Beyond Binary

Microsoft CEO Steve Ballmer delivers the CES keynote speech Wednesday.

(Credit: Corinne Schulze/CNET Networks)

LAS VEGAS--Microsoft CEO Steve Ballmer arrived at the Consumer Electronics Show with his usual optimism, but he also brings a clear sense of reality: The tech industry is in for some rough times.

"The fact of the matter is, this is not a downturn, this is a bit of a reset. Those are quite different and we're trying to really suss through what we think that means for us," Ballmer said in an interview here with CNET News Thursday, a day after delivering the keynote address at the conference.

Ballmer talked about what the "reset" will mean for Microsoft, as well as lessons learned from Vista and Microsoft's move to put Office on the Web. When it comes to what worries him most, most days it's still Google, although he concedes he has had to spend more time recently on economic issues and making sure Microsoft makes the adjustments it needs to. He wouldn't go into detail on what (and who) Microsoft plans to cut, but it is clear that some changes are coming.

The following is an edited version of that interview:

CNET News: Obviously, Microsoft didn't necessarily get everything it might have hoped for in terms of the critical response for Vista. What are you guys planning to do differently with Windows 7?

Ballmer: Well, I think we made some choices in Vista to improve security at the kind of expense, if you will, of compatibility. With Windows 7, we're able to build compatibly off of Vista and really sort of just tune, if you will, the user interface, the performance, and at the end of the day, it'll be what the users think of the product that we're building, and we'll start getting beta feedback this week.

Q: How hard are you pushing the team to get Windows 7 out this year?

Ballmer: I'm not pushing the team hard, the team is pushing itself. They set some goals and objectives and of course we'll ship the product when it's--as I said last night--both right and ready and when we know when that is, we'll share that.

Q: One of the biggest parts of the PC business that's really taken off amid an, obviously, challenging time overall is the Netbook segment. What has that meant for Microsoft both in terms of the technology, but also from a business standpoint? How does that impact you?

Ballmer: Well, we've done very well on Netbooks. When they first came out, I'm not sure if people knew whether they were PCs or something else, and I think everybody kind of understands now that a Netbook is a small-form-factor, low-cost personal computer. And we're doing very well with Windows XP, which fits. Vista does not fit, and we're working hard to make sure Windows 7 fits very well on the Netbooks.

You know, from a business perspective, low-cost machine means a little less revenue per unit to Microsoft, but I think it gives us an opportunity to see expansion of the overall PC market.

Q: Obviously, everything that you're talking about here at CES comes against the backdrop of a very challenging economy. What does that economy mean to Microsoft and its plans?

Ballmer: Well, I think there's two ways to take a look at it: First, what's going to happen to let's call it revenue in our industry? Revenue will be lower in aggregate in our industry than it would have been, and that will (affect) Microsoft, Cisco--you name the company--Intel. We'll all be affected by that.

With that said, the pace of innovation in our business will not change. The opportunity there won't change. And so the key is: how do we right-size a little bit as an industry, and that means different things to different companies to adjust to the fact that revenues will be lower. And yet at the same time, keep a strong push on the R&D that's going to power the future. And each company will discuss its plans. We're kind of in a quiet period, so I don't have much to say about that.

Q: Turning to search, that's obviously a key area for Microsoft. You announced a couple of partnership deals that will get you some more distribution, but clearly there aren't enough distribution deals out there to make the kind of headway you need to make against Google. What else does Microsoft need to really be a serious competitor to Google?

Ballmer: Just keep working. I mean, look, this is not something that changes overnight. Everybody wants us to snap our fingers. We have a good competitor, and yet at the same time, we see real opportunities to improve the search experience, to differentiate, but it's not going to happen overnight. We're going to have to keep working and working; innovating product-wise, marketing, branding, distribution, and we're going to have to be patient about it.

I like our new release. We're making two releases a year. We continue to attract great talent, which lets us do interesting things. Our cash-back program has some early promise in terms of what I call business model differentiation versus Google, but we'll continue to work.

Q:: Fair to say four years in, though, you would have hoped you'd made more progress in market share?

Ballmer: Maybe. Maybe. I'm not sure that would have been anything other than naïve because the market leader is a strong company. And we're going to have to keep at it.

Q: You have said that while you're not interested in buying all of Yahoo, you would be open to some sort of a search deal. How likely do you think that is?

Ballmer: No way to handicap it. I think at this stage, it's probably fair to say I'm not even sure Yahoo would handicap it. They're out doing a search for a new CEO and we'll just have to wait and see how all that shakes out.

Q: You said a little while ago that there weren't any active discussions, is that still the case?

Ballmer: Yeah. I think probably fair for us not to comment too much.

Q: We've talked about Google, we've talked about the economy. Which actually occupies more of your time in terms of which do you spend your time worrying about?

Ballmer: Well in general, the answer is: Google, Google, Google, Google, Google. Now, the truth of the matter is, for a period of time of a couple of months, we do have to go through and say, OK, what do we really think this economic thing is, is it a year thing or is it a reset, and then we build from a new base, and how do we parse and act on the consequences?

So there's a little bubble period in here where I'd say I'm spending a little bit more time. But in general, I can't control the economy. We can drive and control and affect our competitive position, so the lion's share of my energy would be there.

Q: Microsoft, in the past, has been able to get through even some, you know, typical economic downturns by kind of trimming at the edges. Is it fair to say that whatever you have to do this time, it'll be more significant than anything you've had to do before?

Ballmer: It's premature to comment. I mean, the fact of the matter is, this is not a downturn, this is a bit of a reset. Those are quite different and we're trying to really suss through what we think that means for us.

Q: One of the biggest changes coming in the Office side of things is the fact that individuals and companies will soon be able to access Office over the Web. What doors does that open?

Ballmer: There's two aspects: One aspect is sort of the notion of can I get access to the software when I'm not at my own computer, and you'll get access to some stuff when you're not at your own computer. That's nice. People want the full capabilities, generally. The second thing is: do we provide better and better facilities for people to collaborate from within the productivity environment? And I think that's a bigger deal, and you'll see us do both of those--push both of those themes in the new Office release.

It's important to do, it enables some new scenarios, but I don't just say, "Oh, isn't it great, I can run Excel in a browser, or a subset of Excel in a browser." I'm not quite sure that that in and of itself is a breakthrough. Google and people want to run around, "Ooo. Ahh. Woo," you know--I don't quite understand that.

Q: It's been few months since Bill (Gates) switched from full-time work to working with the foundation. Any surprises in terms of what that's meant or what has it meant in terms of changes for Microsoft?

Ballmer: I don't think anything all that surprising. You know, I think we're trying to get settled now in a rhythm. Bill and I see each other, you know, we have a regularly scheduled lunch, there's board meetings, he has a regularly scheduled meeting with a couple of the internal groups. I think he's figuring out how he spends his time. But I don't think any real surprises.

Q: Is it a little weird to be giving the CES keynote? Obviously, you give a lot of big speeches.

Ballmer: Yeah, I mean, yeah, for some reason, it had that oeuvre, and yet like I say, last night I went back to my room and said, "That was actually a much easier speech to give than many others." I wonder why I was thinking that that would be a hard one to do.

Q: In terms of the economy and what that means, what are the kinds of things that are least impacted inside Microsoft and what are the kinds of things that do pretty well?

Ballmer: You mean what'll sell and what won't sell? I think PCs are going to sell a little less well, which means Windows will sell a little less well. I think servers--because capital spending will get hit, servers will sell a little less well, which has got to affect servers. Now, we still are taking share in the server business overall, so I don't know what that'll mean for our overall results. Phones, Web, those things ought to all be growth opportunities for us.

Q: Do you think this reset, as you called it, will force Microsoft to get out of some things that you've been doing?

Ballmer: I'd say at the macro level, the same things that we've been doing. At the micro level, I'm sure there will be some things where we have this many people and, you know, we might right size, or maybe we're expecting to go to this many people (moves his hands in to show a smaller level of growth)... I think that's more likely; to stay more flat on some of the projects. You know, there will be things that may not make as much sense. I don't know. We'll have to see how that all comes together.

LAS VEGAS - Bill Veghte may not be as well known as his boss at Microsoft, Steve Ballmer. But as the head of the company's Windows business, Veghte is one of the key executives to the future of the company.

At the Consumer Electronics Show here Wednesday, Veghte sat with CNET News senior writer Ina Fried for a wide-ranging interview, touching on everything from the planned release of Windows 7 to future of Microsoft's gee-whiz touch technology. The following is a condensed and edited version of that interview:

Bill Veghte, Microsoft's senior vice president for the Windows Business

(Credit: Microsoft)

Q: It's fair to say that you guys would like to have Windows 7 out in time for the holidays?
Veghte: We will ship it when the quality is right, and earlier is always better, but not at the cost of (ecosystem support), and not at the cost of quality.

In the past, one of the tools that Microsoft and other companies used to help manage that transition is some sort of technology guarantee: if you buy Vista after this point, you'll get 7 for free. My understanding is that you guys are planning something similar with 7?
Veghte: Certainly we want to make sure that Windows customers have an easy transition to Windows 7, and over the years we've provided a variety of offerings to customers...guarantee is one of them. And while we have nothing to announce today, we're certainly evaluating the options to make sure that we can help and support our customers in that transition.

One of the things with Windows 7, some of the cool features, particularly multitouch, require the hardware makers to build hardware that has the necessary things to take advantage of that. What is Microsoft doing to make sure that it's more than just a couple showcase machines that have touch?
Veghte: One of the things that we've worked very hard on in this release is engaging with the hardware vendors, taking their feedback, highlighting those opportunities, and then in the high quality releases doing deep engineering cooperation across the organization. Michael Dell, for example, went on record saying Dell worked with Microsoft for many, many years many releases of Windows, and this is one of the best, deepest cooperations that we've ever had...The beta is a big milestone, because we sort of unveil a lot of the capabilities that were not there in the developer release.

Do you have a goal in terms of how many people you want to try out this beta?
Veghte: Traditionally several million people is a good number. Several million means you can take all the feedback. It's important that as people are thinking about whether they download the beta, they actually use it (and share) that information with us. But if we have a couple million active beta testers, then we're going to be in great shape. This release is all about listening to customers, and we certainly have features and capabilities that you're familiar with, and now in the beta, a couple million people banging on it over the next couple of months.

What is the consumer pitch for Windows 7?
Veghte: You know, I get really excited about Windows 7 for a couple of different reasons. One is that it takes a set of everyday tasks that I do all the time, and it makes them faster and simpler. The second reason that I get excited about Windows 7 is there's a set of things that I expect my computer to do the way I want it to do, whether it be around reliability or security or battery life or performance or (controlling) messages popping up. And in Windows 7 on each one of those dimensions there's a set of improvements that we hope to deliver.

The next piece is in every release of Windows you have the opportunity to enable a set of scenarios or capabilities that are not (well-served now)...Like by providing touch support in Windows, whether you're a (third-party developer) or a hardware developer, you'll think about, "Do I touch-enable my notebook or do I touch-enable my application?" That's going to enable a whole set of new capabilities and interaction models for people.

Since we're at the Consumer Electronics Show here, the number of -- the amount of music, photos and video that is increasingly in my household, my PC, my wife's PC, you know, it's all over the place, and I just want one library one library of all of the Veghte photos or all the Veghte music. I don't really care about the physical location. And in Windows 7 we've taken that, through the combination of the new explorer, the PlayTo capabilities, the library construct, and made it much easier for people to manage, store, share their digital content.

The popular sentiment, or what I've heard most often from people who have played with 7, is this is Vista done right. What's your reaction to that?
Veghte: The next release is always (going to be better) and that's called innovation. And so we've got to satisfy a set of customers in Windows Vista now, we've got people announcing exciting new license numbers in terms of the continued growth of Windows Vista, but the investments in the innovation that we did in Windows Vista architecturally are enabling a set of capabilities that we couldn't do.

Many businesses have not jumped to Vista. What's the business message going to be around 7?
Veghte: When I think about the conversations with business customers, they want not only things that we do for end users, but they want great manageability and security. And clearly two years after the delivery of Windows Vista, we've demonstrated a higher degree of manageability and security.

Is it disappointing that it hasn't translated better?
Veghte: No, but in some fashion -- that's why I look at it and say, from a marketing perspective we did make that statement. We said Windows Vista is the most secure desktop OS release we've ever done. By virtue of the release of Windows Vista, we were going to have lots and lots of people going after it. And under that, Windows Vista has stood up very, very strongly... When I think about the conversation with CIOs or with businesses, in this era, this modern desktop era, you want security, you want manageability at a different level than you want it in 1999. And as such, Windows Vista meets that bar and Windows 7 builds on it...And we have to protect the investments that customers are making today in Windows Vista.

Have you changed your marketing approach because of the economy?
Veghte: Can I broaden the question a little bit? When you think about the economic situation, what does that mean to the Windows?

Sure.
Veghte: Windows PCs have always represented a great value relative to other companies in the marketplace, both in terms of the whole range of price points and all the capabilities that you get out of the box.

Given the economic situation, as shareholders would expect us to tighten our belt, but with the things that are most important, and customers would expect us to do that while continuing to innovate. And this is why even in this touch economic situation it's exciting to be able to look at the product pipeline we've got with Internet Explorer 8, Windows 7 and Windows Live...and the next generation of Windows Live, and look at all of the advances that we're offering to customers. A Windows PC is an unbelievable entertainment investment.

It's reasonable to think though that you guys might be spending less on ads and other marketing.
Veghte: The expectation is that the dollar we spend on advertising today will go further than it did (before). But the Windows business is pretty core to Microsoft, it's core to the Microsoft brand, so we will continue to invest in support of Windows.

Do you think the same holds true when we look at things like headcount?
Veghte: Windows is core to the success of the company. I'm certainly looking at how we can be more efficient, and given the mission in our advertising spending that we just talked about, efficient in where we apply our headcount and efficient, but not at the risk of jeopardizing the opportunity that we have, and the opportunity in these economic conditions.

Do you think Microsoft will have do more than you have in the past in terms of reacting to the economy?
Veghte: I think certainly Bill's philosophy and Steve's philosophy has been to take a long term view. The long term view is (stick with) the investments we make in R&D, and then patiently and steadily and tenaciously deliver on that opportunity.

Obviously a lot of the marketing that you guys rolled out as part of the new ad campaign is pretty deliberately trying to say this is what Windows is, and really this is what Windows is vis-à-vis Apple. Where do you see the competitive landscape having shifted from where it was say a few months ago?
Veghte: In the fall we did two things: One is we were clear on what Windows represents... to be clear on what Windows stood for, and give people, Windows customers the opportunity to be proud of who and what (they stand for) in rolling out the tag line, saying "I am a PC." Now, you can decide whether that's competitive context or not. I choose to sort of think about it as we need communicate what Windows stands for, and we need to give our customers the opportunity to celebrate who and what they've chosen.

Microsoft's history with Windows is taking things, concepts, technologies, and making them accessible to the average user. And your competitor, Apple, you know, typically gets a lot of credit for innovating. Are there things that Microsoft is doing in the desktop OS that you believe you aren't getting credit for?
Veghte: I think the important thing for us is making sure that we're serving our customers well. You look at how we've listened and the things that we've picked up on and delivered in Windows 7 or Windows Live Wave 3 or Internet Explorer 8, it's I think a set of everyday tasks, that's huge innovation. I think it's huge innovation when you realize that on average over a third of the time people have four or more windows open. If I can dramatically simplify that, that's innovation...And so when I look sort of against the backdrop of history and sort of the current economic landscape, I think we've got -- we have a tremendous value proposition to bring to market.

LAS VEGAS--It's not clear whether Microsoft is just trying to be overly cautious, but top Windows executive Bill Veghte said the company is telling PC makers that Windows 7 might or might not be ready in time for this year's holiday season.

"I'm telling them that it could go either way," Veghte told CNET News in an interview Wednesday. "We will ship it when the quality is right, and earlier is always better, but not at the cost of ecosystem support and not at the cost of quality.

Veghte also said that the economy is factoring into his marketing plans for Windows, which is in the middle of an advertising push initially estimated at several hundred million dollars over several years.

"Given the economic situation, as shareholders would expect us to tighten our belt, but with the things that are most important, and customers would expect us to do that while continuing to innovate," he said. "The expectation is that the dollar we spend on advertising today will go further than it did in July...and the Windows business is pretty core to Microsoft, it's core to the Microsoft brand, so we will continue to invest in support of Windows."

Asked whether he thought the same applied to the unit's staffing level, he said Windows is core to the success of the company," but added that he's "certainly looking at how we can be more efficient, and given the mission in our advertising spending that we just talked about, efficient in where we apply our headcount and efficient, but not at the risk of jeopardizing the opportunity that we have."

LAS VEGAS--As he takes the stage Wednesday, Steve Ballmer has a mighty big task ahead of him.

Not only is he taking over Consumer Electronics Show keynote duties from Bill Gates, he is also aiming to convince the tech world that Microsoft is serious about defending its turf on the PC as well as making headway on the Web, television and phone. Oh yeah, and then there's that whole economy-melting-down thing.

Ballmer hasn't arrived in Sin City empty handed, however. In perhaps the biggest announcement of the night, he will announce Microsoft is ready with a beta version of Windows 7 and he will show off some of its key consumer features.

Microsoft will also announce new deals for Windows Live that will see Microsoft's search engine become the default on PCs from Dell as well as touting a deal with Verizon Wireless that leaked earlier in the day. The company is also counting on two Halo game releases this year to help keep the Xbox 360 going in the right direction.

But Microsoft faces considerable competition in each of the areas Ballmer is discussing. On the PC front, a resurgent Apple has increased its share. In search, Google continues to dominate. In the phone market, Apple's iPhone has grabbed much of the spotlight, not to mention significant market share. Google also has joined the fray, while longtime competitors such as Research in Motion and Palm are trying to maintain their slices of the pie as well.

And then, of course, there's the substantial financial headwind. Ballmer is expected to express his usual optimism--despite the global financial outlook--and discuss the company's commitment to research and development in both good times and bad. That said, Microsoft is clearly not immune from the problems that led Intel Wednesday to announce that fourth-quarter revenues were down 23 percent from the same quarter a year ago.

On the PC side, Microsoft is looking to turn the page from Vista to its successor, Windows 7. Microsoft isn't talking about any new features of Windows 7, saying it talked about all of the key features at the Professional Developer Conference last year. Instead, it will attempt to demonstrate what features like improved home networking really mean for the average household.

As for the beta of Windows 7, Microsoft said it will be immediately available for technical beta testers and those in Microsoft's TechNet and MSDN developer programs and will be made publicly available on Friday. The company still isn't officially committing to a final release in time for this year's holiday season, although the company is clearly still aiming for that.

Ballmer will also discuss Windows Live. In addition to the global PC deal with Dell and the five year U.S. deal with Verizon Wireless, Microsoft has expanded its relationship with Facebook to allow users to see within their Windows Live homepage certain of their buddies' Facebook updates. The company is also stripping the beta tag off many of its Web-based and downloadable Windows Live products.

On the phone side, Ballmer is expected to talk about the improved mobile browser Microsoft released at the end of last year, but the company is not talking yet about when to expect a serious upgrade to the Windows Mobile operating system, which has grown rather long in the tooth. Microsoft has made reference to an interim Windows 6.5 release that could serve as a bridge until the more significant overhaul of the operating system--Windows Mobile 7--makes its delayed debut.

On the automotive side, Microsoft is announcing a new version of its Ford Sync entertainment system that uses voice recognition software from its Tellme acquisition.

While that's the main news of the show, check out our live blog to get some live quotes, our commentary, as well as updates on any celebrity guests or funny videos that are often the hallmark of Microsoft's keynotes.

See also: Windows 7 beta: First impressions

Microsoft CEO Steve Ballmer was set to unveil the pact as part of his keynote later Wednesday. However, Verizon CEO Ivan Seidenberg mentioned the deal at a Citigroup conference earlier Wednesday, according to a Reuters report.

The Wall Street Journal reported last year that the two companies were working on some sort of deal. And it's not the first time that Microsoft has partnered to get content onto Verizon phones.

The Verizon deal is just one part of Ballmer's keynote, which is expected to focus heavily on Windows 7.

A beta version of Windows 7 got leaked onto the Internet late last month, raising hopes that an officially sanctioned version would be available soon. A Microsoft developer's blog post earlier in December also appeared to indicate that the beta would come in January.

A long time ago, Bob Muglia worked on a Microsoft project designed to offer a variety of services in the cloud. That effort, known as Hailstorm, didn't exactly go gangbusters, and Muglia's career took a detour.

Bob Muglia

But both Muglia and Hailstorm are back. On Monday, Microsoft elevated Muglia to divisional president, a recognition of the success he has enjoyed as head of Microsoft's server software business.

As for Hailstorm, the name is gone, but many of the concepts are back, as part of the Windows Azure platform that Microsoft announced in October. Last month, I had a chance to talk with Muglia about Windows Azure, the cloud in general, as well as the economy. Here are some edited excepts from my conversation:

Is this supposed to be a slow-motion rollout with Azure?
Muglia: The way I sort of describe it is, it'll be phased--there's a whole broad set of services. You'll see some of those services go to production next year; exactly what and when, we're still working through. People are able to begin to develop right now, of course, on it, but it will happen over a period of time.

And the other thing right now is, people are still very much kicking the tires. We have quite a bit of tire kicking going on, a lot of people provisioned on the services right now, and so far, things have been going well.

What are the kinds of things that you think people will want to run in Azure?
Muglia: In terms of the classes of applications, I think you'll see two initial ones, though it's fair to say that people may have an interest in running in this environment any application they would want to run on-premises. But the initial ones I think would be your Web-style applications, which tend be Internet-connected and need geodistribution.

The other class that I think is really interesting is anything that involves working in partnership with others: supply chain sorts of applications, business-to-business, Electronic Data Interchange, those sorts of classes of applications in which you need to connect multiple organizations, and you need to deal with authentication, and you need to deal with network connectivity.

Today it's very complex with virtual private networks and password management, and a whole nasty set of problems to deal with, and Azure has some built-in services to simplify those things, including a service bus to go through firewalls and connect things over the Internet--again, any system to allow people to authenticate. Those are basics that are fundamental, that everyone will really need in this kind of environment.

So, I think you'll see those sorts of things emerge initially, but then you could just imagine all sorts of things. You could imagine people using it for (high-performance computing) applications. That's an area we're looking at, and we certainly are having conversations with a number of academic and other organizations.

In terms of the movement toward the Microsoft-hosted versions of its server products, are there some interesting things that you have come across, as you've had to do the work to get ready for that?
Muglia: There's a ton. I mean, one is, you need to move so that everything works across the Internet, which is just the right thing to do, anyway. Another thing you see is the need to have what we call multitenancy. So, to get scale on these things, you can't be dedicating even a virtual machine to a company. You need to be able to support many users, many organizations within a single instance of an application, and so that's an attribute.

There's a whole set of really interesting regulatory things that you hit when you go across the world attached to this. Turns out, some of our products, like unified communications, have VoIP (voice over Internet Protocol) capabilities. Well, you go and take that to many countries of the world, and the call those telephone companies. They call you a telco, and all of a sudden, there's a conversation about being regulated like a telco, you know, in some countries around the world. That may or not be pleasant.

There are issues about data and where data can reside and not reside, and so that's why when you spread geographically around the world, there's a wide variety of new issues that open up that are quite, you know, quite interesting--billing issues, because obviously, there are different issues with the way the banking systems in different countries work.

Let's talk about the economy. What are you seeing when you talk with customers?
Muglia: People are afraid. I mean, I think we're all a bit afraid, at some fundamental level, because we don't know--no one knows where this is going to land in the long run.

No one really is clear as to how far the contraction is going to go and how long it's going to happen, and then there's a lack of clarity also as to how we get through this. Are we going to be tight six months of the year, then boom!? Well, maybe. That would be kind of a good viewpoint of things right now. Or is it going to be a longer period of time, with a medium period of time with sort of a slow growth.

I sort of always come back to a belief that the fundamentals will drive all of these things, and ultimately, it means that people have to produce things that others value that helps to drive the overall society forward and, you know, generate something that is of sustainable long-term value. Ultimately, one of the key things is, how can we make companies and individuals more productive and able to work together better?

So, I guess I have two questions somewhat related to that. One is, how about for you? As a business manager, obviously, you manage a fairly large business. What are the things that you might have done, had the economy continued, that you're not doing now? What are some of the things that remain priorities, and what are some of the things that you're going to let happen slower?
Muglia: Well, certainly, there's no question that Microsoft's not immune to the circumstances. There's no question about that. So we have slowed our growth. We are still growing as a company, and (the server and tools business) will grow overall this year, though I admit that we did most of our growth in Q1. We actually were incredibly successful in bringing a lot of folks on in Q1, so we would have had to slow (hiring) under any circumstances because we're outachieving our plan, but we've slowed considerably.

So if you take some of the areas in the database space, like some of these areas around business intelligence and data analysis, we're actually investing in some of those areas. But we're taking resources off some things that don't have the same kind of results and long-term potential for us to have returns, one of which was pretty public recently: OneCare, where we, you know, decided to refocus that effort into a much more narrowly focused free antimalware offering instead of providing a broader suite.

Are there other things about which you, as a business leader, are saying, this is going to have to wait a little or move slower?
Yeah. I mean, there certainly are. I think that we've looked inside, at what we're doing really in almost every one of our groups. If you look at almost every one of the things that we're doing and say, OK, there's a set of things we want to do in management, let's tighten the belt a little bit, as to where we're going. Yet we're continuing to invest in this whole virtualization and management space, coherence with Azure, all those sorts of things we're continuing to invest in.

So in each one of our business areas, we've looked at how we could reallocate and refocus, and then across the board, we've made some fairly fundamental shifts like we did with OneCare.

Microsoft started off its new-year executive shuffling by promoting longtime Server and Tools unit head Bob Muglia to president, a title he shares with entertainment boss Robbie Bach and business software chief Stephen Elop.

Bob Muglia

It's a title elevation for Muglia, whose responsibilities remain the same. It also reflects the growing importance of the server unit, which accounted for $13 billion in revenue in the most recent fiscal year, now making up fully a fifth of Microsoft's total sales.

"The core of our success at Microsoft has always been great people--people who combine talent, drive, vision, customer focus, and leadership," CEO Steve Ballmer said in an e-mail to employees. "Few people at Microsoft embody these qualities more fully than Bob Muglia, and few people have contributed more to the company's success."

The Wall Street Journal article on Muglia's promotion notes that it represents quite the comeback for Muglia, who found himself shuttled off to head management software in a post-Hailstorm reshuffling of the Internet unit. Of note, Muglia now heads the Azure Services Platform, components of which look a whole lot like Hailstorm.

I sat down with Muglia last month, just before my extended winter holiday break. In honor of his promotion, I'll post a fuller transcript of my interview on Tuesday, right before I head off to Las Vegas for the Consumer Electronics Show.

With Apple's last Macworld keynote speech just hours away, Microsoft is again talking up the idea of an "Apple tax" that people pay when they opt for a Mac over a Windows PC.

It's a concept that Microsoft started touting in the fall. While the words may be fairly new, the melody sounds familiar. Saying that customers pay an added cost when using a rival is a well-worn page from the Microsoft playbook. One need only look back to the anti-Linux "Get the Facts" campaign for another example.

In any case, it is a notion that is likely to stay around, says Windows marketing VP Brad Brooks. In addition to talking up the idea with reporters, Brooks said it may show up in online marketing and potentially even in Microsoft advertisements.

Microsoft did come up with some new charts trying to put hard numbers on the "Apple tax." On the desktop side, Microsoft argues you can save $100, or 16 percent, by going for a Dell Studio Hybrid or HP Pavilion Slimline over a low-end Mac Mini. Microsoft argues that at the mid-range, a buyer can save 25 percent by going for a Dell XPS One instead of a low-end iMac and that the Mac Pro is more than double the cost of a high-end HP desktop.

Microsoft says consumers are paying an Apple tax when they buy a Mac. Click chart for larger version.

(Credit: Microsoft)

I made the argument when Microsoft first brought up the concept that, if it is a tax, it is a tax that a growing number of buyers seem willing to pay.

Brooks said on Monday, though, that he expects the weakening economy will limit the number of people willing to pay more for a computer.

"More and more people are going to be scratching their head and say is that a tax I am really willing to pay," he said.

He noted that the tax isn't just about the higher sticker price, but also about the lack of choice that Mac users have. Certainly there are fewer hardware options and the Mac software aisles remain far narrower as well. Brooks also tried to position the Mac as less open, pointing to the iTunes App Store as an example of Apple forcing a "walled garden" on users. Were he to be comparing the iPhone and Windows Mobile, he might arguably have a point, but last I checked developers are free to write whatever program they want for the Mac.

Although I don't buy the idea that Mac users don't know there are cheaper PC options, I think the sorry state of the economy will pose challenges for all PC makers, including Apple. Consumers are clearly going to have to weigh any computer purchase against more basic needs, the prospect of not having a job, etc.

That said, it is unclear who will be hurt more by the economy. Apple is in many ways akin to BMW or another automaker that plays only at the high end of the market. I expect Apple will have a tough time keeping up with recent growth trends. But, as the car market shows, the Fords, GMs, and Hyundais of the world are also taking a huge hit.

I don't want to take this auto analogy too far, either. I don't see Microsoft running to Capitol Hill for a bailout anytime soon. Microsoft makes huge margins on its products. And while I hear layoffs may indeed be in the works, the company doesn't face anywhere near the structural issues of the auto industry (the Google threat notwithstanding).

Brooks would not specifically comment on whether Microsoft has trimmed its PC outlook for 2009, but did say that clearly the whole global economy is far weaker than it was in October, when Microsoft issued its last forecast.

"It continues to be a tough economic time for everybody," Brooks said. "We continue to see that our customers are suffering out there.

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