Steve Ballmer has been running Microsoft's Windows business for past 12 months

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Microsoft's annual Financial Analysts Meeting opened under a fog -- a cloud of uncertainty not seen since the company went public in 1986. For most of fiscal 2009, which ended June 30, Microsoft offered Wall Street no guidance on earnings. During fiscal fourth quarter, net income plummeted by 29 percent and revenue for all five product divisions fell year over year. Microsoft also reported its first annual revenue decline ever. When will the fog clear, and what will it reveal?

Financial analysts have reason to hope. Yesterday, Microsoft cut a long anticipated search deal with Yahoo, smart marketing got the new Bing brand off to a surprisingly good start and important -- some exciting -- new products will ship during fiscal 2010, such as Windows 7, Windows Server 2008 R2, Exchange Server 2010, Azure Platform Services and Office 2010.

This morning, Microsoft CEO Steve Ballmer stepped through the fog to stand before Wall Street's finest on the FAM stage. Once again, he harkened about the global economic collapse -- the econolypse -- leading to a "reset." Recovery will be at a lower level. But he also swept his hand, and with typical booming voice cleared away some of the fog. Microsoft will not only survive but excel. Microsoft will spend $9.5 billion in research and development during fiscal 2010. "We have to innovate," Ballmer said. To "grow on a "sustained basis," Microsoft must look to the long term, he emphasized.

During FAM 2008, "We were living in a very different world economically," Ballmer said. "The economy really slowed down, but we did not slow down at Microsoft." He spoke about the importance of Azure and Windows 7 and other products coming during fiscal 2010.

Microsoft's CEO acknowledged that Microsoft had stumbled with mobile phones. "Will we succeed in phones?" Ballmer asked. "It was a tough year in executing in phones." He asserted that "for-profit-only software" -- not a phone from Microsoft -- is the way to get 40 percent to 50 percent market share.

Ballmer said that there was no plan for Microsoft to announce the Yahoo search deal the day before FAM. He described the agreement as a "win-win deal" and win-win partnership" for both companies. He said the biggest benefits would come in North America and the few other Microsoft and Yahoo have combined reach. "Google has about 90-percent paid search market share in Europe," Ballmer said. "

Ballmer described the search deal as "a tool for product improvement." With scale, Microsoft can make the search experience -- of which advertising is an important part -- better. "Product improvement is the key to market share," he asserted.

"For the last 12 months, I've been running our Windows business," Ballmer said. That is why Steven Sinofsky, who was recently promoted to president of the Client business, didn't give the Windows presentation. Ballmer spoke about the importance of integration -- what Ballmer called a "vibrancy" -- with other products, such as Office 2010. Some of that vibrancy will in the future come between Bing and WIndows. This vibrancy is important to Windows continued success. "We're going to come under competitive attack," he asserted.

Ballmer boasted: "New PC designs -- boom -- we're going to have a heck of a Christmas." He reviewed something that most financial analysts should already know: "The bulk of our Windows business comes with the sale of new PCs" -- about 80 percent.

Ballmer spoke about the super-hot netbook category, which -- he didn't say -- has sapped Windows profits during fiscal 2009. He made clear that Microsoft sees netbooks as evolving to larger screens: "Ultrathin -- it's a high-end netbook." Ballmer didn't mention the Dell Adamo, but that's the kind of portable he referred to. Clearly, a high-end netbook would be attractive to Microsoft. "We need an expensive netbook," he said while describing Windows revenue for 2010.

Ballmer made clear that Microsoft's official netbook license is for smaller screens. But with respect to netbooks that OEMs could put Windows "XP on the machine at one price," Windows 7 Starter Edition would be available at a higher price and Windows 7 Home Premium or Professional at even higher prices.

Microsoft's CEO briefly spoke about Apple competition. He described Apple's market share gains as "a rounding error. He emphasized: "Apple's share globally cost us nothing." But he did observe where Microsoft needs to do better: "We have lower share in the investor audience." He joked about the number of Mac laptops at FAM: "Don't hide them. I've already counted them. Feel free, as long as you're using Office."

Ballmer made clear that Microsoft's business is different from Apple's, which is high-priced, low volume. Microsoft is going for high-volume, high-value and low price. "You can't be high priced. That doesn't get us to the high volume that we aspire to," he said.

Apple justifies higher pricer by asserting that "'at the end of the day we have the coolest hardware," Ballmer claimed. He repeated that for holiday 2009, Windows PC manufacturers will release new hardware -- and that will wipe away Apple's hardware design justification. It's possible to make cool computers, with hardware and software coming from different companies, he asserted. Cool doesn't have to come from an end-to-end provider.

Microsoft will continue to "invest in Windows marketing," Ballmer said. He put up a slide showing how Microsoft's brand improved against Apple's following the "I'm a PC" advertising campaign, which includes "The Rookies" and "Laptop Hunters" sub-campaigns.

Ballmer described Windows 7 as "the flagship" and "the hub." He emphasized Windows' importance to all Microsoft's lines of businesses.

Microsoft's CEO got on fire, and went way, way, way over his alloted time. He concluded by talking about how Microsoft is investing in the future and whether "the company is well run," which he posed as a question to financial analysts.

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