Walt: Meanwhile, through all this–I want to get back to the thing we saw in 1997 at Macworld there–but Windows was just going great guns. I mean, Windows 95, to whatever extent earlier versions of Windows had not had all the features, all the GUI stuff that the Mac had, and Windows 95 really was an enormous, enormous leap.

Bill: Yeah. Windows 95 is when graphics interface became mainstream and when the software industry realized, wow, this is the way applications are going to be done.

And it was amazing that it was ridiculed sort of in ’93, ’94, was not mainstream, and then in ’95, the debate was over. It was kind of just a commonsense thing. And it was a combination of hardware and software maturity getting to a point that people could see it.

Walt: So I don’t want to go through every detail, the whole history of how you came back, but…Steve: Thank you.

Walt: But you in that video we all saw, you said you had decided that it was destructive to have this competition with Microsoft. Now, obviously, Apple was in a lot of trouble and I presume that there was some tactical or strategic reason for that, as well as just wanting to be a nice guy, right?

Steve: You know, Apple was in very serious trouble. And what was really clear was that if the game was a zero-sum game where for Apple to win, Microsoft had to lose, then Apple was going to lose. But a lot of people’s heads were still in that place.

Kara: Why was that, from your perspective?

Steve: Well, a lot of people’s heads were in that place at Apple and even in the customer base because, you know, Apple had invented a lot of this stuff and Microsoft was being successful and Apple wasn’t and there was jealousy and this and that. There was just a lot of reasons for it that don’t matter.

But the net result of it was, was there were too many people at Apple and in the Apple ecosystem playing the game of, for Apple to win, Microsoft has to lose. And it was clear that you didn’t have to play that game because Apple wasn’t going to beat Microsoft. Apple didn’t have to beat Microsoft. Apple had to remember who Apple was because they’d forgotten who Apple was.

So to me, it was pretty essential to break that paradigm. And it was also important that, you know, Microsoft was the biggest software developer outside of Apple developing for the Mac. So it was just crazy what was happening at that time. And Apple was very weak and so I called Bill up and we tried to patch things up.

Bill: And since that time, we’ve had a team that’s fairly dedicated to doing the Mac applications and they’ve always been treated kind of in a unique way so that they can have a pretty special relationship with Apple. And that’s worked out very well. In fact, every couple years or so, there’s been something new that we’ve been able to do on the Mac and it’s been a great business for us.

Steve: And it’s actually–the relationship between the Mac development team at Microsoft and Apple is a great relationship. It’s one of our best developer relationships.

Kara: And do you look at yourselves as rivals now? Today as the landscape has evolved–and we’ll talk about the Internet landscape and everything else and other companies that have [gone] forward, but how do you look at yourselves in this landscape today?

Walt:Because, I mean, you are competitors in certain ways, which is the American way, right?Kara: We watch the commercials, right?Walt: And you get annoyed at each other from time to time.Kara: Although you know what? I have to confess, I like PC guy.Walt: Yeah, he’s great.Kara: Yeah, I like him. The young guy, I want to pop him.Steve: The art of those commercials is not to be mean, but it’s actually for the guys to like each other. Thanks. PC guy is great. Got a big heart.

Bill: His mother loves him.Steve: His mother loves him.Kara:I’m telling you, I like PC guy totally much better.Steve: Wow.Kara: I do. I don’t know why. He’s endearing. The other guy’s a jackass.Steve: PC guy’s what makes it all work, actually.Walt: All right.Steve: It’s worth thinking about.

Kara: So how do you look at yourselves?Walt: I mean, let me just ask you, Bill. Obviously, Microsoft is a much larger company, you’re in many more markets, many more types of products than Apple is.

You know, when you were running the company or when Steve Ballmer is running the company, you think obviously about Google, you think about, I don’t know, Linux in the enterprise, you think about Sony in the game area. How often is Apple on your radar screen at Microsoft in a business sense?

Bill: Well, they’re on the radar screen as an opportunity. In a few cases like the Zune, if you go over to that group, they think of Apple as a competitor. They love the fact that Apple’s created a gigantic market and they’re going to try and come in and contribute something to that.

Steve: And we love them because they’re all customers.

Walt: I have to tell you, I was actually told by J Allard, I’m serious, that because of the nature of the processor, the development platform they used to develop a lot of the software for the Xbox 360 was Macs. And he claimed that at one point, they had, like, placed the biggest order for whatever the Mac tower was at the time of anybody, and it was Microsoft.

Bill: I don’t know if it was the biggest, but, yeah, we had the same processor essentially that the Mac had. This is one of those great ironies is they were switching away from that processor while the Xbox 360 was adopting it. But for good reasons, actually, in both cases.

Because we’re not in a portable application and that was one of the things that that processor road map didn’t have. But yes, it shows pragmatism, but we try and do things that way. So that was the development system for the early people getting their software ready for the introduction of Xbox 360.

Steve: And we never ran an ad on that.Walt: I see. Admirable restraint. That’s wonderful restraint.Steve: There were hundreds of them.Bill: Steve is so known for his restraint.Kara: How do you look at Microsoft from an Apple perspective? I mean, you compete in computers and…

Walt: I mean, you can say you don’t compete, you know, the era of destructive whatever, whatever you said in 1997, but you think–you’re consciously aware of what they’re doing with Windows, you followed Vista closely, I think.

Steve: You know, what’s really interesting is–and we talked about this earlier today–if you look at the reason that the iPod exists and the Apple’s in that marketplace, it’s because these really great Japanese consumer electronics companies who kind of own the portable music market, invented it and owned it, couldn’t do the appropriate software, couldn’t conceive of and implement the appropriate software.

Because an iPod’s really just software. It’s software in the iPod itself, it’s software on the PC or the Mac, and it’s software in the cloud for the store. And it’s in a beautiful box, but it’s software. If you look at what a Mac is, it’s OS X, right? It’s in a beautiful box, but it’s OS X. And if you look at what an iPhone will hopefully be, it’s software.

And so the big secret about Apple, of course–not-so-big secret maybe–is that Apple views itself as a software company and there aren’t very many software companies left, and Microsoft is a software company.

And so, you know, we look at what they do and we think some of it’s really great, and we think a little bit of it’s competitive and most of it’s not.

You know, we don’t have a belief that the Mac is going to take over 80% of the PC market. You know, we’re really happy when our market share goes up a point and we love that and we work real hard at it, but Apple’s fundamentally a software company and there’s not a lot of us left and Microsoft’s one of them.

Walt: But you may be fundamentally a software company, but you’ve been known, at least to your customers and to most journalists as the company that kind of pays a lot of attention to integrating software and hardware.

Microsoft has made some recent moves to be a little more like that, obviously not in your core biggest businesses, but with Xbox and Zune and, you know, the Surface computing device we saw today is another example.

These aren’t markets that hold up in size to Windows or Office, but they’re some of your more recent initiatives.Are the companies’ approaches to this merging a little or …

Steve: Alan Kay had a great quote back in the ’70s, I think. He said, “People that love software want to build their own hardware.”Walt: Well, Bill loves software.Steve: Oh, I can resist that.

Bill: The question is, are there markets where the innovation and variety you get is a net positive? The negative is that in the early stage, you really want to do the two together so you want to do prototyping and things like that, you know, really as one thing.

And then take the phone market. We think we’re on 140 different kinds of hardware. We think it’s beneficial to us that even if we did a few ourselves, it wouldn’t give us what we have through those partnerships.

Likewise, if you take the robotics market, very undeveloped. We have over 140 tiny-volume robots using Microsoft software. And the creativity, building toys, security things, medical things, we love the innovation and the ecosystem that’s going to grow up–who knows when, but we’re patient–around that and we’ll have a great asset with this robotic software platform.

So there are things like PC, phone, and robot where the Microsoft choice is to go for the variety. Apple, it’s great. For them, they do what works super well for them.

And there’s a few markets like Xbox 360, Zune, and this year we have two new ones, the Surface thing and this RoundTable, which is the meeting-room thing, where we’ll actually, through subcontractors, but the P&L on the risk and all that for the hardware, the design is completely a Microsoft thing.

Walt: The RoundTable: Is that something you’ve announced or were you just announcing it here?

Bill: We’ve shown prototypes of it. That’s the thing where it’s got the 360-degree …

Walt: Oh, right. It’s like Cisco has something in that market and HP too, right?

Bill: Oh, HP has a very high-end thing that’s a tiny bit like it, but anyway.



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