Ballmer: ‘We Don’t Like Being Number Three’

Microsoft  CEO Steve Ballmer admitted that the software vendor has had difficulties competing for consumers online and developing a business model for online business services.

But he said that he was more worried about being blindsided by a new business model than any one company in particular.

“I think about new business models more than I think of individual companies,” he told analysts at a Merrill Lynch conference in New York today.

Ballmer pointed to open source as one potential source of worry. While the company has gained market share against Linux both on desktops and in the server market, he said that “having a competitor that is nominally close to free is always a challenge… There is a set of pricing pressure that nobody should ignore.”

Ballmer also admitted that Microsoft has struggled to gain traction in online business services and ad-supported consumer services like search, where he has pegged much of his hopes for future growth.

“We’re the number three company in the world for ad-funded online experiences behind Google and Yahoo,” he said. “We don’t like being number three.”

But he said that Microsoft will make significant investments in R&D to build strong online businesses.

“We are committed and we will do what it takes. We’re going to keep right on coming to establish leadership in ad-funded software and online experiences,” he said.

“This has not been an easy road for us,” he admitted.

Ballmer ticked off a number of priorities for the next three years which he said represent significant opportunities for revenue growth, but that he’s still not sure how Microsoft will capitalize on them.

He said that the company has been testing online business services with “three or four large customers.” He said the service involves hosting Exchange, SharePoint and Office Communications Server in the cloud, but admitted he didn’t know when Microsoft will be ready to introduce the service to market.

“It’s a very important opportunity for us of a subscription nature,” he said.

Likewise, he said Office Live is “a big thing for us,” but said he couldn’t predict how quickly that could be developed into a strong business.

Ballmer also sought to temper expectations that Vista will drive strong revenue growth in fiscal 2008. Microsoft’s fiscal 2007 ends June 30.

Ballmer said that Vista sales are driven primarily by consumer purchases of new PCs and corporate upgrades in developed economies. He noted that PC sales at retail are not expected to rise significantly next year, and that a lot of corporate upgrades have already been booked.

“A new Windows release is primarily a chance to sustain the revenue we have — it’s not necessarily a new revenue growth opportunity,” he said.

Releasing Vista, he said, was necessary to keep competitors like Apple  and Linux at bay.

Despite Ballmer’s assertion that he is more worried about emerging business models than particular companies, he did mention Google  on several occasions.

He took note that “we have a very big competitor” in search and e-commerce.
But perhaps more significantly for the company’s long-term prospects, he said that “we have one significant competitor in the talent market for the first time, which is Google.”