It happened. Microsoft is now the underdog to Google in the game of technology world domination.
The Redmond, Wash.-based software giant faces growing competition in its core software business, which dominated the industry for two decades, and it hasn't had a bottom line-galvanizing success in any other area recently. It was late to online advertising, letting Google (nasdaq: GOOG - news - people ) all but run away with that sector. It hasn't had a big Web 2.0 hit yet. Thank god for Halo 3!
But Steve Ballmer isn't worried. The bombastic chief executive of Microsoft (nasdaq: MSFT - news - people ) was brimming with confidence and good cheer about the company's future at the Web 2.0 conference on Thursday in San Francisco. He told a packed room that Microsoft is working hard on several fronts so it can become a "three- or four-trick pony," holding onto the top spot in business software, but also becoming a force in search, advertising and entertainment.
Just give Microsoft a little more time, Ballmer said.
"I'm happy with everything but everything needs some improvement -sort of like your kids," said Ballmer, who strode onto the conference stage toting a vente-sized Starbucks iced tea. "There will be more operating systems releases. In the enterprise business we're going gangbusters, but there's so much of the enterprise market we haven't tapped."
Asked if he thought Google's word processing and spreadsheet applications were good, Ballmer was blunt: "No, I don't."
Microsoft has been criticized for getting into online search and advertising late and with services that weren't quite ready for prime time. But Ballmer said he's not upset and knows it will be a long haul to go head-to-head with Google. To Microsoft's advertising unit, he'd offer these encouraging words: "You're 3-years-old and you're playing basketball with 12-year-olds. You're going to dunk on the other guys some day!"
On the acquisition front, Ballmer did not address questions about whether Microsoft will take a stake in Facebook. He did say, however, that he's pleased with his company's recently announced advertising partnership with the social networking site.
And what about Microsoft's rumored offer on the table for Yahoo! (nasdaq: YHOO - news - people )? Industry observers think the deal makes sense since Yahoo! would give Microsoft instant heft in search technologies. "That may or may not make sense to us or to Yahoo!" Ballmer said. "We believe in our independent path. We like what we're going. If you talk to Jerry at Yahoo! he'd say they like what they're doing."
Ballmer indicated that buying Yahoo! would be a stretch. He said Microsoft would prefer to acquire 20 companies a year for up to $1 billion, rather than a single business that would cost far more.
Still, Ballmer knows Microsoft needs another hit -soon. For the past year, the company's stock has waffled in the high $20s. It closed on Thursday at $31.16. The stock hasn't been north of $32 since 2003. And there's nothing like a new blockbuster product or service to lift share price. "If we produce an advertising business that generates another $5 to $10 billion profit, Wall Street will reward that," Ballmer predicted. "We just have to do that."
Yeah. High time to start working on that comeback strategy.
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