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Bill Gates's Game Plan

When Microsoft's then-President Steven A. Ballmer addressed a meeting of the Society of American Business Editors & Writers in 1999, he lambasted the "overvaluation" of tech stocks, saying they threatened the overall health of the economy. It's a comment that some now point to as the pin that eventually burst the Internet bubble. The Nasdaq dropped nearly 4% that day, based largely on Ballmer's comment.

On May 2, another Microsoft (MSFT) executive, this time Chairman Bill Gates, addressed SABEW's annual conference. He had no bombshells about stock valuations. But in an onstage question-and-answer session with BusinessWeek Seattle Bureau Chief Jay Greene, Gates talked about his efforts to start a blog, his thoughts about the next round of competition in the video-game business, and whether Microsoft is mature or not. Edited excerpts of their conversation follow:

Q: You started your speech today by talking about Steve's comments to this group a few years back. Any chance you think that the tech stocks are undervalued today?

A: Well, I think any statement about stock prices is always suspect unless it's made by Warren Buffett. I would say that there is as much overvaluation today as there is undervaluation. People still love technology companies. They still have the dream and want very big multiples out there.

But it's not like 1999, where you just said, "How can you possibly grow into any reasonable multiple for that business?" You just can't see it. In fact, [with] the Internet, the biggest things people missed -- and often are still missed -- are barriers to entry. The Internet is the easiest thing to get into. To be an Internet retailer, you just get that URL. The barriers to competition are more things in the physical world.

So we're not where we were in 1999. But in no way would I say we've swung to the other direction to some measurable degree.

Q: Microsoft employees blog, and sometimes that creates great corporate benefits, but sometimes they air the company's dirty laundry. Speaking as chairman, do the benefits of employee blogging outweigh the risks?

A: One of these ones we do is very video-oriented, where a guy just goes around with a cheap digital camera and videos people that are working on Visual Studio [Microsoft's software for developers]. And they put that up as a channel, and that gets incredible viewership.

In fact, sometimes I do video interviews, and I'm talking with an outlet that's well less-viewed than the video on the Microsoft Web site. So I'm always saying, "Hey, why doesn't somebody interview me for that channel?" That one is watched many times a day and gets in a search engine.

Q: Sounds like something you might be able to work on?

A: Yeah, we're working on it. [Laughter.] But I'd say, overwhelmingly, blogging has been good. It does raise lots of issues. You used to have these spokespeople, and you could call them together in a room and say, "Make sure you don't give out the earnings before we're supposed to" and, "Don't tell everybody's salaries," or whatever it is that you wanted them to understand.

Well, now you have thousands of spokespeople, where speaking off the cuff is part of the whole charm of the thing. So you'll get into issues. But even just the blogging for internal use, where our people are seeing each other's blogs, has allowed groups to work together on a better basis.

Q: You've written up three test blogs. Is that something you're really seriously thinking about jumping into?

A: Well, my rate has proven to be irregular so far. And basically what they've said to me is that, if I turn out at least two a month for a while, then they'll put me online. I've often thought that I might, but so far I haven't.

Q: I'd think that you'd have some say in that matter.

A: I've got priorities. I've got to get past the writing.

Q: You talked in your speech about your Halo video game and the next Xbox -- folks are saying that "Xbox 360" is the name. You can share that with us if you like. But why is the video-game business so important to Microsoft?

A: Well, actually, our code name for that product is Xenon, and the actual name, I think, will be released in a May 12 MTV special. The living room is important to us, because we think you want a common experience as you move between being entertained and finding the content you want. The video games have to be specialized. PCs run games. They do that very well. In fact, [in] games where you need a keyboard or storage, the PC will always be superior at those. But there's a type of game that is best in that 10-foot living-room experience.

Q: Will the feature set in video-game consoles more closely resemble the feature set in PCs as consoles evolve?

A: There will be a substantial overlap. Let's look at this from the user point of view. If I'm a teenager, and I want to see what's up with my friends, I'd like to see this one is watching this TV program, this one is playing this Xbox game, this one is on the PC. And I want to be able to send messages to them. I want to be able to talk to them. I want to be able to use a video with them. I want to be able to browse and edit together with them.

And so the PC and all this communication stuff come together. If I'm on my Xbox, I want to be able to listen to the music in that living room that's on my PC. I want to be able to call up photos from my PC. And I don't want to learn a bunch of stuff, a bunch of commands and interfaces that are different for the living room than I have elsewhere.

We have the Media Center PC, which sort of brings into it that 10-foot experience. And so what the video-game console will have [is] that kind of digital entertainment capability. In fact, if you're used to that menu, when you use Xenon, you'll see a menu a lot like that, to get photos, TV, music, all those different things.

Q: Sony (SNE) is the hands-down leader in the current generation of video-game consoles. Can Microsoft surpass Sony in the next generation?

A: Well, our goal in the last generation was to be in the game. And there were three companies -- Nintendo (NTDOY), Sony, and Microsoft -- who were in this round. We came out of this round a very strong No. 2. But as you say, Sony's installed base is more than double ours. They shipped before we did, and that gave them some momentum.

What we got this round -- at some significant financial cost -- was the opportunity to play again. But play again with greater credibility, credibility in terms of the strength of our team, the software developers, our understanding of the market.

And so now people are looking really at two companies. I'd say that everyone's watching what Sony will come out with for this next generation, and what will we come out with, and who can be the leader this time around. Both companies will be very big on it. Nintendo is more likely to be a niche player this time around.

Q: Will you win this next generation?

A: There are people who've written on their goal sheets to Steve [Ballmer], "We will win this generation." That doesn't mean we'll win. But they come to work every day thinking that. So we'll just do our best job, and we'll see how that stacks up.

Tomorrow: Gates discusses the next version of Windows and whether Microsoft has become a mature company

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