Microsoft’s Qi Lu Talks Future of the Web: Look Out, Facebook, Groupon, Apple, and (Oh Yeah) Google

If Microsoft has its way, you’ll soon be Skyping on your Windows Phone with 500 of your closest Facebook friends about the latest daily deals in your city. Then you’ll find those local businesses through Bing, which will help you decide which ones to pursue—and will help both merchants and consumers cash in on those local deals.

OK, that’s not quite how Qi Lu described it, but I’m reading between the lines here, so cut me some slack.

Lu, Microsoft’s president of online services, delivered a wide-ranging talk last Wednesday at the firm’s New England Research and Development Center in Cambridge, MA. He put forth a sweeping and ambitious vision for how Microsoft plans to create the future of the Web, amid the rise of fast communications (Twitter), social networking (Facebook), local deals (Groupon), search capabilities (Google and Bing), and mobile app stores (Apple).

Create the future? That’s right—even though Microsoft is still a business software firm that makes most of its money from things like Windows, Office, and SharePoint, it has been making big investments in the consumer Web for years, with efforts like its MSN portal, Xbox Live online gaming service, and Bing search engine. The future of the company is online, and it’s time to start looking for a new customer base—and a payoff. In fact, two years after the Bing rollout, it might be now or never for the Redmond, WA, tech icon (NASDAQ: MSFT).

“The opportunity to innovate is truly vast,” Lu said in his talk. Later, he added, “The Web has far outgrown its heritage. It’s a full-blown digital society.”

Lu, for those who don’t know, was brought in by CEO Steve Ballmer in late 2008, after a decade at Yahoo, to revitalize Microsoft’s online efforts in everything from search and advertising to Web software, services, and infrastructure. So, yes, Xconomy talked with him in private about Microsoft’s $8.5 billion acquisition of Skype (which everyone was interested in hearing about last week). But that wasn’t the focus of his talk, or our interview (which follows below).

I’m not going to summarize Lu’s presentation here—that would not do it justice. But here are three nuggets that stood out to me (as well as my interpretations and speculations), having listened to talks about Microsoft’s online strategy for several years now. Collectively they scream, “Look out, Google,” though not in the ways you would have expected maybe a year or two ago:

Microsoft is about to dive into local deals. The meteoric rise of Groupon took all the tech giants by surprise, so it was just a matter of time before Microsoft made a big move in this sector. Lu said that while Google is built around half a million businesses (advertisers), Groupon is built around “the next 10 million businesses trying to reach customers digitally.” He didn’t say exactly what Microsoft is planning in deals, but he noted that the sector “taps into unfulfilled capacity” from businesses with relatively fixed costs, and that it “fuels new technology development.” What’s more, he said the deals sector “isn’t about one company” (he cited about a thousand Groupon copycats in China). So look out, Groupon.

Facebook is key to Microsoft’s future on the Web. Whether he meant to or not, Lu tied Microsoft’s social strategy pretty tightly to its partnership with Mark Zuckerberg’s company. He called social media a “tidal wave” that is changing the structure of the Web. He hinted that social recommendations from trusted people in your network could become an important source of how Microsoft (presumably Bing) helps people make decisions in “a digital version of the world.” So look out, Facebook (which already has its own ideas about translating social recommendations into advertising revenue).

Connecting mobile apps is a big opportunity. As more software moves from PCs to app stores and mobile devices, Lu said that connecting these apps represents a great chance for Microsoft “to take a leadership role” in online services. Whether he meant creating a new kind of app search engine, or a platform for combining and unifying apps on your (Windows) phone, I wasn’t sure. But he talked about how managing apps better could “enrich any human activities.” Look out, Apple.

Indeed, perhaps what’s most striking is how quickly search and the Web—and all the tech giants playing in the sector—have evolved in the two and a half years since Lu was recruited to join Microsoft. In particular, search has gone from being mostly a standalone source of ad revenue to a “gateway” to online services, he said, and it “occupies a unique place in the consumer value chain.”

We wanted to get a sense of how things are going in that ever-changing maelstrom. So, before his public talk, Lu sat down with Xconomy’s Bob Buderi and me for an exclusive interview. Here’s an edited transcript of our Q&A:

Xconomy: Let’s start with some of your personal and career experience. What are some unifying themes and lessons that you have brought to Microsoft?

Qi Lu: I can share a couple things that come to my mind. [One is] a more internalized understanding of the importance of the rate of heartbeat of an organization. One [aspect of this] is hypothesis validation. Any innovative ideas, whether these are ideas about a new algorithm or particular techniques or a feature that feeds into your search ranking, all at some point require you to verify a particular hypothesis. Even user-facing visible features—-small things, different fonts, different colors—require hypothesis validations. The rate at which an organization can validate hypotheses is one of the hallmarks of a heartbeat.

But one thing I didn’t learn until a few years along that journey is, the talent base you have in an organization—the tools, the processes that enable you to formulate high-quality hypotheses—is equally if not more important. So to summarize one of the learnings I can bring to the table, it’s to help an organization to raise the overall heartbeat.

For me personally, one thing I bring with me is a relentless quest for excellence. It may take time, it may take a long journey, but anything we decide to do, we will settle for nothing short of being the very best. It’s a reflection on the personal level of what I would like to pursue.

X: Critics say Microsoft is too big to move fast. Could you give some examples of what you’ve done to raise its heart rate?

QL: This needs to be put in the specific context. I have this notion of “innate rhythm.” You want to design your cadence, your heartbeat, to tap into the innate rhythm. If you go overly fast, you’re not actually able to be in tune. The key thing is you keep the rhythm that’s in harmony; you don’t want to spin unnaturally faster than the natural rhythm. Different businesses will have different innate rhythms. For all the businesses in the area I’m responsible for at Microsoft, they all have different rhythms. I’m responsible for Microsoft’s data centers, networks, some of the key infrastructure; the innate rhythm for those segments of development is actually much longer cycles. That’s how the whole value chain holds.

Online services is iterative by its nature and its heartbeat is very important. For example, [take] search quality. If you ask the question, “who decides search results (relevance ranking)?”—our view is it’s not us, it’s the collective producers and consumers of the Web that decide what are the right results given particular queries. If you take that perspective, then our job is to be very nimble, in tune with the ecosystem of people producing content and consuming content and services on the Web. So search quality is fundamentally iterative. If you [look at] search logs and you take any particular period of time—a day, a week, or a month—there’s always between 25 percent to one-third of the queries you’ve never seen before. That indicates that we as a society, collectively, are always looking for new things. The high-quality results always need to be evolving. What we need to do is raise the heartbeat so we can always be in tune with the ever-evolving user pursuit of what they’re seeking in the digital universe.

X: But to enable the future, you have to put in new processes and make some changes. What are the most important things you are implementing?

QL: One is infrastructure—storage and compute. One of the important aspects of online services is you have a low-cost way of capturing “digital observances”—every view, every click, every mouse move. You capture those and you run a lot of computations on those. That becomes the baseline for you to be able to formulate and validate hypotheses and do analytics.

We also need to build “enabling capabilities”—usually a combination of talent, skills, and tools. These capabilities become a force multiplier. If you are good at those, it spreads out and lifts other parts—for example, the ability to run experiments. To try a new [user interface]—new font colors or a different way of rendering the text—how do you design that experiment, instrument the systems, and get the analytics so you can quickly validate or falsify the hypothesis? Once you have strong infrastructure and develop enabling capabilities, over a period of time you will have the foundation of lifting the rate of heartbeat in the key areas. That’s important.

X: How should we think about Microsoft’s evolving online efforts relative to its overall business strategy? If online is the company’s future, where do you stand now, and where are you heading?

QL: I’ll pick one key pivot which is our overarching focus: Preparing a differentiated consumer experience across Microsoft’s key product lines. For Microsoft to go forward, our fundamental focus is on bringing in our company’s assets and driving innovations across our company’s product lines. By combining all those experiences in a coherent, integrated manner, we offer differentiated and very compelling experiences to our users.

For example, on Windows Phone, Bing is one of the key anchor services. There are so many consumer scenarios [that] can be unlocked by having integrated experiences. Think about Bing as the engine that understands what’s in the digital cloud. It can make sense of all the entities computationally that are in the cloud—people, places, things, all the locations, all the businesses, all the organizations, all the products, all the services, all the music, all the events. You can imagine the future of the phone experience. Any time you press a button on your phone or swipe a visual control module on your phone, that in many ways is “search.” Imagine you’re listening to a piece of music. We look into the cloud to say, do we have other information about that particular song, about this band, will they be in town for a performance? If so, are there tickets available on discount?

You can imagine the experience is all live. Anything you are conducting in terms of consuming content or using services on a mobile handset—it’s all seamlessly connected to what’s in the digital cloud. We use computational intelligence that Bing is producing to enrich the experience. That’s just one of many areas that we are focusing our innovations using the consumer-facing cloud services, so that our company’s other products—whether it’s phone, TV, or future generation PC or tablet—can be very differentiated and very compelling. That’s our fundamental focus in terms of innovations.

X: How do you sum up the current status of Bing vs. Google in search?

QL: We are pleased with our progress so far. We’ve been making improvements to our products; our search quality gets better and better. At the same time, our experience is more and more differentiated. And, by and large, our brand also resonates with our consumers; we are generally viewed positively by our users.

It’s a long journey. We know we have gaps. We know we have many areas where we still have barriers to overcome. We fully understand that this is going to take time, dedication, deep commitments, but for the long term we are absolutely confident, we have deep faith in our ability to compete, and to compete very well.

X: In the long term, how committed is Microsoft to this vision? Certainly there are challenges for any big corporation to keep investing in the long term.

QL: One thing I’ve learned at Microsoft, in my two years and five months, is the company’s culture and heritage of being tenacious and having the patience and the willingness for investing for the longevity. This has been abundantly clear. I do have the honor and fortune to have more of an ongoing discussion and interaction with our chairman, Bill [Gates]. He fundamentally believes that by investing for the longevity, we always will have the opportunity to drive breakthrough discoveries and innovations. That to me is precious.

X: Has that waned at all since Gates stepped down?

QL: I would say Steve [Ballmer] would more than 100 percent share the same belief and faith. Coming from a different company to Microsoft, this I do believe is something that we as a company will continue to treasure. Look at society as a whole. Technological breakthroughs are profoundly one of the key driving forces in how our society and overall [civilization] is evolving and improving. So, with that as the larger context, I do think Microsoft has huge potential, given the talent base we have and our market footprint. We are aware of our challenges, no doubt. One of the key things for me personally, and for people in our division, I always emphasize, let’s be brutally honest with ourselves on where we are and all the hurdles. But at the same time, we also have unwavering faith in our ability and the long-term prospects. It’s the balance of those that keeps us going.

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4 responses to “Microsoft’s Qi Lu Talks Future of the Web: Look Out, Facebook, Groupon, Apple, and (Oh Yeah) Google”

  1. Marty says:

    The only thing missing from this interview ‘fairytale’ is unicorns, dragons and swords!…sure Facebook, Google and others or shaking in their boots…or is that just them picking themselves off the floor after from laughing so hard!

    MSN always talk about technology innovation and not people innovation…there day is done and they ain’t coming back!