Oct. 6--Microsoft's Xbox 360 has lost its lead to Nintendo's Wii and is losing ground to Sony's PlayStation 3, despite debuting a year earlier than either. Smart-phones such as Research in Motion's BlackBerry and Apple's iPhone are stealing share from Windows Mobile devices. Microsoft's Zune MP3 players are an afterthought in a market dominated by Apple's iPods. And in search, the company's MSN is a distant third behind Google and Yahoo.

During a visit to Silicon Valley late last month, Ballmer talked with the Mercury News about Microsoft's consumer electronics efforts and the challenges it has faced. Here is an edited transcript of his remarks.

Q How do you assess the state of Microsoft's consumer businesses today?

A We've got various businesses that are in various states. If you needed to have one word that fit all, I think you would say, "very present." Almost everything is entering into kind of a cycle of improvement, which is interesting.

Consumer products are as much about the way they're marketed as the way they're built. And we have some work to do, I'd say, on the marketing side.

Q If you look at what they've done in the last year or two, do you view any of your consumer products as unqualified successes?

A I certainly would say the work that we've done around Xbox is an unqualified success. No question about that.

Q How so?

A The product

is selling very well. The Xbox is an absolute home run.

Q But sales of the Xbox have slowed markedly. It's been overtaken by the Wii. The PS3 is starting to catch up. You cut the price on it, which some might say is an indication you have run out of ideas to boost sales.

A No, that's the craziest thing I've ever heard anybody say. All consoles start at higher prices. They always come down through the long cycle.

Q The story in July at E3 was that you had many bullets left in your holster that you could use to juice Xbox sales. You had all these great games that were coming out for the fall, and you didn't need to cut price to juice sales. But now two months later, you've cut the price.

A Price is not something you discuss externally. Nobody ever does. So, whether we were planning on cutting price the next day or in six months or a year, we're not going to discuss price changes.

If you ask me, Xbox Live is going gangbusters. The console is selling well.

Q What else would you say has been an unqualified success of late?

A Since (we updated it), I'd also refer to Vista as an unqualified success. It doesn't mean that people aren't still picking on it, but we've sold 180 million copies, something like that, of Vista.