Steve Ballmer: MSN Strategic Account Summit 2006

Remarks by Steve Ballmer, CEO, and Yusuf Mehdi, Senior Vice President, Chief Advertising Strategist, Microsoft Corporation
MSN Strategic Account Summit
“Digital Marketing Outlook: The Future Is Now”
Redmond, Washington
May 4, 2006

ANNOUNCER: Ladies and gentlemen, please welcome Chief Executive Officer, Microsoft Corporation, Steve Ballmer. (Applause.)

STEVE BALLMER: Now that we have all of this access to content on the Internet, I want to encourage all of you to be very careful about when you allow people to record you on videotape. You never know when it’s going to come back and haunt you anymore.

It is a real honor and privilege for me to have a chance to be with you today. We are so excited that so many of our good customers and partners took the time to come and spend it, and really talk about a subject that, frankly, is beyond exciting I think to all of us at this stage, because we are at the verge of what I would call the next major inflection point in terms of the impact that technology has on society. And I’m going to talk a little bit about that, give you something of a feel for why we have the excitement that we do, and also have a chance to talk a little bit about some of our, I won’t say specific plans, but I would like to be able to at least give you a context of where we are and where we’re going.

And, I’m going to assume this is actually like a mouse and should work. Let’s start with a little bit of a perspective on the world, because the world is changing. People ask me all the time, has the technology revolution peaked? Where are we? Are we early, are we mid, are we late? And in a sense, I find it a very unusual question, because I see so much impact, so much change, positive change, that will be driven by advances in technology over the next year. And yet people say, how possibly can the technology industry, in a sense, continue to outdo itself?

And, you know, if you think about it, I’ve been at Microsoft 26 years. When I arrived at Microsoft, I think the notion that people would want computers was a funny notion. I remember when I dropped out of school to come up here, I told my folks I was coming, and we did software for personal computers. And this is 1980, Macs had been out – not Macs…Apple IIs, Apple IIs had been out for maybe three or four years. I went and told my mom and dad, and my dad said, what’s software? You’re dropping out of Stanford Business School to work on software. What is software? And my mother said, personal computers? Why are persons going to want computers?

And, yet, look at where we are today. Compare back even to 10 years ago, 10 years ago is not that long a time. Yet, 10 years ago most people in this room didn’t have cell phones. Ten years ago most people in this room didn’t know what the Internet was, and I’m not picking on this room, this room could be any room of sort of non-technophile people that I might talk to. Ten years ago, certainly, this fellow sitting right here with that digital camera wouldn’t have had a digital camera, he would have been going with the film, wasting valuable, precious natural resources instead of just burning things into memory. It was a different world. I’m not trying to give you a hard time, sir.

It was a very, very different world. And all that has happened in 10 years. The next 10 years has the same kind of positive change in front of it. The technology is moving – the hardware technology is moving at a rapid rate, cheaper, smaller, faster, and that’s true whether we talk about screens, or disks, or storage, or communications capabilities. I was with folks from Dell yesterday down in Austin, and they were showing me this new flat-panel display that they have, 30 inches, beautiful. That thing will be dirt cheap during the course of this next 10-year period of time.

We’ve got new business models, and frankly new business models have been important to technology growth. Bill Gates and Paul Allen really understood that software was a separate business from hardware. It wasn’t just the technology vision that started this company, it was a business vision as well. And perhaps most importantly, we’ve got a user community that’s ready to run with it. It’s not like maybe 10 or 15 years ago where you really would talk about a large percentage of the adult population as being techno – kind of – phobic.

I tried to make a sale, probably almost 10 years ago, with one of the largest banks in the U.K., and we’re trying to sell them e-mail, and I worked on it, and I was part of the team, and we were selling against IBM. And finally the CIO calls me up and says, well, we’re not going with you. I was devastated. I said, it’s IBM, they did it to us, didn’t they? He says, no, he said, we’ve decided we’re not going to put in e-mail. Excuse me? He said, I decided that none of the senior guys in our bank would actually use e-mail, so it would never really become an acceptable form of communication. Hey, that’s 10 years ago, that’s not our world today.

We live in a world today where it’s still at various rates depending on where people are in their lives. People embrace technology. They’re willing to live what Bill likes to call the digital lifestyle, the digital work style. And we see that in communications we see that in what people have in their pockets, we see it in media and music, entertainment. We see it in so many – we see it in the amount of time people are spending online versus in other forms of consumption of information. And that’s a very powerful thing.

The only thing that really stands in the way of an incredibly amazing 10 years is a lot of software has to get written, and I will say that. Ten years from now, if the computer is really going to understand you when you speak to it, we’ve got a lot of code we’ve got to write, a lot of innovation that’s got to happen. And we’ve got to get, essentially, ecosystems of massive numbers of companies and third parties and individuals to embrace and create kind of the milieu that will make this world as vibrant and exciting as possible.

People ask me some days, how did Windows really take off? I mean, you get to read a lot in the paper now about how we’re in court sometimes talking about how Windows took off. But, what really was it that helped Windows take off? What it really was was this incredible ecosystem of third parties who wrote applications that surrounded Windows, that enhanced Windows. It took some core applications like Microsoft Word and Excel and Outlook that sat on Windows.

In some senses the key to the next generation of digital work style and digital lifestyle is fairly similar, and we’ve seen it in the sense that many people have embraced the Web, and written Web sites. But, to take the next step to really deliver the rich experiences and all of the information and content people want, will really require a lot of folks, from the media industry, the advertising industry, the content industry, small third parties, music, TV, video, you name it, reaching out and further embracing, and embracing an infrastructure that just like Windows has gotten richer and richer over time. The infrastructure for you to do your job, for the media companies to do their job, or for us to do our job, the infrastructure is going to keep getting richer. So we can do more interactive, more interesting advertising, interactive, more interesting content every day.

Bill talks about the digital lifestyle and the digital workstyle, I kind of take it personally. I don’t have a digital lifestyle and a digital workstyle, my wife accuses me of kind of just having a digital my style. She thinks I’m always working, so I can’t possibly be having a lifestyle, and I do know that occasionally I’ll turn on some music on my laptop, so I must have at least a little bit of a lifestyle, so they really kind of blend together. I think it’s actually important for all of you as advertisers to really think about that.

Our ability to separate the consumer world, the work world, our time, that has really changed, and will continue to change. I’ll bet if I ask how many of you have a device sitting someplace in your pocket that lets you get access to e-mail, to the Web, we’d see a very high show of hands in this audience, and I think that’s part of it.

So what is it that will come to the digital my style? Publishing: All information will be published, and all information will be able to be read and consumed on the Internet. And we’ve got a lot of work to do, we, the industry. I mean, I look around and I still see a bunch of people with paper and pencil right now in their hand. We still haven’t made information technology that’s quite as good as paper. And we like to talk about sort of the battle, our guys have to out-innovate, 500 years post-Gutenberg, what was possible with paper and pencil and printing. But, hey, it’s kind of nice, you can write on it, it’s pretty flexible, it’s really small, paper is convenient. [Crumples up paper.] You can’t do that with a computer screen. There are some advantages to the – not that you necessarily want to do that with your speech that you’re giving right now, but you have a whole set of options that are available to you. But reading will go.

And I think people underestimate, you know, if I say to you, literally 10 years from now everything you read you will read on a screen, I think most people will push back on that. And yet I think in the short run most people tend to overestimate how much change will come, and in a 10-year timeframe people tend to underestimate how much change will come. This change will come, and I think it’s this 10-year period of time.

Television, radio, that will all become interactive. I’ll give you just a couple examples. I’ll be watching, I don’t know, the U.S. Open – the Masters has already passed. I’ll be watching the U.S. Open, I’ll see Tiger Woods hit the putt, and I’ll yell at my TV, “Hey, Bill, did you see Tiger hit that putt?” And my TV will have enough intelligence to process my voice, understand what I said, Bill, who’s his friend named Bill; oh, his most common one is Gates; hmm, where is Gates; and then Bill will be sitting there on his couch, probably not watching the golf match, “Hey, Bill, did you see Tiger make that putt.” That’s interactivity. And we can think about – or I’ll be sitting there watching that same golf match, and I’ll see Tiger take that big swing, and I’ll say, “I wonder what driver her hit.” Boom, I’ll click, it will say tailor-made blah, blah, blah, blah, blah. Boom, click, I want to buy one, and it will take me directly to where I want to shop.

This is the digital – and people say, oh, that is the nuttiest thing you’ve ever said, and yet if we had said 15 years ago we’d all be carrying around really cheap little inexpensive phones, or we’d be talking to everybody in the world and looking at anything you want to read anywhere in the world, if you’d said that 10 or 15 years ago, people would have said you’re crazy. That’s the pace we’re talking about of these innovations.

The way we communicate and collaborate, searching, finding information, shopping, business – still today most business interactions don’t tend to be digital, a lot of paper flowing around inside companies, between companies.

Gaming: All gaming will be interactive, even what we would think of as traditional board games. We’ve got this thing under development here, and I don’t know whether it will ever be a big deal or not, but it’s a table, an electronic table that essentially will allow you to do all your board games electronically, it allows a whole new generation of what we think of today as board games to develop through electronic means. So a lot will happen.

Perhaps the industry though that will be as affected and will embrace this digital my style as much as any will, in fact, be the advertising industry. All advertising will be effectively delivered digitally. Why do I say that? Well, first I said all the media will be delivered digitally, and then I’ll tell you that in point of fact the technology will be there to do a superior job delivering advertising in every way. We will know more, we all can know more about the users if we’re talking to them digitally. We can know more about the context of what the user is doing if we’re talking to them digitally. You will be able to get guaranteed placement on advertisements for fixed price, you will be able to participate in auctions for advertising inventory. We will have the option of not only having today’s, quote, display ads or listings ads, but anything you could do today in print, anything you think you can do today with rich media, with video, you will be able to do, plus a whole range of interactivity, like the golf example I cited.

To get a sense of just how real this stuff can be in the short front, I’ll just highlight the fact that we’re driving a project working very hard with AT&T to really start delivering television services over the Internet. This isn’t five years, 10 years, 15 years; this is a company that’s very serious about acquiring subscribers now, and over the next year, two years, three years, we’ll have the capability essentially to take that basic TV screen and target ads in a very different way, to use electronic techniques for insertion, to have greater sense of context and user knowledge. That’s stuff is going to start building really in the next year or two or three.

So I think this digital lifestyle, digital work style issue is very important.

Big innovations: I’m going to talk about some things we’re doing in the next year that are not particularly related to advertising, but all of you are also digital content producers. And as digital content producers, it’s probably important to know that there are some important innovations at least from us coming in the context of our Windows product and our new release, [Windows] Vista, and our very popular Internet Explorer.

We’re moving out with new security technologies, anti-phishing, parental control, Digital Rights Management technologies, built directly into Windows.

And you think about the environment in which you want to advertise, I think a lot of parents will want to make sure their children are relatively safe, you’ll want to make sure that you’re advertising in places where people will want to see you and not in places where people don’t want to see you, new technologies coming to the fore.

Rich presentation and user interface: I mean, when you get right down to it, the number one reason you ought to look back and me and say, hey, look, the world is not going to go all digital is a listing ad or a display ad today is still pretty flat, it’s not the greatest communication vehicle. We’ve got incredible things happening in the way graphics can happen on computers, and in our Windows Vista release we have an incredible new set of technologies for presentation of information we call WPF, Windows Presentation Foundation, which I think will be extremely important.

Internet: We’re building into Internet Explorer and into Windows Vista the core technologies to support RSS, and I think for a lot of you RSS feeds will increasingly be an important way for how you essentially allow your users to sign up to receive your messages. It’s an amazing thing. There are times and places now where it’s easy to say, hey, users are far more selective about where they want to see advertising online than offline, but users are also more willing to sign up and say I’ll subscribe to things that are important to me, and we’ll build a platform that enables that into Windows.

We talked yesterday about gadgets as a way to kind of connect what’s happening in a rich Windows environment with what’s happening at one of your Web sites, built into the next generation of Windows and Internet Explorer. And we’re moving to implement all of the important Web standards so that you can have a consistent implementation across the Internet of the important messages that you need to deliver.

As a company we’re investing in a variety of different places and a variety of different experiences that I think should have value for marketers. Interactive television: Maybe below your radar screen, it won’t be once we really get off the ground here in thee next several months with AT&T.

MSN: I hope you really got the message yesterday, and I’ll deliver it again, we are delighted with where we are in content, we’re driving hard, we think people want that kind of an experience, in addition to the more customized Windows Live experience, and in a sense we’re stepping up our investment in the way that John described yesterday to work with content partners. Frankly, we’re a little sold out right now on inventory. We think the desire for people to read online and the desire you have to communicate online actually exceeds the good inventory that’s available out there today.

Windows Mobile: On your phone there are – when Christopher Payne talked yesterday about local search, believe you me, the most important place maybe for local search will be on the phone itself, and that will be an experience where it’s easy to see how the advertising actually improves the user interface, just like advertising can in traditional Yellow Page advertising.

Windows Live, Office Live: Our initial target for Office Live is business customers, but really what we’re targeting is the whole world of people and businesses, small consumers, who want to author, be productive, engage in commerce.

Robbie will talk today about what we’re doing in online gaming, on Xbox, and on the PC.

And, of course, in terms of core technologies for advertising we’re going to talk a little bit today about adCenter.

I think we’ve made a lot of progress over the course of the last several years. We reach as a company about 59 percent of the Internet population, pretty darn good. We have over 250 million people who turn to our software and technologies every day on the Internet to communicate. And this doesn’t include what you do with Microsoft Outlook in your corporation, these are just people who are using products like IM and Hotmail. We have over 72 million users, No. 1 blogging site on the Internet, in MSN Spaces. Page views, we’re up to 274 billion page views. And I told you we need more content; readers want it, readers are engaged with it, and advertisers want it as well.

We were an early pioneer of video on the Internet. With MSN video it’s number one. I think we had a chance to talk some about our burgeoning partnership with AP and some of the other exciting things we’re doing there.

Live. Live: I couldn’t be more excited about Live, both from a consumer perspective and from a platform perspective. I think there will be a variety of different experiences that people want at different times on the Internet, and we want to be able to give them, as Blake talked about yesterday, these two points of view between MSN and Live.

But behind the Live strategy is also all of this infrastructure, what we call a platform. Just like Windows is a platform, it is a platform for people to do new media types, new advertising types, new content types, new communication experiences. New applications and exciting new things can be built around it.

I was in the U.K. last week, and now my mind is just blanking. I was in the U.K. last week, and I met with the manager of one of the most popular musicians – apparently outside the United States, whose name I did not know, and my mind is completely blanking, British singer, appeals to teenage girls.




STEVE BALLMER: Robbie Williams. That shows my age, and the fact that I have three boys. (Laughter.) Both were revealed there.

But I met with the manager of Robbie Williams, and we were talking about his fan site, they charge money, it’s an incredible business actually for him. They have a good number of people who pay just to get to the Robbie Williams fan site.

And we were talking about how what they’d really like to do is kind of integrate – if Robbie Williams could get access to the information that’s in our buddy list so that when I go visit the Robbie Williams site I could say, hmm, which of my friends are also at the site, what have they viewed recently, what was cool to them, what was exciting, and kind of mash together some of what we know from the IM experience with what they know about Robbie Williams and what people are doing on the site, that would be a fantastic kind of new experience that they could deliver.

And so as we think about kind of what I’ll call the platform aspect, it gets to this issue of how do you, as they like to say these days, mash up some of these experiences on the platform in really a very strong way.

We’re just out of the gate on Windows Live as a platform, we’ve got a lot to do, but it’s important, it’s important to content creators, large and small, not just the two or three biggest, but the whole tail of content producers, of advertisers, of people who want to do business over the Internet.

As a platform provider, I think we do as a company understand better than anyone how a rising tide can lift all boats. And these are certainly early days in this Internet world. I believe that only two or three companies can really deliver the infrastructure that’s required to keep pace with both consumers demand and advertisers’ need. And certainly we are humbled by both the challenge that we have in front of us, and the opportunity to provide the technology to really make this marketplace better for consumers and marketers.

No one is more committed, I would say, to investing and partnering with you behind this need. And I know folks would really like to see good, active, healthy competitive innovation in this area. And I want you to know that we are a patient, determined, long term participant in everything that we do, and we are patient, long term, and committed to really having a significant, more and more significant footprint in the advertising arena.

And we’re investing behind that. We have built out these great end user experiences through Live. You saw the commitment to content. Christopher talked about some of the great things that are going on with local and domain specific search.

These search macros as an example are incredibly powerful. It’s a platform on which you can create your own customized view of the world, customized view of what’s on the Internet for somebody who’s interested in the products that you make.

What does the world of health look like? Well, it might be an interesting view of the world to provide. Or what does the world of a certain disease type look like? It might be a very interesting idea, if you’re in the pharmaceutical industry, to want to provide that as a place for your consumers to come and, of course, also learn more about your own products.

I talked about this concept of mashing up with the Live platform. Global infrastructure is not inexpensive. The ad platform, which we’re going to show you ad Center today, there’s a big technology challenge, but there’s also a big business challenge. In some senses the market of advertising is moving like the market for used items. You get all these buyers and sellers up there on eBay; we need to have healthy marketplaces where there’s buyers and sellers of advertising opportunities. And the advertising opportunities, as I said, will include not only traditional media type opportunities, but the tail of the Internet, communication experiences, and many, many others.

We will spend as a company overall about $6.2 billion in R&D. We have told our R&D folks that our number one priority, number one priority is software as a service, which really relates to this notion of the kinds of experiences that I talked about for the digital my style, if you will.

We’re investing behind that very specifically though also in online. Our R&D spend just in our online MSN area has gone from a 500 million in our fiscal year ’05 to a projected $1.1 billion in our fiscal year ’07, which starts July 1. I think we surprised some in the financial community with some of this last week, and our stock showed that surprise, but our dedication and determination to invest in important ways in this business is strong. And we will invest as much in this online opportunity in R&D as any of the other big players in the market, let alone the rest of our $5.1 billion, the rest of the $6.2 billion total of R&D spend.

We’ve been ramping up our cap-ex. We’ve gone from about $100 million of capital expenditure in fiscal year ’05 to about $500 million anticipated in fiscal year ’07.

Now, why do I tell you all this as advertisers? Because I think it is important for you to understand our deep commitment to absolutely providing you the experiences that you need to bring audience and to give you platforms and tools to help you intersect with that audience, and get the jobs done that you need to get done in a way that’s good for you and good for the consumers that you want to interact with. And we’re very serious about making those investments.

I do think, as I said, that this is really a platform play. We need an ecosystem, as we call it, around our Live platform, just as we needed an ecosystem around Windows, thousands of communications service providers, thousands of content authors, thousands of people who want to provide unique, customized versions and views of the Internet and information. All of that will build in the excitement and interest and audience. And then we also need an ecosystem of advertisers and agencies and search engine marketing companies. And we’re dedicated to that kind of partnership and ecosystem. Particularly today I would tell you it’s the only way we will be able to get to critical mass is by literally reaching out.

And as I said on that little video that they showed at the beginning, developers, developers, developers, advertisers, advertisers, advertisers; that’s in a sense not even facetious, it’s the new area of third party innovation and ecosystem development is this whole area in which you are absolutely key participants.

To get the ecosystem to critical mass we have to have some winning services. Windows Live has got to be, Office Live has got to be, Xbox, MSN, and that’s why it’s so important that we have the success we have today, but as Christopher and Bill and others said yesterday, we’re driving hard to go to the next level.

I want to wrap my formal remarks at this stage. I’m going to bring out on stage Stuart Frankel from Performics, a part of DoubleClick, and Yusuf Mehdi, our chief advertising strategist, to give you a little bit of a demonstration of our adCenter technology, just to give you a sense of how some of this R&D is paying off. And when they’re done, I’ll just have a brief wrap, and have a chance to take your questions, thoughts, and comments. Please welcome Stuart and Yusuf.

YUSUF MEHDI: Thanks, Steve. Good morning. I want to show you three different things we’re doing in the area of advertising, and we’ll start with some things in the present, and then we’ll go to what’s coming next for ad Center, and then I want to finish by showing you a couple of sneak peaks at future technologies that are out there that kind of reinforce the point Steve is making about our deep commitment to win in the advertising space, and do some great new things.

But first we’d start with the hot thing, which is adCenter, which is shipping today, and I thought rather than showing you the product myself, and walking through what we’re doing, we’d bring out one of the foremost experts in search engine marketing, who will talk to you about how he’s using adCenter and how he’s using it for his clients. And so with that, Stuart, why don’t you come out and tell us a little bit about what you’re doing with Performics and how things are going with our service.

STUART FRANKEL: Well, great. Well, let me start by, Yusuf, thanking you and really everybody at Microsoft for inviting me here today to talk about our experience with adCenter.

Performics, along with our parent company DoubleClick, is the largest provider of SEM services and technologies in the country, and we’re a longstanding partner of MSN. And, Yusuf, as you know, we were really early adopters of the adCenter product, and so far we’re really pleased with the results and, in fact, they’ve exceeded expectations.

YUSUF MEHDI: That’s fantastic. Give us a sense, since you’re an expert and you work with all the different platforms that are out there, how is adCenter doing. So for someone in the audience, how are we doing relative to competition, how are the click-throughs, how is the traffic; give us a little sense of that.

STUART FRANKEL: Sure. Well, let me start by saying that we’re highly automated, and through adCenter and our integration with adCenter we’re able to bring all of our clients onto the platform in a very easy way. We leverage our DART search technology, along with the adCenter API, to actively manage each search campaign, so doing things like uploading of keywords, managing bids, changing and optimizing copy. We also work very closely with the MSN services team to develop strategies to enhance the reach of each of our campaigns.

And we’ve found that the tools within the suite, within the adCenter suite are extensive. And so we’re able to leverage our integration to capture a lot of rich data to drive better insight than we’ve been able to in the past.

And in terms of performance, we’re really encouraged by the results that we’ve seen through our campaign. In particular during the pilot, the vast majority of our clients have seen higher conversion rates on MSN than the other search engines, and so we’re very pleased so far.

YUSUF MEHDI: And we are, too, and we hope that holds up.

One of the things that we made a big bet on, and that I know that you’ve been a huge participant on, is the API, which allows anyone to use their proprietary tools to come and access our great data.

So let’s talk a little bit to the audience about the API, how is that working for you, how do things look on that.

STUART FRANKEL: Sure. Well, when you manage large and complex search campaigns the way that we do, you tend to have huge keyword lists, multiple variations of copy, frequent bid updates, and clients that just demand better and better ROI.

And so we’ve been able to through the API take the information that we gather, combine it with data from MSN, and just create tremendous efficiencies. And so what we’re essentially doing is freeing up human time. So rather than spending the time focusing on some of the rote aspects of running a search program, our people are spending their time just being more strategic, and actually figuring out ways to advance our clients’ programs and drive better performance for our clients.

I should also add that not having to pay a fee to access the API certainly made it easy to integrate. (Applause.) Was that a big issue? And I think it represents really on the part of MSN a commitment to create a true partnership with third parties like Performics.

YUSUF MEHDI: And we are deeply committed, and that is why we’ve taken that approach on that piece. Why don’t you come over and show us a little bit about your applications that you’ve written, so people can see how you’re writing special applications on top of the API.

STUART FRANKEL: Great. So our DART search application is mapped directly to adCenter. And so things like hierarchy and features and functionality are both very complementary and consistent between the two applications. We’ve been integrated with the API for several months, we’ve got a number of clients currently running on adCenter, and literally on a daily basis through the system we’re uploading keywords and changing campaigns and adding new clients.

So I’m going to walk you through literally about a 90-second demo here to show you some of these integration points.

So users can, of course, set up and then edit a campaign, again directly on the interface, and this is transmitted through the API. They can target by language or country, and as MSN rolls out new languages and countries, we’ll modify DART search to accommodate those changes.

Users, of course, have the ability to create keyword groups, which map to MSN orders, and essentially are sub campaigns, and you can see the variables associated with each of those sub campaigns.

We’ve obviously got very sophisticated bid management technology, and again through our interface you can manage the bids on adCenter. We allow for two primary strategies – or rather a primary strategy and a secondary strategy for bidding for each campaign. In this example the primary strategy is an ROI-based campaign, and the secondary strategy is a position-based campaign.

For users with massive groups of keywords, either to upload or to modify, they can use our bulk upload functionality, which is very convenient and very nice.

And then finally we have extensive reporting. So what we’ve shown here is reporting at the very detailed keyword level, but we’ve got reporting at the account level, the campaign level, group level, and then we’ve got reporting by bid strategy as well.

And, you know, Yusuf, I should add that we’ve really been a part of the API development process since the beginning, and in many ways it feels like we actually helped build the product. So each time that we’ve come up with product ideas, we’ve been able to get on the phone or get in front of somebody from the MSN services team, talk about those ideas, and just see if it made sense to incorporate those ideas into the product itself.

YUSUF MEHDI: That’s been fantastic, Stuart, and we’ve appreciated the partnership. I think maybe you could just close by just having a couple of quick comments about the audience intelligence information, how has that worked for you.

STUART FRANKEL: Sure. Well, I think in general the audience intelligence features it’s a huge step forward for search. So, right, any time MSN can empower us with more data and insight, we’re just going to do that much better for our clients.

In particular, the audience intelligence features allow us to identify those segments of the market that either return the highest ROI or just make more sense from a demographic perspective. So we’ve designed our program management functionality to take advantage of these features, analyze the data that we capture through the use of these features, and then just drive better investment decisions.

YUSUF MEHDI: Fantastic.

STUART FRANKEL: So I guess the question for you is if we get too good at this, are you worried that MSN makes less money off of us.

YUSUF MEHDI: We’re not worried. We think it’s a growing market and we’re excited about it.

Thank you very much, Stuart.


YUSUF MEHDI: Thank you. Let’s give a hand to Stuart, please. (Applause.)

OK, I wanted to show you two other things. That was what’s launching today, adCenter. I want to talk to you about what’s coming next and just give you kind of an early look at a prototype of some things that are coming.

So clearly one of the big initiatives for us as we move forward is how do we expand beyond what we’re doing with adCenter to go off to third-party networks and start to do things like contextual advertising. And so one of the things that we’re announcing today is that we will start to go to a pilot this summer with a contextual effort on our network, as we learn to do that, and then slowly as we get feedback go out more broadly.

And again like we did in paid search, we want to go beyond today’s effort, and not just do the same thing, but add some innovation. And I think there are two areas where we’ll do real innovation in the area of contextual. One is again harnessing the power of audience intelligence to get better ROI for advertisers, and the second is to really do a better job to give you more complete control over the two separate marketplaces, because, as you know, search and contextual work in different ways.

And to do that I wanted to just kind of give you an example of what it looks like within the workflow. So this is a little bit of the workflow of setting up a campaign, and as you can see here, just like you would use – if you’ve used adCenter, you can set up a campaign, there’s an ability to click search, and there’s a new area to do things like content ads. And I can do targeted content on the entire network, or I can, for example, pick specific parts of the network, in this case our Microsoft properties, because we’re starting with our own pilot, but pretty soon we’ll give you an access to look at the entire network that becomes the MSN adCenter contextual network.

Once you’ve picked your capabilities, another area where we do some differentiation is in addition to the creation of ad types for text, we now have the ability to create image ads. And so you can come in and pick the image ads that you want, and then run those on different parts of the network, which is a great feature.

And finally, you can come in then and start to do some different matching. So we can, of course, match by keyword, but we’ll now do things like matching by category through some of the advanced matching algorithms we have. So if you say, for example, I want to target luxury car buyers or luxury car parts of the network, I can do that. And if you want to, in fact, pick specific Web sites, you can come in and type in URLs, so, for example, or, and then you can choose to run your advertising on the URL.

So we really kind of push the envelope here and give you the capability to reach out to categories of buyers, to specific Web sites, and you can do text and image ads.

And finally, you can, of course, then come in and control pricing for search, like you see here, max TPC and clicks, and separately control pricing for content, which is another big thing that we’ve heard from you, which is let’s get some more control.

So those are some examples of how we can basically go beyond with contextual, and that’s a big thing that’s coming, and that’s really the second thing I want to talk to you about.

The last two areas I want to talk to you about are really the future of advertising, where do we go from here. Steve talked to you about the increase in spending of R&D, going to upward of half a billion dollars. Where is all that money going in advertising? I want to give you one area, which is the incubation that we’re doing on advanced research for advertising. This is a site that is our incubation lab, and we have now actually over 50 percent who are working on advertising that are Microsoft researchers, PhDs, a lot of folks in our Microsoft Research Asia lab. And what you can see here is a set of projects that we have work on doing very advanced math, machine learning, computer science to improve the ability to advertise.

And I’m just going to pick two of them. I’ll start with something a little more technical, the demographic prediction. One of the key things on contextual, contextual works great if you know the context of the page, but clearly the context of the page is not super helpful if you’re in spaces areas or user created content.

So one of the things we do with demographic prediction is here is a prototype, actually it’s working code where we start to do some analysis of keywords and URLs to get the demographics.

So let’s just pick a couple. Let’s stick with the car theme, Dodge Caravan, and take a guess if it’s more male or female. And we’ll go look through, and it turns out it’s 54 percent female between the ages of 25 and 50. And we can do that on the fly and get the demographic.

We’ll do kind of another simple one. We can say, for example, the Ferrari Maranello 575, it’s a nice little car, and take a guess, male or female. It turns out 66 percent male, 33 percent female, between the ages of 18 and 24, so there must be some young entrepreneurs doing pretty well. What we’re doing is we’re figuring out how things are going.

So those are kind of three or four – let’s pick a tough one now, at least tough for me, Miata, Mazda Miata. Is it a women’s sports car, is it a male midlife crisis car; I can never tell by looking at the car. So let’s take a look at people who are searching for it, and it turns out it’s 55 percent male between 35 and 50, so I think it is more men looking to get that sports car enthusiasm back in their life.

So you get the sense of it. You can type in URLs and you can start to get the demographics. And this is going to return better ROI for advertisers.

All right, the last thing I want to show you is then what we’re doing out to go beyond to now future, much farther out in the area of not just search and display but interactive video and TV. And so we’re looking at all sorts of things, and with our investment in the Xbox game console, with our investment in Media Center, there are some capabilities to add value to even interactive video and TV.

I want to show you two things. One is a speed bump that sometimes you can see on TiVo, but we take it to another level. And here you’re watching a TV ad, a commercial will come up, I’m going to skip it, and what we have is some code as the commercial comes up, 30-second spot, and I can come in and click to skip, and what you see here is I get a 5-second bumper that is a video that is on top of the 30-second bumper. So even as you skip through the ad, you can still get the 5-second bumper for the user.

Here’s a different one for a car for Ford, and again I can, as I’m skipping through the 30-second spot, I get the 5-second. But if I said, hey, that 5-second was pretty interesting, I want to come back, I can come back and click and say tell me more about that Mustang, tell me more about it, so some interactivity.

The other one I wanted to show you is actually what Steve talked about, I don’t know if he was just prescient as always or he knew what we were going to demo, which is you’re looking at a show and you want to interact with the program show, you see something interesting. He talked about Tiger Woods, I’ll pick something else. Let’s say that you’re looking at a show and you see James Bond in that movie, and say, man, that is a good looking suit, or what happened yesterday when Donny Deutsch said to Jay-Z, “Hey, is that a Paul Stewart suit?” and you don’t know, but you’d like to know. One of the things that we’re working on now is a capability to take a look at something like here, Sarah Jessica always looks very good, always nicely dressed, would love to know what is that coat, is that red suit, and, in fact, if you wanted to buy it, can I click on that and pop out to a site, in this case it’s a prototype, so you can go out and buy that particular coat. Or in another one here, a couple go walking down the street, and you can take a look and say, hey, tell me what it is they’re wearing, can I click and interact with that capability.

So some very rich ways to get an example of how you bring interactivity. These are just a couple of things we’re prototyping to give you a sense of where we’re headed with our ad capabilities. We are committed to spending the money it takes to drive advertising to the next level, and as Steve said, we want to have rich interactivity across all of advertising, not just what you do with search and display advertising.