Steve Ballmer: There are four ways to make money in high tech

Microsoft CEO says his company is good at three out of the four, but real opportunities come when these markets intersect

Microsoft CEO Steve Ballmer says there are basically four ways to make money in the technology business -- consumers, telcos, enterprise IT, and enterprise marketing departments -- and Microsoft is successful at three of them. But the real opportunities come when these markets intersect, and that's where consumerization comes into play.

Ballmer spoke at a Churchill Club event last night in Silicon Valley, and interviewer Reid Hoffman, the chairman and founder of LinkedIn and now a venture capitalist at Greylock, managed to draw a surprising amount of information out of him.

[ More from CITEworld: HP's Todd Bradley says Microsoft Surface is "kludgey," not competition to the company. ]

Ballmer spoke candidly about the departure of Steven Sinofsky ("he has some things he wants to do"), the biggest risk Microsoft has ever taken (cannibalizing on-premise business apps with Office 365, a process that took "eight or nine years"), and the importance of sunshine in Silicon Valley's success ("nice weather is a systemic issue that most places can't address" -- spoken like a true Seattle native.)

But perhaps the most interesting part was when Ballmer explained his overall view of the technology market and how to make money in it.

"In the tech business, when it comes down to it, there seem to be four ways to pay for things," he said, plus one group that ties them all together.

  • Selling devices to consumers. "We really came through devices," said Ballmer. "People now think of us as enterprise focused, but we really came through PCs," selling Windows and often Office pre-installed on millions of PCs per year. The Xbox is also an example of this business.
  • Selling telco services to consumers. One of the few things consumers are willing to pay a monthly fee for is telecommunications services, said Ballmer. "Most of us aren't going to be phone companies," so the best way to capitalize on this is to get a telco to subsidize your product. "Sharing in telecom markets is essentially what iOS and Android are doing, from the subsidy that comes through the operator." Ballmer admitted Microsoft was weak in this market, but he hopes that Windows Phone 8 will change that by giving telcos a third option that's more controlled than Android, but less restrictive than iOS.
  • Selling to enterprise IT departments. Microsoft "certainly" plays here.
  • Selling to enterprise marketing departments. Here, Ballmer made an argument that Google and other Internet companies are not really consumer companies -- the actual product that they sell is advertising, and the main buyers of those ads are big company marketing departments (often through agencies, ad networks, or other brokers). Microsoft is a player here as well with a "$3 billion or so advertising business."
  • Developers "make everything go around" by building the necessary applications and tying services together. Microsoft has long catered to developers with a variety of "extensible applications," starting with Windows (which he defined as an application -- a piece of software) and Office, and eventually extending to infrastructure servers like Windows and SQL Server and business apps like Exchange, SharePoint, and (most recently) Yammer.

There's a particular opportunity for Microsoft at the "connection points" between these markets by focusing on product first, rather than trying to target any particular customer set. "We start actually at the product and get to the customer," Ballmer said. "The business model when you start something is not generally as obvious as the customer value proposition."

He continued, "You just have to say to yourself, what's the value proposition we're trying to build, then find a monetization model, as opposed to saying we're going to try to give telcos everything they want ... because then you miss these connections. The consumerization of IT, or using Office at home and work, that's a connection point. You're not really building for one customer or other, you're trying to span, building something for the consumer and the employer."

When Hoffman asked if some IT products capture some combination of customers, Ballmer was unequivocal.

"The strongest ones in our industry actually are."

You can watch the entire conversation on Fora.tv for $9.95.

This story, "Steve Ballmer: There are four ways to make money in high tech," was originally published at InfoWorld.com. Get the first word on what the important tech news really means with the InfoWorld Tech Watch blog. For the latest developments in business technology news, follow InfoWorld.com on Twitter.

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