Ballmer Interview Demonstrates Microsoft Adrift in Consumer Markets

If you’ve seen it already, I apologize for my tardiness in getting around to mentioning it, but yesterday BusinessWeek’s website featured an edited transcript of an interview with Microsoft CEO Steve Ballmer.

The interview is fascinating because of how clearly and confidently Ballmer speaks about enterprise markets and competitors and how ambiguous and uncertain he seems when discussing Web 2.0 developments, consumer-oriented markets, and advertising-driven business models.

On the subject of Google’s acquisition of YouTube, Ballmer doesn’t seem to know what to think. On one hand, he argues that no business model supports Google exchanging $1.6 billion in stock to acquire YouTube. Then, when challenged by a BusinessWeek interview on whether he is clear in his assessment of YouTube’s valuation, he wavers.

What follows is the relevant excerpt of the interview:

Is YouTube really some permanent, long-term thing, or is it a fashion? I’m not saying it is a fashion. But every time we do valuations, I wonder if we can afford to keep this hot for 10 years. I’m sure somebody at Google has got to do the same analysis, because even $1.6 billion is more than 1% of their market cap.

Is there a business model? Right now, there’s no business model for YouTube that would justify $1.6 billion. And what about the rights holders? At the end of the day, a lot of the content that’s up there is owned by somebody else.

The truth is what Google is doing now is transferring the wealth out of the hands of rights holders into Google. So media companies around the world are all threatened by Google. Why? Because basically Google is telling you how much of your ad revenue you get to keep.They better get some competition. Us. Yahoo! (YHOO). Somebody better break through or you can short all media stocks right now. As long as there are two, you can hold onto media stocks. Google understands that. And that’s one reason why they’re willing to lose money up front. Just look at some of these deals. That MySpace deal (where Google provides the ad engine for MySpace). We bid a lot of money on that MySpace deal. And we got outbid. We wanted to win that MySpace (NWS) deal. At some point, we said we can’t do this. Now Google can afford to spend more than us and Yahoo because they have more people in their ad system, so they’re getting better yield, effectively.

Getting back to the core question, it all depends on how that plays out. I am surprised that Google would pay $1.6 billion for it.

Then, when challenged by an interviewer, he says the following:

I’m not saying it is overvalued. I’m not trying to say that. It depends on a set of factors. I’m not saying I wouldn’t write a check for that amount of money. I might. . . . .

It is one of those things where you have to think. You can’t punt either way. If you’re asking me if I would offer $1.7 billion if no one else was offering $1.6 billion, no I wouldn’t do that. On the other hand, if somebody is really going to offer that amount of money, you cannot reject these things. And I’m not saying that we are.

He’s hardly confident in his assessment. In fact, it seems he’s fundamentally unsure of his opinion or about how Microsoft should approach such matters. It’s a safe bet that he’s not the only one at Microsoft struggling to comprehend these issues.

He seems on firmer ground when discussing the Xbox business, but he really finds his feet when talking about competitors and business dynamics in enterprise markets. Here’s a relevant excerpt:

Any one company, we know how to compete with. It’s alternate business models that we will have to embrace or compete well with. You give me any enterprise software company, O.K., and I’ll say c’mon. We know how to go do that. We do do that. And we’re really pretty good at it. We haven’t gotten any worse at it. Boom. Boom. Boom. We know how to keep coming.

[Take open source.] Open source is not a new technology area. It was a new business model. In the last three or four years, we have competed very well by extending our value. Open source never goes away as a business model or competitor. We have learned how to compete with open source, and we will compete with it for the rest of time. But competing with open source will have to be something that’s burned bright on the foreheads of our senior people.

Notice the change in tone, if not in substance. Microsoft is downright cocky when it comes to understanding how it can leverage its Windows and Office installed bases in the enterprise to open up new revenue streams in areas such as unified communications, CRM, business intelligence, security, and asset management, among other areas.

When it comes to consumer markets, Ballmer, and the vast majority of the executives below him, are in a fog.

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