Would you buy Windows Vista?

For Bill Gates and Microsoft, that's the big question. This week at the software giant's Professional Developers Conference, Gates rallied the troops -- software developers, Microsoft's most important audience -- to build enthusiasm for Vista, the oft-delayed new version of Windows, and Office 12, an update to Microsoft's most profitable franchise.

Gates' mantra hasn't changed much in 20 years: The PC is the centre of the computing universe, and Windows, along with Office and other products, represents the best platform for new software development. What is new, and is much in evidence this week in Los Angeles, is the growing influence of Web-based development.

In that realm, Google has emerged as the poster child for a new wave of applications assembled from the piece-parts of several Web sites. No Windows necessary. Microsoft has its own ideas, of course.

Gates sat down with ZDNet Australia sister site CNET News.com to talk about competitors old and new, why software hasn't fulfilled promises and the mixed blessing of controlling 90 percent of the world's PCs.

Q: More developers are becoming interested in building new applications using the Web as a platform, as opposed to the PC. Do you feel you're in competition with Google, Yahoo and other Web properties for developers' attention?
Gates: No, I don't think so. The architecture we are interested in we call server-equals-service, so that we will have the full Exchange capability that you can subscribe to, where we run it, or you can have it on-premise with the traditional licensing approach. At this conference, we do give out APIs (application programming interfaces) for the MSN Search and the MSN Virtual Earth capability, so things that have been cloud-based services, you can have client applications that other services can connect to. So, I'd say the evolution is server to service, and bringing that symmetry in.

With Google, there are rumours about them being interested in that services piece, but they really haven't done that much. Our search API is way better than their search API. Clearly, they are working in that area. They haven't done as much on the server piece. They had a Google server, but it was very bad at corporate search. That did not work well at all. That's the only place where I think they have done any server-type piece. Yahoo doesn't think of themselves as a platform company. I don't think you will ever have the Yahoo PDC. Google, because they are in the honeymoon phase, people think that they do all things at all times in all ways.

Well, I guess that's what you have to combat, right? They are in this phase, and when Google does anything, they get attention.
Gates: Yeah. You do me-too Google Talk, and it's a big deal. But we had our honeymoon phase, and it was fun from maybe 1985 to 1995. And we've had lots of competitors in their honeymoon phase. But I'd say, in some ways, this is the biggest honeymoon I've ever seen.

Is that a long-term threat for Microsoft? People like Google come along and they have this Web development idea and they popularise that notion and people listen?
Gates: Developers are not building on some Google thing at this point. The idea that the computing industry can simplify its offerings dramatically by having this server-equals-service approach, and having richer services, absolutely I believe in that, and we need to be at the forefront of that. The idea that management can be more automatic and software updating can be more automatic, state-replication more automatic -- there are some big things here that can drive the industry forward. They are very complex, because we have to make things very reliable and very secure if you are going to do this. It's just now that we have the maturity of XML and the Web Services protocols that we can start to do (this).

So Google is not offering development capabilities yet. Of course, I expect they will. But they're not in that game at all today. In fact, they have this slogan that they are going to organise the world's information. Our slogan is that we are going to give people tools to let them organise the world's information. It's a slightly different approach, based on the platformisation of all of our capabilities and not thinking of ourselves as the organiser.

So that would be the philosophical difference between Microsoft and what Google is up to at this point?
Gates: Well, we don't know everything they are up to, but we do know their slogan and we disagree with that.

How does Microsoft want to bring that server-equals-service capability to the market? You have the servers. Do you have the services?
Gates: Well, let's go through it. We have Active Directory, which we are making a lot richer. There's a lot of talk about that here. And we have Passport. So we're making those very symmetric, and having this federation capability be central to the architecture, those things follow.

We have e-mail where we have Hotmail and Exchange. We'll have hosted Exchange from some of the telcos, too. In terms of Web sites, we have some people doing hosted SharePoint now, we have Spaces, which is a low-end version of that. We'll bring those together. So our services have started out as very inexpensive but not feature-rich. Our servers are very feature rich. So as we bring these things together, we give you the richness and also the choice of having it as server or as a service. And that is a very big deal to us. The place we are strongest in this today is in instant messenger, where the MSN Messenger is the service, and Live Communications Server is the server. So those things are very symmetrical.

So why services now? That idea has been around for a while. There have been some projects within Microsoft to offer Office-like capabilities that didn't actually make it to market. So what has happened to make this a reality?
Gates: The fact that Windows monitors when people are having crashes and problems and we get reports, that's been there for three years. Software is becoming better because it is connected up and you can see how it's being used and you can improve it over time. There hasn't been an infrastructure for doing the patching. Some of these security things have driven that, and we can benefit from having that infrastructure, not just for security but for other improvements. The services concept is coming along. The first company meeting where I talked about software as a service was in 1998. The relationship with our customers has changed from software in a box to something else.

(Google has) this slogan that they are going to organise the world's information. Our slogan is that we are going to give people tools to let them organise the world's information.

So you will see the services thing increase. We bought a company called FrontBridge that's kind of a software service firm. We have a lot of expansion ourselves in this area. It's not just consumers. A lot of it, actually the majority of this, is focused on businesses. We're giving them a choice of how they do IT, and some of it is through services.

Telcos have been wanting to do this for a long time. Some of them are your customers. Doesn't this pose a conflict?
Gates: Our relationship with telcos is stronger than ever. As they have seen us be a proprietor of basic technologies that let them get into the video business, they are saying, could their R&D department have done that? So they are seeing how they can incorporate that in and be a service provider beyond telephony. So their strategic plans are more dependent on how we get those things done, more than ever.

With Oracle buying Siebel, does that change your approach to the customer relationship management software market?
Gates: Larry (Ellison) forecast big consolidation, and he wanted to see that come true, so he's making it come true. It's a brilliant forecast. If the next three people under you don't write code but they do deals, what do you get? You get deals. They will probably do more deals than anybody, and we'll write more code than anybody. We've been very serious about our CRM plans, including scaling that up to very demanding cases.

SAP is very strong in CRM and a good partner. Siebel was the original leader in CRM, and we have a good relationship with them. We'll maintain that, even though they are part of Oracle. A lot of what CRM is about is work flow, and we're building work flow deep into the cloud. You would have to say that CRM as a whole has not fulfilled some of the promise that was out there. So the fact that it is being repartitioned as an assumed part of Office and the platform -- lots of it -- I don't think that is too surprising. It never emerged as a clear-cut thing by itself quite the way that some people expected.

This morning, you were speaking about some of the tough problems that software hasn't solved -- speech recognition, security, presence. What's holding us back from solving those problems?
Gates: The pace of software innovation today is as fast as it has ever been. In speech recognition, over the past decade, the error rates have come down, down, down, down. Now, we haven't hit that magic threshold where speech recognition is better than the keyboard.

Our money is where our mouth is. It's like IPTV. I said over a decade ago that would happen. It took longer than I expected, but I'm sure glad we got in early and put the money behind it. I feel the same way about speech. It will be mainstream.

Let's talk about WinFS for a second. That's a good idea. But sometimes these really big ideas are difficult to implement when you have a really large installed base of customers, as Microsoft does, using various versions of Windows. That legacy problem seems to be an impediment to bringing new technology online. Does that get in the way of sweeping changes you'd like to make to Windows?
Gates: Well, that's the real world. We're in a very good position because we understand a lot of what is out there and how we can make moving up to the next thing very straightforward with the least amount of discontinuity. I've always been a big champion of WinFS. I was never satisfied that we were bringing it out as a client-only technology, and I was worried about that. Now we've chosen to skip doing it as a client-only thing and to do it as a big-bang client and server release. There's still a lot of work to be done on that one, and that's all wrapped up in this next release of SQL Server.

Those things are hard. They are fantastic when you get to them, because they greatly simplify things. It's the kind of thing that takes a company with a long-term approach on these things and willing to do something quite risky. The Office 12 user interface you saw this morning is another good example of that. Microsoft was willing to take that 2D menu structure that things are kind of buried in and blow that up. Here's Office, the most used software of all time, people are familiar and comfortable with it. Particularly our Office group that wants things to be exactly right. They decided it was time to step back (and do that). There will be some shock among users. But pretty quickly (people get used to it).

Looking at the open-source world, there's this movement away from selling licences toward selling support. A lot of people are participating in that, and you have been skeptical. Why? Do you think that's fundamentally the wrong model?
Gates: The industry will always be a mix of free and commercial software. So there will be a balance between those. I think that we are going to have a lot of both. There are some zealots that think there should be no software jobs, that we should all, like, cut hair during the day and write code at night. Should you take some of those extreme views, I think it's easy to say that's not right. There are things like compatibility and 24-hour support and taking big leaps like IPTV or speech recognition. The painstaking work over a decade that you have to do, that costs hundreds of millions or even billions of dollars. That's the commercial side. It's good at hiring people and selling licences and taking the risks that go with that.

I've always believed in low-cost, high-volume. It should be a cost that's so obvious that you should spend, because it saves you on personnel time, hardware, communications costs, which are gigantic when compared to the price of packaged software. That cost is almost a rounding error. The value you get out of the system is a lot larger than that. I don't just believe in a single model. There's a lot of neat things that can be done. But I don't think that someone who completely gives up licence fees is ever going to have a substantial R&D budget and do the hard things, the things too hard to do in a university environment. But that's OK. There will be a commercial software industry, hopefully, with companies that take the long-term approach and make the investments that drive those new breakthroughs.