"The challenge in the coming years will be to take advantage of what has happened in the past decade - that is, the internet and mobile phone"

He studied with bill Gates at Harvard University, followed him to Microsoft when it was set up, and 20 years later stepped into the CEO's shoes when Gates vacated them. In the six years since, Steve Ballmer has transformed the company, leading it from software to video game consoles and, later this month, to portable entertainment devices (the Zune). In its core software business, Microsoft, whose revenues now top $44 billion, is launching an all-new operating system, Vista, by the end of the year (early next year for retail markets) and also a new version of its profitable Office suite, Office 2007. On his first visit as CEO in late 2004, when he inaugurated Microsoft's campus in Hyderabad, Ballmer had met BT's Kushan Mitra. Two years on, he talks to Mitra again on how Microsoft has changed, the challenges the company faces as it transforms into a 'multi-core' technology company and the future of the company in a Web 2.0 environment. Excerpts:

There are a lot of products you have unveiled so far this year. Can you talk us through those?

2006 has been a great year for us. Vista and Office 2007 are around the corner. We have recently launched the new Windows 'Live' search and have a lot of exciting new products that we plan to unveil under the 'Live' platform. There are a lot of new games and services we are launching in the console business. For example, a few days ago we announced how Xbox360 customers can download music and movies onto their console. Our Windows Mobile software has become the software of choice for smart handheld devices, and we are soon launching an updated version of that software as well. We recently launched Internet Protocol TV services with a few European telecoms operators, and we are introducing a range of new products in our enterprise solutions business as well.

Technology has evolved tremendously over the 10 years since you introduced Windows 95. As the CEO of the world's largest software company, where do you see technology progressing in the next few years?

Take a look at technology today. There is the pc, the mobile phone and the internet. The last two technologies did not exist a decade ago and the environment has completely changed. The challenge in the coming years will be to take advantage of what has happened in the past decade. There will also be the continuing evolution of the user interface. See how Windows has progressed from Widows 3.1 to the advances in Windows 95 and now in Vista. I believe in the future devices will understand what the users want through voice and will be able to respond to their intentions. There are also huge opportunities in mobile Web technologies.

Do you believe that Vista is as revolutionary a change as the change was from Window 3.1 to Window 95?

I would say that Vista is the most exciting version of Windows that we have worked on ever. This is not to say that Windows 95 wasn't exciting. But given that the market was so small back then and the challenges were different and the pc was the only exciting consumer product. Vista is not just a large architectural change; there are massive changes to the way the software deals with security from its very core. Vista has so much more capability than any other operating system before it.

You said security was a major challenge. What are you doing to address security concerns?

There are real bad guys on the internet and there are some mischievous bad guys. There are worms and viruses, and even while those attacks have gone down, there is malware and phishing attacks. And Vista deals with a lot of these concerns and more.

Web 2.0 has transformed the internet in the last couple of years with user-generated content becoming a major driver. You have also introduced new technologies like Windows Live, following on from the success of XBox Live. How has that changed the way you do business?

There has been a fundamental change. We have realised that it is not just software or not just services. I look at Web 2.0 as an opportunity for a company like ours to interact with our customers more closely and more frequently. And while business analysts often say that something like that will change our business model, I believe any opportunity for greater interaction with our customers will bring in financial opportunities as well.

Windows Live and Office Live will bring in a whole host of services going forward. Some of those services can be funded by advertising, some using the subscription model, and I believe there are possibilities of the transaction model, where people buy services online. Live has already given us more varied revenue sources; we have a thriving multibillion dollar online advertising business already. We are the world's third largest online advertising service-something we didn't have a few years ago.

Two years ago you told me that Google was just a fad. In the last couple of years, Google has become a lot bigger, offering a host of online services. Google is entering areas where Microsoft is strong now.

I said that? Well, I believe that all of us are playing offence and defense at the same time. You're protecting the areas that you are strong in and attacking competitors in areas they are strong in. I think Google needs some good competition in search. I believe that 50 per cent of online searches still do not work, they do not give users what they are exactly looking for and a lot of the other half does not understand what people are looking for. I believe our new Windows Live search is good competition to Google. As for them entering online word-processors and spreadsheets, while there is a market for that I do not fully agree with the notion that people want such tools online. People will want real tools and be able to work anywhere and everywhere. But yes, Google is good competition.

"The risk for tech firms comes from underextending themselves and not from overextending themselves "

Talking about revenue and business diversification, in the past few years Microsoft is looking like less of a software company and more of a consumer electronics company with products like the XBox360 and now the Zune. Are there any more products you might develop, and how do you compete with so many companies simultaneously?

We are a 'multi-core' technology company, working on several things simultaneously. And as I just said, we are playing both offence and defense at the same time. Let me turn the question around: What does a modern consumer electronics company look like? With both the XBox and the Zune it is the software experience that is crucial. People have to embrace the software and be impressed by it. We are what you would call a '21st century Consumer Electronics Firm'. As for more devices, we are very clear that we will not do personal computers. Other smaller devices, let us see what happens going forward.

By doing so much, don't you think you run a risk of overextending yourself?

I don't think we are overextending ourselves. The risk for technology companies comes from underextending themselves. Look at so many technology firms that have not diversified enough and where they are today. I think a part of our vitality and the fact that we have consistently grown has come from the fact that we have continued to diversify into new areas. In the last 26 years that I have been with the company, we have never abandoned an area we have entered. Maybe some areas haven't done as well as we would have wanted them to, but we are a tremendously patient company. There are five things about this company that you have to understand-we are innovative, we have talent and are constantly attracting fresh talent, we are patient with new ventures (look at the console business), we are focused on the consumer (look at Live), and we are a multi-core technology company.

Talking about India, how differently do you see India today than two years ago?

You can answer that question better than I can. The place is booming, the economy is doing very well. As for us, our revenues are growing over here. But I believe we have just scratched the surface when it comes to India and its potential for Microsoft.

Piracy is still a problem out here?

Yes it is, but it's better than China! I believe with so many Indian companies wanting to grow on the basis of their Intellectual Property (IP), I think there is an understanding evolving around respecting IP over here.

Are you going to extend your development facilities over here, and are you announcing any new investments?

Bill (Gates) made some announcements of fresh investments when he was here last year and we are still deploying those. So I am not announcing any fresh investments. But we will continue to expand our facilities in India. You have to keep in mind that we did not come to India for reasons of labour arbitrage, because that advantage will not stay for too long. We came here because we feel there is a pool of extremely talented people over here and because of the potential of the market.

But there is a talent crunch in India. Is that affecting you?

I don't think so. India still produces a lot of qualified computer science graduates every year and I don't feel we will have a problem in attracting the best talent.

"We came to India because we feel there is a pool of extremely talented people over here"

Another aspect in India is that there is a large amount of the market that does not have access to computing. Microsoft has pioneered several projects across the world, including 'Flex-Go' in Brazil. How will you face the challenge of taking computing to a wider audience?

The way I see it, there are three sets of the market: There is the top of the market, which is as evolved as developed markets where people buy the latest hardware and software and pay for broadband internet access, and that market is growing. There is also a significant part of the market at the bottom, and the best way to connect them to computing will be through Internet kiosks. We are running projects on this front here and I believe that this situation will remain like this for some time to come.

The market we want to address is the 'middle of the pyramid'. For that we are looking at several options and we have worked on several options for addressing this market in various countries. You mentioned Flex-Go in Brazil which is a 'pay as you go' solution and we have started working on that in India. We have an interesting project in Egypt, where we work with a telecom provider on a 'pay as you use' solution connected to their phone. There are other ways we are studying, including re-engineering the pc for this market and developing software solutions for them as well. We launched 'Starter Edition' for India a few years ago and it has done very well. We will continue to look at new and innovative ways of addressing this market.

Recently Microsoft announced a deal with Novell. Is this an attempt to embrace Open Source and Linux?

Linux is a competing software. We have to constantly out-innovate Linux and constantly keep our total cost of ownership lower than that of Linux. We recently did a study in India and this is an India-specific study which proves that Windows is a cheaper operating system. As for Open Source, we welcome open-source as a development model and we have a lot of developers who develop software for Windows who have embraced open source. But as a licensing model it remains a challenge because the licensing is complex and often does not respect IP rights. Our deal with Novell is a sort of 'IP Bridge', where Novell has said that our IP will be respected and compensated. On another front, we are constantly working with our enterprise customers for strong interoperability between our systems and software such as Linux and OpenOffice.