Microsoft Corp. Chief Executive Steve Ballmer defended the software company's expansion beyond its Windows and office software businesses, saying Web services and consumer devices are key to the company's future.

Speaking on Thursday at an annual meeting with financial analysts, Ballmer acknowledged he had been hammered by investors who argued Microsoft should focus on its core desktop and server software business and forget businesses like digital music players and video games.

Microsoft aims to make software that integrates the best features of desktop software, higher-end corporate software, Web services and devices, and it needs to be in all of those areas to keep up with the pace of innovation, Ballmer said.

Great things don't happen overnight, he said. Most successes require long-term investment and innovation ... and that's our perspective.

Ballmer said he is more optimistic now than at any point in the company's history and sees more opportunities for growth in the next 10 years than in the past 30 years.

Microsoft's expansion into new businesses has not always been smooth. Ballmer said the $1.06 billion charge the company took to fix problems with the Xbox game console was painful, teaching it a lesson about hardware design.

Microsoft has been under pressure from investors in the face of faster-growing rivals, especially Google Inc., and analysts noted that the company on Thursday was setting out a road map rather than basking in the profits of its established franchises.

The focus of the message today seemed to be about where this company is going for the next few years, Bernstein Research analyst Charles Di Bona said.

Chief Software Architect Ray Ozzie, who spearheads Microsoft's push into Web services, argued that leading-edge technologies began with consumers. Microsoft's access to consumers gave it a leg up over rivals focused on serving corporations and large organizations, he said.

Microsoft can also drive growth through its bread-and-butter software products like the Windows operating system and Office productivity software, Ballmer said.

Those products, which account for almost all of the company's profit, support Microsoft's newer initiatives like online advertising, its Zune music player, software for mobile phones and online service.

Microsoft said it sold 60 million Windows Vista licenses as of the end of June, including 20 million copies sold since mid-May. Windows Vista, the latest version of its dominant Windows operating system, was released on January 30.

EMBRACE DISRUPTION

Ballmer said the company plans to embrace disruptive technologies like Web-based applications that threaten Microsoft's traditional desktop software, which runs locally on a computer hard drive.

Every piece of software -- the basic core value in the way software gets created -- will change in the next three, five or 10 years, said Ballmer, adding that future software will all factor in some aspect of desktop, Web and server elements.

However, he rejected the idea that the software industry would shift entirely to an Internet delivery model.

Microsoft also said it is committed to building an advertising powerhouse to compete with Google and Yahoo Inc.

The company announced the acquisition of AdECN, a market for buyers and sellers of Web advertising. AdECN functions like a stock exchange for advertisers and publishers to buy and sell display advertising online.

The acquisition comes on the heels of Microsoft's plan to purchase Web advertising firm aQuantive Inc. for $6 billion earlier this year. Microsoft said the aQuantive deal cleared regulatory hurdles and will close in mid-August.

Kevin Johnson, president of Microsoft's platforms and services division, said the company's online services group will undergo another year of investment in this fiscal year, suggesting that the loss-making division will not turn a profit in fiscal 2008.

(Additional reporting by Eric Auchard in San Francisco)

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