Diversification now the game for Microsoft

REDMOND - Microsoft's expansion beyond its Windows and office software businesses has been defended by chief executive Steve Ballmer, who says web services and consumer devices are the key to the future.

He told an annual meeting with financial analysts yesterday that he had been "hammered" by investors arguing Microsoft should focus on its core business and forget things such as digital music players and video games.

Ballmer said Microsoft aimed to make software that integrated the best features of desktop software, higher-end corporate software, web services and devices, and it needed to be in all of those areas to keep up with the pace of innovation.

"Great things don't happen overnight," he said.

"Most successes require long-term investment and innovation ... and that's our perspective."

Ballmer was more "optimistic" now than at any point in the company's history and saw more growth opportunities in the next 10 years than in the past 30 years.

Microsoft's expansion into new businesses has not always been smooth.

Ballmer said the US$1.06 billion ($1.36 billion) charge the company took to fix problems with the Xbox game console was "painful", teaching it a lesson about hardware design.

Microsoft could also drive growth through its core products like the Windows operating system and Office productivity software.

New versions of Office and Windows are yielding higher-than-expected renewals of multi-year agreements with large organisations. The cash generated supports Microsoft's newer initiatives such as online advertising, its Zune music player, software for mobile phones and online service.

Microsoft said it had sold 60 million Windows Vista licences as of the end of June, including 20 million copies sold since mid-May.

Windows Vista, the latest version of its dominant Windows operating system, was released on January 30.

The company said it expected the total installed base of the Windows operating system to hit one billion - which Microsoft noted was more than the number of cars in the world - this financial year.

Ballmer said the company planned to embrace "disruptive technologies" like web-based applications that threatened Microsoft's traditional desktop software, which runs locally on a computer hard drive.

"Every piece of software - the basic core value in the way software gets created - will change in the next three, five or 10 years," said Ballmer, adding that future software will all factor in some aspect of desktop, web and server elements.

However, he rejected the idea the software industry would shift entirely to an internet delivery model.

Microsoft also said it was committed to building an advertising powerhouse to compete with Google and Yahoo.

The company said it had bought AdECN, a market for buyers and sellers of web advertising. AdECN functions like a stock exchange for advertisers and publishers to buy and sell display advertising online.

"It allows us to move ahead with all the core components needed to enable an ad platform," said Kevin Johnson, president of Microsoft's platforms and services division.

The acquisition comes on the heels of Microsoft's plan to buy web advertising firm aQuantive for US$6 billion earlier this year. Microsoft said the aQuantive deal had cleared regulatory hurdles and would close in the middle of next month.

Johnson said the company's online services group would undergo another year of investment, meaning it may not turn a profit until 2008.

- Reuters

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