(FORTUNE Magazine) - When Microsoft (Research) went public in 1986, there was no 3-D videogaming, no enterprise software, and no Google (Research).

Two decades and $285 billion in market cap later, CEO Steve Ballmer is facing a stagnant stock price and more competition than ever. His strategy? Take the offensive.

Microsoft CEO Steve Ballmer

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Microsoft is about to roll out new versions of Windows and Office. On the day he unveiled a bold $500 million marketing campaign to challenge IBM (Research) in the corporate tech market, the affable and energetic Ballmer, 50, bounded into FORTUNE's offices to discuss what Sony's troubles mean for the Xbox 360 game system, the future of advertising and why his kids shun iPods.

You guys took some heat for Xbox shortages over Christmas, but now Sony says its PlayStation 3 will be delayed until November. Did you pop a cork?

We weren't unhappy. In every other generation, the first guy to ten million consoles became the No. 1 seller. Did we just get an even better opportunity to be the first guy to ten million? Yeah, of course we did.

What might get your stock moving?

We've got companies like AT&T (Research) and Verizon (Research) driving this Internet television stuff very aggressively. If you can get a few bucks a month on a lot of televisions around the world, that's a pretty darn big opportunity. Same thing for Windows Mobile, where we're a negligible player but we have real market traction for the first time. The stuff we announced today has quite a nice growth profile. Frankly, our competition in the business market is more absent than not.

Did Time Warner (Research) made a mistake by selling a stake in AOL to Google instead of to you?

AOL is not making any investment in the future of the media and advertising business. [AOL would respectfully disagree.] It ceded that to Google. The argument I made is that some media company--as opposed to just Microsoft, Google, and Yahoo--should've cared enough to make the bet as well. Will anybody be selling newspaper ads in ten years? Or will they all get sold out of these online marketplaces? Even TV advertising. Who is better to deliver an ad, a computer that knows about you and can target you, or an ad sales guy who's walking around?

Do you have an iPod?

No, I do not. Nor do my children. My children--in many dimensions they're as poorly behaved as many other children, but at least on this dimension I've got my kids brainwashed: You don't use Google, and you don't use an iPod.

Think you can you crack the iPod market?

It's going to take an innovative proposition. In five years are people really going to carry two devices? One device that is their communication device, one device that is music? There's going to be a lot of opportunities to get back in that game. We want to be in that game. Expect to see announcements from us in that area in the next 12 months.