When I first read an article at the Register about the recent FAM presentation by Steve Ballmer, I thought I'd mistakenly gone to the Onion, so I had to go and read the actual transcript for myself. As expected, the presentation is long, so I'm going to highlight some of the more juicy morsels that give us an insight into the mind of the man that is tasked with setting Microsoft's course. Admittedly, the speech was given to a room full of financial analysts, so it was always going to paint a rosy picture, but it makes for fascinating reading nonetheless.

we will still spend, in the next 12 months, $9.5 billion on R&D. So 9 1/2 of our—whatever it is, roughly $27 billion—of operating expense will be in R&D. I think at 9 1/2 billion, we are the No. 1 R&D spender of all companies in the world.

Where is all this money going? Microsoft's annual research and development budget has been increasing each year since 2005 and what has it yielded? Vista is stated to have cost $6 billion to develop, and Windows 7 shouldn't have cost anywhere near as much as it uses Vista as a foundation, yet Microsoft has managed to spend around $20 billion since Vista was released, and another $9.5 billion is expected this year.

The bulk of our Windows business comes with the sale of new PCs—over 80 percent of the revenue. And I could talk to you about the upgrade business. I'm not. I'm not going to talk about it today. I just want to talk about the first 80-plus percent, because I think many of you think we have problems we don't have in the Windows business.

This is interesting. I had thought that the bulk of Microsoft's Windows income came from businesses licensing, in the form of Microsoft Software Assurance, but it seems it's actually coming from businesses and private customers buying new PC's with attached Windows licenses. The current economic climate must be playing havoc with Microsoft's income projections as consumers are putting of replacing equipment. It also can't help that PC's have gotten to the point recently where even the cheapest unit does nearly everything the average user needs, but that's going to be an ongoing problem for Microsoft if it's Windows business relies on hardware sales.

Our license tells you what a netbook is. Our license says it's got to have a super-small screen, which means it probably has a super-small keyboard, and it has to have a certain processor and blah, blah, blah, blah, blah. We want people to be able to get the advantages of lightweight performance and be able to spend more money with us, with Intel, with HP, with Dell and with many, many others. So the shifting dynamics here will continue to evolve.

Microsoft, with Intel's assistance, have issued decrees to netbook manufacturers that limit the specifications of netbooks, presumably to artificially segment the market between netbooks and notebooks. The reason is that there is not much margin in low cost hardware, and especially in Microsoft's case, this means that the cost of a Windows license becomes a big percentage of the overall cost of the device, which puts downward pressure on how much Microsoft can charge.

There is also a bit of a question about what's going on with netbooks. So let me talk to the callout here. I said the netbook is a PC. And yet, when I start talking to many of our customers about this, they'll say, "I love the netbook, but can I get one with a bigger screen?" Well, what they're saying is they want a thin, light, long-battery-life, bigger-screen netbook. I think it makes perfect sense. You'll get other people who say, "I want a faster netbook." And what everybody really is trying to tell you is, there are sort of two dimensions in how to think about PCs' characteristics: low performance and higher performance. And let me just say: lower power and lower weight, and heavier power and heavier weight. And you can say this is true of desktops as well as notebooks, and I tried to lay everything in there.

Ballmer is trying to justify yet another segmentation of the notebook/netbook market, in the form of the big screen netbook, nothing but a regular netbook with a screen between 10.2" and 14.1" and a thinner case. If marketing of this segment is successful, then we should expect to see an unreasonably large price difference between a netbook and a big screen netbook, despite minimal hardware differences.

So what we did in this last year—we, Intel, Dell, HP, Acer, Toshiba, Asus, etc. —what we all did is, we created something that was cheaper but in some ways a little better than the expensive thing.

When Linux took off on the netbook platform, Microsoft had to drastically cut the price of Windows licenses to OEMs to slow adoption. This has been effective, but severely hurt Microsoft's profits. As Ballmer goes on to say, the device was cheaper, and it was little better than the expensive thing, but that's why consumers love netbooks so much.

Sometimes you'll hear people say, "At the end of the day, we only want to run code that complies with standards—HTML, HTML 5, other standards." We as a company believe in proprietary innovation and standards support. And I actually think most of the commercial guys do too. Certainly, it's important as the standards advance, as HTML moves forward, we have to embrace them. But the standards will never be able to move as fast as the sweeping innovation.

Microsoft has built it's business on "standards will never be able to move as fast as the sweeping innovation", where sweeping innovation is another way of saying that they change their proprietary formats with every new release. We see it again and again in the incompatibility of Microsoft Office file formats between versions. Sure, it's great for Microsoft's bottom line, but it's sucks for the consumer because it promotes single vendor lock-in.

So just when rich graphics comes to HTML, it will all be about touch user interface. It will be about things which are not yet in the standard. So we need to support standards, and we will go beyond standards.

Here's that eternally popular lock-in plan again. "go beyond standards". Embrace, Extend and Extinguish

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We say we want big market share. But with big market share, you take a lower price. Well, along comes Linux, and they say, "We have no price." Which, of course, we know for IP and other reasons, of course they have a price. But they say, "We have no price."

The infamous "Linux violates hundreds of patents, but we won't tell you what they are until we sue you" threat. Microsoft knows that if they reveal what those patents are, then the community will simply route around them and the impact of the threat will be removed.

In the Linux case, you also have some other issues that come to bear. Linux is, quote, open. In our case, we say we are open. We support open standards and open innovation, but you can't change our operating system.

Claiming to be open doesn't make it true, but it does confuse potential customers who are looking for an open solution.

Android, Chrome OS, they are part of the competitive landscape, not a part I understand very well. I was just getting my mind fully wrapped around Android. We were expecting to meet Android in the market this year on netbooks. I gather from press reports that those netbooks are going to get delayed to next year. Oh, well. And I don't know what Chrome OS is yet. I know what all of you know, and I don't know its relationship is to an Android, so right now I just put it on the list for competitive completeness more than anything else.

Ballmer and Gates have both been heard to say something like "I don't know what Chrome OS is". It's an operating system, in this case a Linux based one, that boots straight into a browser. This is a huge threat to Microsoft's Windows business model because it makes their primary product irrelevant. The average person, using such a system, would never know who made the operating system, because it wouldn't matter.

And are the ads working? In an independent survey, we asked 18- to 24-year-olds—or they were asked, "Who offers the best value, Apple or Microsoft?" You can kind of see Apple was comfortably ahead despite the fact they —well, despite whatever the facts are. Our ads started in April of '09. You can see kind of what the perception changes have been so far.

I hope they didn't ask the same group that told them to make the Zune brown :)