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Disclaimer: I am working at MS this summer. But I would have said the same thing months ago.
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People even except phones to crash nowadays. In a Palm Pre review I read the other day they praised the Pre's stability: it "only" crashed 4 times during testing, and it was because "we were running a lot of apps at the same time".
Expectations matter.
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From my view, Mr Bill and Microsoft cant stop evolving because of the bugs. They are right on focusing in new features rather than on bugs. The problem is building to complex software. That´s the mistake, on my opinion. Sometimes i use office 2000 to write some document and i don´t feel any difference from the 2007 ... well ... both do the job. So why i need the 2007 ? Because it´s have more features ... just this. So the interviewer should go for that, in my opinion, "Mr Bill, why you guys don´t build more simple and less complex software ?" So Bill would probably answer what EVERYBODY KNOWS BUT STILL WANT TO LISTEN TO FROM HIM TO CRUSH THE GUY ... "Well, because simple software don´t give so much money"
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By now, anyway... Were the OSRn upgrades to Win95 free?
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You're not going to be able to sell a piece of software based on the idea that it has less bugs. People expect software to be bug-free. When people buy a new version of a product, people expect new features. I mean, history has proven him completely correct - today, vendors provide free updates in their software to fix bugs and sell new versions with more features.
Secondly, you're always going to have bugs. It's inevitable. What's important is that your software, both in terms of design and testing, is resilient enough to avoid major bugs that a large proportion of people will run into. Historically, Microsoft were good at this - there's a reason they were behind "Writing Solid Code". What remains are bugs which are quirks and corner cases, which are generally less important and are harder to test for. Of course, the situation with security is rather different, as certain quirks and corner cases can have serious unintended repercussions.