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When Apple started running the anti-Vista commercial (above) mocking Microsoft for spending $300 million on Vista’s own ad campaign instead of on fixing its problems, I called it hypocritical:

Apple’s advertising budget is also pretty massive. I mean, I see more Apple commercials on TV than ads for Barack Obama. Apple is on track to spend more than $3.5 billion on SG&A (selling, general, and administrative expenses) for its fiscal year that ended September 30. How much of that was spent on advertising? I don’t know, but 10 percent doesn’t seem unreasonable.

It turns out that I underestimated Apple’s advertising budget. Lindsay Blakely at Bnet (a former Business 2.0 reporter) found the actual numbers in a subsequent SEC filing. In its 2008 fiscal year that just ended last September, Apple spent a whopping $486 million on advertising. (In fiscal year 2007, it spent $467 million, and in fiscal year 2006 it spent $338 million).

Half a billion dollars on marketing. No wonder I think Apple products are so great.

Update: Microsoft spends more on advertising across all of its combined businesses than Apple does, but its Windows business is what competes most directly with Apple. Microsoft’s total advertising budget across all of its businesses, including Windows, Office, Xbox, and all the enterprise stuff, was the following (from the 10K): “Advertising expense was $1.2 billion, $1.3 billion, and $1.2 billion in fiscal years 2008, 2007, and 2006, respectively.”

Microsoft’s fiscal year ends in June, so these numbers do not reflect the $300 million Vista campaign. But that would have eaten up 25 percent of Microsoft’s entire ad budget for any of the previous three years.

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Microsoft is launching a new program called BizSpark to encourage startups to build on their stack this morning.

Virtually everything a startup needs to build a web service (many of the tools and software compete with open source alternatives, such as MySQL) is being offered to startups for free for three years. The program, run by VP Strategic and Emerging Business Development Dan’l Lewin, is global and provides access to full-featured development tools and production licenses of server products with no upfront costs. BizSpark also provides the necessary hand holding with free technical support.

The fine print: startups need to be referred in via a network of venture capitalists, consultants and other professionals in a position to flag promising companies. To qualify a startup needs to have been in business for less than three years and have less than $1 million in revenue.

What startups get: a free, tech-supported alternative to open source software. Microsoft gets to train a new crop of engineers on their software and services, and lock these guys in after three years when fees start to be charged. Brilliant.

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Microsoft CEO Steve Ballmer sent an email to customers today (reprinted below) summarizing some of the big news coming out of the Professional Developers Conference (PDC) in Los Angeles. He talks about both the Azure cloud services platform (a comprehensive set of storage, computing, and networking infrastructure services) as well as Office in the browser.

The email reiterates Microsoft’s core messaging that the Internet is fine, but it needs a little desktop software to really make it hum: “the key to delivering value today and in the future lies in combining the best aspects of software running on PCs, servers, and devices with the best aspects of services running on the Web-an approach we call “software plus services.”"

Client software is needed, he argues, to take full advantage of the hardware on devices. Multicore processors and new programming languages will expand computing capabilities, he says, and “the interactive experiences that people expect on their PC, mobile phone, and media player depend on sophisticated software running on powerful processors”:

In other words, software does the heavy lifting, and the browser makes access and communication easy: “For the Web, it’s the ability to bring together people, information, and services so we can connect, communicate, share, and transact with anyone, anywhere, at any time.”

The full email is below. What Ballmer says makes sense. But Microsoft also has a huge stake in software, since it powers more than 100% of their profits. If he’s betting correctly, Microsoft can dominate another generation of computing. If not, Google eats their lunch.

Or maybe Google is thinking the same way…as they expand the functionality of Gears ever further, Google is also saying they need a direct tie to the hardware on a PC to really make their services sing.

—–Original Message—–
From: Steve Ballmer
Sent: Tuesday, October 28, 2008 2:37 PM
To:
Subject: A Platform for the Next Technology Revolution

During the past decade, a dramatic transformation in the world of information technology has been taking shape. It’s a transformation that will change the way we experience the world and share our experiences with others. It’s a transformation in which the barriers between technologies will fall away so we can connect to people and information no matter where we are. It’s a transformation where new innovations will shorten the path from inspiration to accomplishment.

Many of the components of this transformation are already in place. Some have received a great deal of attention. “Cloud computing” that connects people to vast amounts of storage and computing power in massive datacenters is one example. Social networking sites that have changed the way people connect with family and friends is another.

Other components are so much a part of the inevitable march of progress that we take them for granted as soon as we start to use them: cell phones that double as digital cameras, large flat-screen PC monitors and HD TV screens, and hands-free digital car entertainment and navigation systems, to name just a few.

What’s missing is the ability to connect these components in a seamless continuum of information, communication, and computing that isn’t bounded by device or location. Today, some things that our intuition says should be simple still remain difficult, if not impossible. Why can’t we easily access the documents we create at work on our home PCs? Why isn’t all of the information that customers share with us available instantly in a single application? Why can’t we create calendars that automatically merge our schedules at work and home?

This week at the Professional Developers Conference (PDC) in Los Angeles, we shared news with software developers about a new set of platform technologies that will help transcend these limits. Because you are a subscriber to Executive Emails from Microsoft, I wanted to share my thoughts about the impact that these technologies will have as developers begin to use them to create a new generation of experiences that extend uninterrupted from the desktop to the mobile phone, media player, car, and beyond-to places where we never thought information and communications would be available to us.

A NEW PLATFORM FOR CLOUD COMPUTING

At PDC, we announced the availability of an early preview release of a new technology called Windows Azure. Windows Azure will enable developers to build applications that extend from the cloud to the enterprise datacenter and span the PC, the Web, and the mobile phone. For the first time, we shared pre-beta code for Windows 7 and for Windows Server 2008 R2. Windows 7, which is the next version of the Windows desktop operating system, will take advantage of software and hardware advances to help eliminate the boundaries between information, people, and devices.

We also previewed Office Web applications, which are light-weight versions of Word, Excel, PowerPoint, and OneNote that are designed to be accessed through a browser. Office Web applications will be part of the next version of Office and will enable people to view, edit, and share information and collaborate on documents on the desktop, the phone, and in a Web browser in a way that is consistent and familiar.

Windows Azure is part of the Azure Services Platform, a comprehensive set of storage, computing, and networking infrastructure services that reside in Microsoft’s network of datacenters. Using the Azure Services Platform, developers will be able to build applications that run in the cloud and extend existing applications to take advantage of cloud-based capabilities. The Azure Services Platform provides the foundation for business and consumer applications that deliver a consistent way for people to store and share information easily and securely in the cloud, and access it on any device from any location.

Windows Azure is not software that companies will run on their own servers. It’s something new: a service that runs in Microsoft’s growing network of datacenters and provides the platform that helps companies respond to the realities of today’s business environment, and tomorrow’s. Windows Azure technologies are already finding their way into products such as Windows Server 2008 and System Center Virtual Machine Manager, enabling organizations and Microsoft partners to create their own cloud infrastructure.

Windows Azure will enable organizations to respond to realities such as the need to use the Web to provide customers with comprehensive information and to interact with an audience that has the potential to expand exponentially overnight; to integrate operations with partners-and sometimes even competitors-to meet customer needs; to add new capabilities quickly to respond to new opportunities; and to enable employees to work efficiently and effectively no matter where they are. These realities apply not just to businesses, but to organizations of all kinds: schools, governments, community groups, and more.

Traditional approaches to building technology infrastructure and delivering computing capabilities make it difficult and expensive to adjust to these realities. You need systems with enough capacity to meet the highest possible demand-capacity that includes servers and buildings to house them, the power to run them, and the people to manage them. You have to spread that capacity across locations so there’s a backup if one part fails. You have to solve issues like access for different types of users and compliance with tax regulations in all countries where your customers reside.

Designed specifically to meet the global scale that today’s organizations require, the Azure Services Platform will provide fundamentally new ways to deploy services and capabilities. It gives businesses the option to take advantage of the capacity available in the cloud as it is needed, reducing the need to make large upfront investments in infrastructure simply to be ready when demand spikes. It will enable developers to create applications that run in the cloud and provide the features, information, and interactivity that employees, partners, and customers expect-no matter how many of them there are, where they are in the world, or what device they have at hand.

SOFTWARE PLUS SERVICES AND THE POWER OF CHOICE

The Azure Services Platform reflects our belief that choice is critical for developers, companies, and consumers. It is also based on our belief that the key to delivering value today and in the future lies in combining the best aspects of software running on PCs, servers, and devices with the best aspects of services running on the Web-an approach we call “software plus services.”

Our software plus services approach lets people take full advantage of the incredible power of today’s devices. While there are undeniable benefits to being able to tap into the wealth of information and services that can be accessed over the Web through a browser, the interactive experiences that people expect on their PC, mobile phone, and media player depend on sophisticated software running on powerful processors.

The richness of these experiences will only increase as multicore processors expand the computing capabilities of our devices and new programming languages open the door to a new generation of applications that let us use more natural ways to interact with digital technology such as voice, touch, and gestures.

Software plus services also recognizes that for most companies, the ideal way to build IT infrastructure is to find the right balance of applications that are run and managed within the organization and applications that are run and managed in the cloud.

This balance varies by company. A financial services company may choose to maintain customer records within its own datacenter to provide the extra layers of protection that it feels are needed to safeguard the privacy of personal information. It may outsource IT systems that provide basic capabilities such as email.

This balance will change over time within an organization, as well. A company may run its own online transaction system most of the year, but outsource for added capacity to meet extra demand during the holiday season. With software plus services, an organization can move applications back and forth between its own servers and the cloud quickly and smoothly.

Today, companies around the world are implementing Microsoft technologies to take advantage of the best combination of on-premise software and cloud-based services. Using Microsoft Online Services, businesses including Coca-Cola Enterprises, Blockbuster, and Energizer access and manage Microsoft Exchange, SharePoint, Office Communications Server, and Live Meeting over the Web through a single, secure infrastructure. In addition, 1 million people rely on Office Live Workspace for sharing and collaborating with friends, family, and colleagues.

EXPANDING THE DEFINITION OF PERSONAL COMPUTING

Ultimately, the reason to create a cloud services platform is to continue to enhance the value that computing delivers, whether it’s by improving productivity, making it easier to communicate with colleagues, or simplifying the way we access information and respond to changing business conditions.

In the world of software plus services and cloud computing, this means extending the definition of personal computing beyond the PC to include the Web and an ever-growing array of devices. Our goal is to make the combination of PCs, mobile devices, and the Web something that is significantly than more the sum of its parts.

The starting point is to recognize the unique value of each part. The value of the PC lies in its computing power, its storage capacity, and its ability to help us be more productive and create and consume rich and complex documents and content.

For the Web, it’s the ability to bring together people, information, and services so we can connect, communicate, share, and transact with anyone, anywhere, at any time.

With the mobile phone and other devices, it’s the ability to take action spontaneously-to make a call, take a picture, or send a text message in the flow of our activities.

Through Live Mesh-a service from Microsoft that we announced earlier this year and about which we shared new information week-we’re beginning to bridge the PC, phone, and Web and create this next generation of connected experiences. Built on the Azure Services Platform, Live Mesh enables you to use programs and information stored on your work computer from your home PC, and vice versa. With Live Mesh, you can share folders and ensure that the information is automatically synchronized across your devices.

Live Mesh hints at how our lives will be transformed as the barriers between devices disappear and the option to connect instantly to people, devices, programs, and information becomes a reality.

We’re not quite there yet. Today, the Azure Services Platform is available only as a limited technology preview release. But as developers begin to combine the capabilities of this new platform with the amazing ongoing hardware and software innovations that we are seeing from companies across the industry, it will bring us significantly closer to the time when information, communication, and computing flows along with us seamlessly as we move through our day-to-day activities.

You can learn more about these technologies and the progress we are making by visiting the Microsoft Software + Services Web site at http://www.microsoft.com/softwareplusservices/.

I look forward to sharing more information with you about these new technologies in the near future.

Steve Ballmer

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Microsoft announced earnings today for the third quarter. Overall revenues for the quarter came in at $15 billion, growing a decent 9 percent annually. But its net profits of $4.37 billion rose only 1.9 percent. As usual, Microsoft’s stability came from is Windows client, server, and Office businesses.

The company’s online revenues, which includes MSN, search and its advertising networks, grew 15 percent to $770 million in the quarter. However, the online business posted an operating loss of $480 million, nearly double the $267 million loss it posted a year ago. On the conference call, Microsoft boasted about its Silverlight partnership with NBC during the Beijing Olympics in which 70 million videos were streamed. You’ve got to wonder how much that partnership ended up costing Microsoft.

Total online advertising revenues were up 15 percent in the quarter, with search growing faster than display. The company expects online revenue growth to slow to 6 to 10 percent next quarter, with display advertising being more sensitive to the recessionary environment.

The company will be taking $400 to $500 million out of costs by slowing its hiring, spending less on data centers, and cutting back on marketing and travel expenses. But Microsoft still has plenty of cash: $21 billion, and that was after buying back $6 billion in stock and paying out $1 billion in dividends during the quarter. To put that $7 billion Microsoft handed back to shareholders into perspective, Yahoo’s entire market cap is now only $17.5 billion.

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Update: Microsoft says “Our position hasn’t changed. Microsoft has no interest in acquiring Yahoo!; there are no discussions between the companies.”

An off the cuff remark by Microsoft CEO Steve Ballmer this morning set Yahoo’s stock soaring more than 15% to $13.73, adding well over $3 billion in market cap to the struggling company.

Speaking at the Gartner ITXpo, Ballmer reportedly said a Microsoft acquisition of Yahoo (presumably he’s talking about a full buyout, not the repeatedly rejected search deal) would still “make sense economically” for both companies shareholders.

But he also cautioned that Yahoo is no longer worth the $33 per share originally offered: “Ballmer said that even with the recent drop in Yahoo’s share price, the company “probably thinks its still worth as least as much today,” as when Microsoft made its offer.”

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Microsoft has announced that the latest version of Windows, due in the next couple of years, will be called - drumroll please - Windows 7. It’s about time Microsoft adopted a naming system that might actually make some sense to users, but I can’t wait for hordes of customers to start asking if they somehow missed Windows 1 through 6.

Windows has had one of the most ridiculous naming schemes in the history of software. First there were logical (but ugly) version numbers, like the once commonplace “Windows 3.1″. Then with the release of the overhauled Windows 95 the company adopted a naming system based on the year of release, which it continued until Windows 98.

Windows Me (perhaps the worst operating system I’ve ever used), sacrificed the scheme for a chance to be clever (it stood for “me” and the millennium at the same time!) Next up we hit Windows XP, which has served most of us reasonably well since 2001. It sounds sort of cool, it’s catchy, and we have no idea what it means. Fine.

Finally we had Windows Vista, which seemed to stick with the naming convention of “something that sounds sort of cool but didn’t really mean anything”. It had been more than five years since the release of XP, so there was little chance of confusion.

Microsoft is now in a hurry to push out its next operating system after the generally dismal response to Vista. And so we’ve come to Windows 7, which is apparently tied to the build numbers and not the actual releases. The new naming scheme lends itself well to faster, more incremental releases similar to what we’ve seen from Apple (about once every 18 months), but it’s probably going to confuse everyone and couldn’t be more bland.

You can read more at the company’s blog post here.

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Private equity fund Mithras Capital, which holds 1.9 million shares of Yahoo (about 0.14%), will propose to Microsoft that they buy Yahoo at $22 per share, Reuters reports. Microsoft would then unload Yahoo’s Asian assets adn non-search businesses, take $3 billion worth of cost savings and some tax benefits, and end up with Yahoo’s search business for $10.3 billion.

Microsoft is obviously thrilled to see this kind of corporate chaos at Yahoo, although they are unlikely to even respond to the proposal. Yahoo, as usual, looks like amateur hour as their shareholders conduct (or try to conduct) negotiations behind their back.

Mithras Capital partner Mark Nelson said he will send a letter proposing the deal to Microsoft and Yahoo this evening.

Meanwhile, Yahoo was down another 8.1% today, to $12.65, from yesterday’s close of $13.76.

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Hummer Winblad’s Ann Winblad interviewed Microsoft CEO Steve Ballmer this evening at a Churchill Club event in Silicon Valley. The live video stream is embedded below.

The early part of the discussion focused on Microsoft’s views on web based software offerings from companies like Google and Salesforce. Ballmer says apps don’t really belong solely on the client or in the cloud, but rather a “software plus services” approach that distributes processing and storage across the cloud and the local machine or device. This hybrid approach, known as Windows Live Wave 3, is being rolled out now and major announcements will be made at the upcoming Microsoft PDC conference in Los Angeles. Windows 7 will also be available for the first time at the PDC.

Ballmer also talked about Microsoft’s only money-losing business unit - online. He admits the company is a distant third in search, but claims second in “advertising software.” He says he remains committed to finding a way to win in search, and in fact says that Microsoft is the only company in a position today to compete with Google in search. He reiterated that they would continue to commit 5-10% of total operating cash flow for the foreseeable future to try to gain search share.

When Ballmer talks about search, he’s really talking about advertising, since such a high percentage of online advertising flows through the search engine. He also stressed that Microsoft is the only company that can compete with Google as the advertising market continues its digitization.

“We need to fundamentally redefine the search experience and the search business model,” he said early on.

Ballmer and Winblad also discussed the mobile market. Ballmer is focused on the smartphone market, where Microsoft software is a major player. 125 million smart phones will be sold this year, he said, and that will grow to a billion in five years. He says proprietary hardware/software stacks (iPhone) will have trouble competing with the more open approaches, such as Microsoft, Android, Symbian, etc. He ads a caveat, however: users won’t trade off usability just to have different hardware choices. The operating systems must work seamlessly across different hardware configurations.

“The smartphone market today is a lot like the PC market in 1983,” he said.

In response to a question about acquisitions v. internal research, Ballmer says they buy about 20 companies a year and will keep spending $9 billion or so a year on research and development. Most of those acquisitions are under $100 million, with a handful of larger ones. “We’ll keep buying about 20 companies a year.”

Winblad finished the interview by asking Ballmer how hard he’s found it to steer Microsoft without the recently retired Bill Gates. Ballmer was diplomatic in his response. The company is very diverse in its goals and revenue streams, he says, and so the leadership team as a group has to lead the company.

One of Microsoft’s biggest challenges is to focus on what’s really important for the company, he said. The urgent drowns out the important, he added, and they have to focus on long term growth strategies. “The decisions on what to invest in are the most important.”

Ballmer also let off a few zingers in the Q&A session.

• One attendee complained about the unreliability of Windows - Ballmer said he’d fix his computer himself after the talk before giving a more serious answer.
• When asked about advertising supported websites, Ballmer stated that there are very few sites that can run their business on advertising alone today. He used Facebook (a Microsoft partner) as an example, and said there was still a lot of work to be done there to figure out monetization.
• In response to one question about education, Ballmer said he thought we weren’t doing enough to teach our children about computer science, and that computer programming knowledge should be a requirement for high school graduation.

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It looks like Bill Gates finally found someone who can fight for him. Now that Microsoft killed those awful Seinfeld ads and is finally punching back against Apple on the advertising front, it has someone you don’t want to mess with in its spokesman’s corner: Ultimate Fighting Championship bruiser Rashad Evans.

The mixed-martial arts fighter has recently been spotted entering the ring sporting a T-shirt with Bill Gates’ famous police mug shot. (His training gym in New Mexico is right next to Microsoft’s original headquarters). And he is going to be featured in some upcoming Microsoft ads. In fact, that might be him already making a cameo at the end of one of the new “I Am A PC” ads current running (second video embedded below).

Evans is definitely an improvement over Seinfeld in the spokesman category. His record in UFC fighting is 17-0-1. After knocking out his opponent Chuck Liddell earlier this month (see first video embedded below), he now has a shot at the title.

Microsoft should shoot an ad with him beating the crap out of the “I’m a Mac” guy.

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People at Microsoft that I trust are saying that it has absolutely, positively, definitely (really) always been the plan to have Seinfeld appear in just the first few warm up commercials for their $300 million Vista ad campaign, and then move on to the meat of the messaging. And I believe them, with the appropriate wiggle room (like if the ads were super well received, they may have exercised an option to keep him longer, etc.).

But either way, Seinfeld is out, at least for now, after three controversi