Speaking to a Silicon Valley gathering at the Churchill Club in Santa Clara, California, Microsoft CEO Steve Ballmer delivered a speech entitled "Innovation or Stagnation: The Technology Industry at a Crossroads." The thrust of the speech was Microsoft's efforts to meet the security demands of Windows users in the wake of recent computer virus attacks, but Ballmer also set forth what he believed to be Microsoft's business strategy of putting innovation first, even if it means delaying returns on Microsoft's investments.
"The bottom line for any company in our industry is that we have to meet customer expectations through a relentless focus on innovation," said Ballmer. "It's the soul of our company, and it's what we aspire to more than anything else to contribute. We invest heavily in innovation. We'll spend about $6.8 billion this year in innovation alone."
During a question-and-answer session after his presentation, Ballmer commented on how Microsoft will wait patiently to see returns on its investments in mobile devices, its MSN Internet service, and the Xbox. Ballmer said, "Taking a long-term approach has been effective for us, and it's an approach that our industry must continue to take to serve customers. It's the approach that produces some of the most powerful innovations in the industry...things that took years of investment to deliver the kind of innovation that finally pays off in the marketplace." Ballmer's comments to some degree reflect Microsoft's position as a competitor in the video game console market. Console first-parties--Microsoft, Sony Computer Entertainment, and Nintendo--typically adopt the "razor and razor blades" business strategy. The idea behind this, of course, is that the cost of the game console (or razor) is more expensive than its retail price, but in the long term, revenues generated by first-party software sales and third-party software royalties pay down the remainder of the console cost and then make for profit. It usually takes several years for a console to become profitable. Analysts suggest that Microsoft's Xbox, the most powerful of the current generation of consoles, will take the longest to become profitable, if it does at all before the launch of the Xbox 2. This is in part due to its custom chipset and pricey off-the-shelf parts, which result in the most expensive hardware.
Microsoft is generally believed to hold a solid second place in the current console market, ahead of Nintendo and behind Sony. Despite sluggish sales in Japan, Microsoft has outperformed the Nintendo GameCube in Europe and North America.