In separate interviews, BusinessWeek's Seattle bureau chief, Jay Greene, sat down with William H. Gates III, Microsoft's chairman, and CEO Steven A. Ballmer to discuss innovation, competition, and the company's future.
GATES on Microsoft's growth prospects
If you want growth, don't go to the big guy. Go to the small guy. If growth is your story, you're looking in the wrong place. Now, if you're looking for innovation... we're more of a change agent for the way business is done, the way people work, the way people do things at home. We're 100 times more interested in [change] than we are [in] growth percentages or something like that.
On the company's innovation
With our $6 billion a year [in research and development], we're doing more new things than anyone else. Because of our high-volume approach, we can do a lot of new things that strengthen and maintain our profit pool and in some ways grow it. Percentage-wise it's not all that dramatic, and yet it's the most important work in the world.
On how its seven business units cooperate
We use this structure [profit and loss for each unit] to make sure that things are delegated and measured and fairly autonomous, and then we have various mechanisms that keep these P&Ls working together. The most interesting story for us is how we said: "O.K., give the P&Ls default autonomy, but then be very explicit about the things they need to work together on."
[These are] initiatives that I'm driving where many of the really big breakthrough things, like getting people to take advantage of [the new operating system] Longhorn, cut across the P&L structure. And that's just natural because it's integrated innovation.
We tried one approach, and it was just mediocre. Now we've got this new one that we put in place [last year], and it looks like this approach is really going to work well.
On the new approach: Gates's to-do list
So there's this list of [about 50] things. You see things on there like telephony. [These are technologies that cut across business units], where many P&Ls are involved, and it's so important to a scenario that we've got to get it right. They'd better be huge things, where if we get them right people go: "Wow, that's cool." They'd better be big-impact things. We're using a lot of IQ to go after these things. These are the things that, as they get into the products, define the excellence of the products.
This is the first time that we've really had a structure to formally deal with it. So it's not just "Hey, if you're confused, send mail to Bill" -- something extremely ad hoc like that. This is very structured and very necessary for the breadth of things we're trying to do.
On Microsoft's real competition
I don't know if people really get what I'm saying or if they just think I'm being cute when I say our biggest competitor is our installed base. Yes, we have other competitors -- Sony (SNE ), Linux, Nokia (NOK ), Oracle (ORCL ), and IBM (IBM ). But the fact that you can sit on the existing [products] -- that's a perfectly legitimate choice. This is not a soft drink where you get thirsty and say: "I drank my word processor, let's have another." No. Some people actually say to us: "There are no new things you can do." I know at least for the next decade that is just wrong. It's just wrong, and it will be fun to surprise them.
BALLMER on Microsoft's growth prospects:
We'll outperform the rest of our industry. The real issue isn't what's your growth rate. It's always got to be what's your growth rate relatively. Will there be startups that will be able to get a nice little boost early? Sure. Those same startups, if they were part of Microsoft, might not move our overall meter. We've grown a billion-dollar advertising business [in MSN] over the last several years. If that was a startup, it would look awfully darned good. So we sit here and look at the opportunities, and I couldn't be more excited.
On revenue growth vs. profit growth:
We'll focus on both. In a sense, we have had the luxury of being able to have great profit growth without putting much of our IQ on the cost and efficiency side. We're putting more of our IQ on the cost and efficiency side. But, hey, the basic way all companies grow is with innovation. If we don't innovate, we don't grow. Yes, we'll apply more IQ on the efficiency and cost side. But still, the future to our growth will be innovation.
Like all great companies, we have a mix of de novo innovation -- that is, things that started here. And we have a mix of things where we provide a better innovation, better integration, better synthesis than somebody else may have done with a basic concept that they had come up with. But if you take a look at where we are today with TV software, we really pioneered the work. Smart phones, we really pioneered the work. Now the truth is, those categories are still nascent.
The thing that is most important is to be the guy who can come up with the innovation that gets the category to explode, not the one that did the de novo innovation. Sometimes we're the category exploder. Sometimes we're the de novo guys. The guy I really want to be is the category exploder.
On his restructuring the company into seven business units:
I know we did absolutely the right thing. I'm so excited about what we did two years ago. Everybody is kind of having to grow and get to the next level. It's really exciting to see, and I know it's absolutely the right thing for the long-term health of the company.
On giving more authority to execs:
I think we are still really making the transition from the world in which we could think of ourselves, in a sense, as being in one or two businesses that could be run in a very centralized fashion to a business where we need to have strong business leadership really shepherding those businesses... I think really letting those talents grow, building the talents underneath them, that will be a critical part for us to realize our potential.
On comparisons of Longhorn to Cairo, an ill-fated Windows attempt in the 1990s:
[Longhorn] will ship. It's got our best brain-power on it. The fact that we'll ship, of course, makes it dissimilar to the old Cairo project. But it's a firm project with a firm schedule with a team working on it. I think we pushed it back appropriately because of the need to focus in on security. But it is a very ambitious piece of work. It will be in the pantheon of most ambitious Windows releases of all times.
On whether the decision of European Commission trustbusters will force Microsoft to change Longhorn:
I don't think so. We're now studying the 300-page document. At the last press conference, the commissioner went out of his way to say that he was acting consistently... with the precedent set in the U.S. courts and in the U.S. consent decree. In the U.S. consent decree, it's quite clear we can continue to innovate, to integrate new capa-bilities into Windows. So if in fact they are consistent, we should be able to continue down the path we've been on with Longhorn.
On whether Microsoft is having a midlife crisis:
No, we're not having a midlife crisis. We're in a great mode. I don't know if you remember this old TV show, The Mary Tyler Moore Show. At the end she throws her hat up and says, "We're going to make it." That is kind of the spirit [we have]. We've got a lot to do, great opportunities, let's go, go, go, go, go, go, go.