On April 2, Microsoft Corp. President and CEO Steve Ballmer and Sun Microsystems Inc. Chairman and CEO Scott McNealy announced a major settlement to end Sun's lawsuits and cross-license patented technologies. Last week, Ballmer met with eWEEK Editor in Chief Eric Lundquist, Executive Editor Stan Gibson and Senior Editor Peter Galli on the Microsoft campus in Redmond, Wash., to explain how Microsoft's agreement with the Santa Clara, Calif., company—which cost Microsoft close to $2 billion—will enable the company to drive deeper into the enterprise.

We've seen a lot of executives get up onstage and shake hands over the years. Sometimes, that's all there is to it.

You obviously know that this is not that. You've been at a lot of silly press events—never one where somebody wrote a check for $1.95 billion. This is unique. $700 million is about settling the antitrust issues; the rest of it is all about intellectual property. We paid $900 million to assure that all past patent issues are behind us. Now why do that? Only to go forward. We paid to Sun $350 million for technical information that they'll provide us, and they'll pay us for technical information and protocols that we'll provide to them. But this isn't some alliance. This is a concrete set of licenses. It's not everything. It doesn't end the competition between the companies.

How does this agreement play into products and your strategy going forward? What does it give Microsoft the right to do, and what are you going to do with those rights?

It's not like there will be one product that comes out. What it lets us do is work with interoperability scenarios—customers who want to plug together for single sign-on, for example.

This only extends to the products that they control and we control. This only extends to Solaris, not to anything else they happen to offer.

Will [Microsoft Chairman and Chief Software Architect] Bill Gates and [Sun Chief Technology Officer] Greg Papadopoulos talk about .Net and Java integration?

Interoperability is a better word than integration, which makes it sound like two things are going to be one thing. But what does it mean to be interoperable? Should there be a common denominator that developers can target? Or should there be interoperability in the execution environment? What does that look like? What does it mean for Web services protocols? It's that kind of discussion.

Would Microsoft Office and [Sun's] StarOffice be encompassed in any way by the interoperability?

Certainly, there are things that Sun can do under the interoperability provisions. I'm not going to comment specifically on what that has to do with StarOffice.

We spoke with [Sun President and Chief Operating Officer] Jonathan Schwartz a few days ago, and he said this agreement, to him, was a big victory for Linux and open source because it makes interoperability between Sun's Java desktop and the Windows client easier to do. That seems to be a contradiction because you guys compete on the desktop.

There's nothing in the agreement that relates to open source. This is all about Solaris. There's nothing in this thing about Linux. We don't license our intellectual property under that framework, because we need to get paid for it.

We indemnify our customers about the use of intellectual property in our products. The open-source community does not—anybody can come after the customer any time for patent fees.

We put in place a framework for today and for the next ten years where we can have an intellectual property peace with Sun.

Was the outcome of your negotiations with EC [European Commission] a catalyst to getting the negotiation done with Sun?

No. I think Sun had a desire to get the thing done quickly. I think it was convenient for them to talk about it along with quarterly results.

Does that mean that they accepted conditions that you had previously considered acceptable but that they had not?

Oh, no—I'm not saying that. We were continuing to work on the deal. But everybody said it would be nice to get this done by the end of the quarter. Having a time deadline, as all good reporters understand, is the mother of invention.

Going back to how it got started, let me tell you about the Easter invitation. Before Scott [McNealy] called for golf, Scott's wife invited my wife over for Easter. My wife doesn't know Scott's wife. There are two families that are good friends of the Ballmers and good friends of the McNealys—they happened to be with the McNealys in Palm Springs [Calif.], and they thought I was going to be there with my wife and kids. It turned out we were going someplace else for Easter. But Scott's wife checked with Scott. At the time, I guess he was sort of thinking about this in a preliminary way.

Could you outline the high points of your enterprise strategy?

Let me set the overall context. We start with the mission of helping customers realize potential. It all starts with us having lots of customers. We like having lots of customers. You may think that sounds funny but in some businesses, there are not a lot of customers to have.

But our goals are high unit volume and high customer satisfaction across a large constituency. We are also interested in revenue and profit growth. But we assess impact in terms of the number of customers we have. It builds from the theme of helping individuals and businesses around the world realize their potential.

When I think about the things we are working on I think about four things:

First: integrated innovation. We have to innovate, and the whole of what we do has to be bigger than the sum of the parts. E-mail is a good example. To really do e-mail right takes at lease five of our businesses. We have to innovate and we need integration across our businesses. Bill Gates is spending the lion's share of his time on these integrated innovation scenarios.

The second area we have prioritized is much improved customer responsiveness. Security really dramatizes that. How do we know what is important to respond to? We've gotten much better at capturing that data down to including Watson, which is the little message that asks the user to report events to us. We have taken a hit on Longhorn features – in order to make sure we prioritize what we need to do in security.

The third thing is overall excellence. To achieve engineering excellence, we've revamped processes quite a bit.

Last on the list is value proposition—to make sure we have a clear value proposition for people.

So: Excellence, integrated innovation, responsiveness, and clear value proposition. We want to be the innovative trusted partner of our customers, starting in the large enterprise. A lot of what we have been doing is trying to put legal matters behind us.

And as we respond to security issues, we're seeking to reposition the company as a trusted responsible—I won't say mature—but responsible, company. We're not old and stodgy, but we've come out of adolescence and we're now into our adult prime. We're out of that herky-jerky adolescent awkward phase.

Are you working on a version of Windows without the Media Player to satisfy the EC?

We'll do what we need to do to appeal. And we'll do what we need to do to comply. Right now, we have an opportunity to appeal. We'll comply with the order when it's appropriate to comply with the order.

One of the things we're hearing from enterprise customers with regard to Software Assurance is their concern about new releases being pushed back so that they may not get upgrades during the life cycle of their Software Assurance agreement.

What has been pushed back other than "Longhorn"?

"Yukon."

Yukon slipped. We'll get it delivered, and I think customers will be happy. We'll have a way to make sure there's good customer satisfaction for people who have been on Software Assurance for SQL Server.

And for the Windows client?

It hasn't been pushed back. It was never going to be two years. It was more than three years after XP. There's a lot of value in the Software Assurance program other than new releases. We want to make sure we have a strong value proposition.

With regard to security, on a scale of 1 to 10—where 1 is completely insecure and 10 is completely secure—where would you put the level of security for Microsoft enterprise products?

There are three different answers: First, there's what we're doing now in our R&D labs; second, there's the quality of what we have in the market right now; and third, there's the state of the installed base. We can be doing a perfect job in No. 1 and No. 2, and we could still have problems with No. 3. In our installed base, the key work we're doing is education for the customers on the best way to secure their environment.

It's a hard problem. There are 600 million PCs in the world, and even for companies that have the best discipline about security, you have an imperfect world. I would say there, relative to the challenge, we're doing maybe "4" work. In terms of what we have in the market—or will have in the next several months—I think we're probably doing about "7" work on a 10 scale. But in terms of the quality of ongoing execution—the focus, the learning and the IQ that we have applied and where we will be—I think we're doing the best work we've ever done

Who do you see as your biggest competitors in the enterprise?

IBM and community-developed software. Why do people think Linux is a real competitor to Microsoft? It's because it's low-price, high-volume. That's our model.

I think you've got to have lots of customers in the long run to succeed. A company that has the strategy to focus narrow and deep only, in the long run, they're out of business, in my opinion. That's what I think in the long run is going to be the thing that undoes IBM. I think it has undone IBM to some degree already. Let me even be more blunt. I think IBM is less credible as an enterprise player today than they were 10 years ago. Why? Their software just doesn't get used very much.

When I came to Microsoft 24 years ago, people used IBM software for everything. Today, 90 percent of all that goes on in the enterprise—off the mainframe—is not done with IBM software.

It's because they're happy to have few customers that give them a lot of money. We're not. We much prefer to have lots of customers who pay less money, and then we build from that foundation depth that allows us to have the full enterprise relationship.

I'd much prefer to have 100 guys paying me ten bucks than have ten guys paying me a hundred bucks.

But you still need a few of those customers that give you the hundred dollars in an enterprise strategy. Those customers need high touch, don't they?

If you have a model that brings you volume at a lower price you can still afford the same kinds investments in customer touch and support. IBM has always been a heavily resourced model for customer touch and support. We'll probably never get to where they were, and they've been declining. We, on the other hand have been increasing. We've got over five thousand people working in the enterprise. We've got another four thousand almost consultants working in the enterprise. We've got almost a thousand high end technical support specialists working in the enterprise. We've got 10,000 plus people working in the enterprise. I'm not going to say that's as many as IBM has, but if you compare us to anybody else who serves enterprise customers—hey, we're big guys. We're up there with Oracle. We're up there with SAP. We're up there with Sun. We're in the game.

We know we need to put skin in the game with enterprise customers. The dialogue with customers is about how to put skin in the game. How do you participate with partners if you're not a systems integrator? Do you have the architect I need when I need him? It's a different kind of discussion—as opposed to, 'Do you have any capability at all?' which was the discussion of 5-6 years ago.

Did Microsoft executives call up [officials at investment company] Baystar and direct them towards making an investment in SCO?

I actually don't know anything about it myself. I read about Baystar in the newspaper. I get asked about this. I don't have a clue what interactions may have been. I had never heard of Baystar until I read about it in the newspaper. If SCO needs money, they'll have no problem. They're a publicly traded company. Their stock price is up.

There's an impression that you might be the moneyman behind the scenes.

Of course we're not. If we were funding them we would have to disclose. What was disclosed is accurate—we did take an intellectual property license with SCO because we indemnify our customers, which some people and software products don't do. We did take a license, we disclosed that publicly.

There's talk about XP reloaded—in the context of an interim Windows client and perhaps an interim Windows server version before Longhorn.

There's no plan to have an interim version other than the ones you know about: XP SP2, which is very important. It may not have the sexiest name in the world, but that is a tremendously important release.

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