

Update 5:15 p.m. PST: Well, Gates didn't mention Yahoo and, surprisingly, no students asked about it.

Gates did have a lot to say about education and global health, some of which I will try to blog about later tonight.