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Mike Ricciuti

Staff Writer, CNET

ORLANDO, Fla.–What’s one of Steve Ballmer’s biggest headaches? It’s not Linux or security breaches. It’s piracy, the Microsoft CEO said Wednesday.

“The biggest problem we have right now is that people who should be paying for software aren’t,” Ballmer told an audience of technology executives at an industry conference here sponsored by market researcher Gartner.

One way to stem piracy is to offer consumers in emerging countries a low-cost PC, Ballmer said. “There has to be…a $100 computer to go down-market in some of these countries. We have to engineer (PCs) to be lighter and cheaper,” he said.

People in poorer countries have one low-cost computing option, Ballmer said. “They have a least-PC concept: the Internet cafe. Pay-by-the-drink computer use–that has a very important place in the market. (Microsoft) has five times as many Hotmail users in India and China than there are PCs because of this,” he said.

Ballmer said piracy of Microsoft’s Windows and Office software in emerging markets has become a major concern for the software giant, especially among business users who can afford to pay for software.

“PCs are not selling to the lower end of the population in China and India. People buying machines there are relatively affluent. So…should the prices be lower? Not really. Until government and situational factors reduce piracy…those affluent people cannot pay, so they don’t pay,” Ballmer said.

But lower prices have become part of Microsoft’s strategy for gaining market share in developing nations. In recent months, the software maker has announced plans to introduce low-cost “starter editions” of Windows XP into countries including India, Russia and Thailand. These versions will be bundled only with entry-level PCs and will not be available for retail sale.

The Microsoft CEO bristled at the suggestion that Linux is gaining in popularity as a client operating system at the expense of Windows. “There’s no appreciable amount of Linux on client systems anywhere in the world,” he said.

Ballmer said that some governments have decided against using Linux after studying the costs involved. “You can sit here and read the drama stories and assume they are true. Paris said Linux was dramatically more expensive than Windows. In…Brazil, it’s the same thing.”

One exception is the city of Munich, Germany, which is planning a widespread Linux installation, Ballmer admitted. “Yes, we lost the city of Munich. But the fact that the same story gets told 65,000 times, and they are still diddling around to some degree…come on, where’s the evidence?”

Munich councilors said last month that the city was finally ready to proceed with its Linux installation.

Ballmer also defended a comment made earlier this year by Bill Gates, Microsoft’s chairman, who said security will not be an issue in three years. “If (that) was something we weren’t shooting for, no one should come to this keynote. Whether that statement will come to be true or not remains to be seen. But it expresses Bill’s fundamental optimism,” he said.

On the topic of Microsoft’s shifting marketing initiatives, Ballmer admitted that the company’s “integrated innovation” message isn’t easy to grasp. “Sometimes, our own people get confused about it. But it’s one of the top concerns we hear from customers–they want a coherent development platform and management tools. Most of the integrated innovation points are about reducing complexity,” he said.

Microsoft’s intentions in the business software market became an issue in the ongoing trial involving Oracle’s hostile takeover attempt of PeopleSoft. Ballmer reiterated that Microsoft has no designs on the very high end of that market. “We are not targeting the largest enterprises. We’re not going to bid on a supply chain system for General Motors. That would put our products out of the simplicity band for the companies we target,” he said.

Earlier this year, Microsoft confirmed that it had held takeover talks with enterprise software market leader SAP. A deal would have given Microsoft an instant channel to sell its software to SAP’s customers, Ballmer said. “Some office scenarios would have been easier to solve if we had been part of one company. But we have no ongoing discussions, at least not on that front. Acquisition is no longer part of that dialogue,” he said.