Ballmer: That didn't go over so well.
Flunky: The reaction seemed about 50-50.
Ballmer: At best.

That was elevator chitchat overheard by a Business 2.0 reporter and relayed on a blog by the magazine's Owen Thomas. Microsoft ( MSFT) CEO Steve Ballmer had just emerged from a meeting with analysts in Manhattan last Thursday.

Yes, that meeting -- the one at which he uttered those magical, market-cap-killing words about the company's new Vista operating system: "Perhaps people are somewhat too bullish."

On Wall Street, of course, that's the same thing as wandering down a dark alley and wondering aloud if you have too many $100 bills in your wallet.

Microsoft tumbled 2.4% to $28.74 Friday, its lowest level since Nov. 3. In just a few minutes, Ballmer managed to suck more than $7 billion in market cap out of Microsoft's stock. (On Tuesday, shares regained 8 cents to $28.83).

There has been a lot of back-and-forth in the days since Microsoft's CEO said Vista sales could come in below analyst forecasts. Some argued that Microsoft is notorious for downplaying its projections so it can leave room for earnings surprises later on.

Others countered that the tactic was foolhardy this time, given the anxieties surrounding tepid Vista sales.

A careful reading of the transcript of the analyst briefing provides more insight. For one thing, Microsoft recently started recognizing more revenue up front rather than spread out over time, which creates what Ballmer called a "blue bell" in year-over-year comparisons.

When Ballmer talked about Vista sales forecasts, he was ignoring that one-time bump in revenue.

But it's not clear that the analyst forecasts that he believed were overly optimistic were also factoring out his blue bell. When Merrill Lynch analyst Kash Rangan confronted him with that possibility, Ballmer's tone grew uncertain, stuttering, as if he realized he may have blundered big time.

Here is part of the exchange that follows, according to the transcript on Microsoft's investor relations site :

Steve Ballmer: What I basically tried to say in the very highest level was that you shouldn't think of a huge surge in fiscal year '08 versus fiscal year '07, huge relative -- I mean, in some senses whatever you think the growth is of PCs in developed markets, in developed markets -- because I talked about emerging markets -- we should do somewhat better than that. We shouldn't do that much better, we should do that much better, whatever it means. This is before the accounting one-time blah, blah, blah.

Rangan: That was very good.

Very good, indeed. You can almost hear the analysts thumbing in messages to favored clients on their BlackBerrys.

I found Ballmer's diffident tone more discouraging than any single comment of his. Gone is the Ballmer who skipped mightily across the stage, who pumped his fists and shouted "Come on!" ... who exhorted the crowd to "Give it up for me!" Instead, he starts off the analyst briefing with jokes about infected feet, infected stocks and profuse sweating.

The rhetoric of global domination that Microsoft relied on for decades is vanished without a trace. Now the tone is more hat-in-hand solicitation, with talk of being in third place but trying harder.

Ballmer did promise great things a few years down the road, such as an ambitious initiative involving health care and subscription-based revenue from companies using customer relationship management and other business services.

More immediate gratification came Thursday when Ballmer said that Microsoft would push down its operating-expense growth to be slightly slower than it was in 2006, easing pressure on margins and possibly allowing for more room at the bottom line for dividends. Ballmer said Microsoft would stay the course in both dividend payments and stock buybacks.

Still, there was talk of faster-growing rivals: Google ( GOOG), Apple ( AAPL) and Salesforce.com ( CRM) were named. Microsoft seems to be using a Salesforce.com-like, on-demand, CRM product as an anchor for its business side. Reviews have been mixed to date, but Microsoft is using its close relationships with large companies to win over new users.

Speaking about the CRM potential, Ballmer said, "That's a product that I think is just a gem most people don't even think much about ... But again we're kind of No. 2 or 3 in trying harder; we're not the No. 1 guy in the market, which again I view as an upside opportunity."

Which got me wondering: Of the three rivals it's watching, one of them has a much smaller market cap than the others. Google, at $144 billion, is half Microsoft's size, while Apple, at $73 billion, is again half as big.

But Salesforce is valued at only $5.6 billion. That's less than what Microsoft spent on R&D last year. Microsoft has enough cash ($7 billion) to take over Salesforce at a 23% premium to its current value, which would take it from third place to first overnight in a key growth area.

Combining Salesforce's technology with Microsoft's client base would arguably help both companies. And it would cost $7 billion, a pittance for Microsoft. Remember, that's how much it cost shareholders when Ballmer opened his mouth last week.

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