It’s interesting to watch Steve Ballmer’s reaction to a question about the iPhone in this interview, which he obviously is not comfortable answering. First he busts out with a seriously nervous laugh and then proceeds to belittle the iPhone–not a very good idea. He then goes on to make a ridiculous claim about the Zune having 25% of the market, which gets ratcheted down to 20% over the course of the response–and even that is a highly dubious claim. I think he’s probably counting shipped units vs. sold, Zune is #15 in popularity on Amazon, and I don’t really think Ballmer himself even believes what he’s saying. Watch how he laughs nervously, shifts his eyes off to the side, sniffs, and shifts around in his seat as he responds:
He also looks really excited when he says "I like our strategy–I like it a lot", doesn’t he? 
What Microsoft hasn’t been able to grasp, and what they don’t seem to be close to grasping, is that user experience is everything. Features are important, yes, but they do not make the product. It’s all about making the interaction between the human and the machine as seamless and transparent as possible, and Apple gets that. I’ll bet the iPhone is going to be the most popular phone in history because not only are the user interface features slick, easy-to-use, and NEW, but it’s a touchscreen iPod as well. A touchscreen iPod. I would pay $500 for that alone, a phone with the Apple design touch thrown in is just going to seal the deal.
I’ve said it before, and I’ll say it again–Microsoft needs to find a Steve Jobs clone who understands user experience and design at a fundamental level, and who has veto power over market research.
