(Adds more quotes from Ballmer, details)
By Daisuke Wakabayashi
REDMOND, Wash., July 26 (Reuters) - Microsoft Corp. (MSFT.O) Chief Executive Steve Ballmer defended the software company’s expansion beyond its Windows and office software businesses, saying Web services and consumer devices are key to the company’s future.
Speaking on Thursday at an annual meeting with financial analysts, Ballmer acknowledged he had been “hammered” by investors who argued Microsoft should focus on its core desktop and server software business and forget businesses like digital music players and video games.
Microsoft aims to make software that integrates the best features of desktop software, higher-end corporate software, Web services and devices, and it needs to be in all of those areas to keep up with the pace of innovation, Ballmer said.
“Great things don’t happen overnight,” he said. “Most successes require long-term investment and innovation ... and that’s our perspective.”
Ballmer said he is more “optimistic” now than at any point in the company’s history and sees more opportunities for growth in the next 10 years than in the past 30 years.
Microsoft’s expansion into new businesses has not always been smooth. Ballmer said the $1.06 billion charge the company took to fix problems with the Xbox game console was “painful,” teaching it a lesson about hardware design.
Microsoft can also drive growth through its bread-and-butter software products like the Windows operating system and Office productivity software, Ballmer said.
New versions of Office and Windows are yielding higher-than-expected renewals of multiyear agreements with large organizations, according to Microsoft.
The cash generated from those products, which account for almost all of the company’s profit, support Microsoft’s newer initiatives like online advertising, its Zune music player, software for mobile phones and online service.
Microsoft said it sold 60 million Windows Vista licenses as of the end of June, including 20 million copies sold since mid-May. Windows Vista, the latest version of its dominant Windows operating system, was released on Jan. 30.
The company said it expects the total installed base of the Windows operating system to hit one billion — which Microsoft noted was more than the number of cars in the world — during the current fiscal year.
Ballmer said the company plans to embrace “disruptive technologies” like Web-based applications that threaten Microsoft’s traditional desktop software, which runs locally on a computer hard drive.
“Every piece of software — the basic core value in the way software gets created — will change in the next three, five or 10 years,” said Ballmer, adding that future software will all factor in some aspect of desktop, Web and server elements.
However, he rejected the idea that the software industry would shift entirely to an Internet delivery model.
Microsoft also said it is committed to building an advertising powerhouse to compete with Google Inc. (GOOG.O) and Yahoo Inc. YHOO.O
The company announced the acquisition of AdECN, a market for buyers and sellers of Web advertising. AdECN functions like a stock exchange for advertisers and publishers to buy and sell display advertising online.
“It allows us to move ahead with all the core components needed to enable an ad platform,” said Kevin Johnson, president of Microsoft’s platforms and services division, without disclosing the deal’s financial terms.
The acquisition comes on the heels of Microsoft’s plan to purchase Web advertising firm aQuantive Inc. AQNT.O for $6 billion earlier this year. Microsoft said the aQuantive deal cleared regulatory hurdles and will close in mid-August.
Johnson said the company’s online services group will undergo another year of investment in this fiscal year, suggesting that the loss-making division will not turn a profit in fiscal 2008.
(Additional reporting by Eric Auchard in San Francisco)
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