Steve Ballmer: ANA Annual Conference

Remarks by Steve Ballmer, CEO, Microsoft Corporation
ANA Annual Conference
Phoenix, Ariz.
Oct. 12, 2007

STEVE BALLMER: Well, thanks, Bob. Thanks to all of you. I’m excited to have a chance to be here. As I was listening to Bob’s introduction, I thought I missed it, and I thought he was inviting me here because I spent two years as a brand assistant and an assistant brand manager at Proctor & Gamble, but I guess that wasn’t the reason.

We live in a time of incredible change, incredible, incredible change. As Bob said, I’ve been at Microsoft 27 years now. My only other job wasn’t at Proctor. And I remember the old days, the only other job I ever had people didn’t even have word processors. And to think about the level of disruption that has happened in a wide variety and forms and places in people’s lives, it’s unbelievable in many, many ways.

Even if you look back and think back 10 years ago, 10 years ago, statistically most people in this room weren’t carrying a cell phone. Ten years ago, most people here statistically probably had a computer, but didn’t know what the Internet was or barely had it connected, and broadband was just a glint in our eye.

So, in some senses, the theme of what I want to talk about today is embracing disruption, embracing disruption, and really talk about some future disruption that I feel inevitably will happen, and have a chance to give you some perspective on what I think that means for all the folks here.

You know, if you stop and say, is disruption a good thing or a bad thing, I think disruption is always personally discombobulating; and yet disruption continues to create new opportunities. Disruptive technologies will, in fact, in my opinion, turn the ad industry on its head, but perhaps, and I think strongly, in a way in which we can all benefit.

So, today, I want to discuss the evolution of media, the evolution of advertising, the shift to digital, so to speak, and some of the kind of powerful software and technology that I think will transform the way all of us as consumers, businesses and marketers think about the world of the future.

I start with a fundamental premise which hopefully you’ll share at least a little bit with me. We send a bunch of our top, top, top technical guys away once year, and we say to them, “Okay, tell us what’s going to be different as enabled through technology five to 10 years from now.” Generally what they’re doing now is updating kind of the vision from a year ago, but one of the powerful themes that they come back with consistently is within 10 years, no consumption of anything that we think about as media today — print, TV, Internet — everything that we think about today as media will, in fact, be delivered over IP Internet technology, and will all be digital. I don’t care whether you’re sitting there watching your big screen, whether you think you’re reading what we would have called a magazine or a newspaper in the old days; everything will be delivered digitally, delivered digitally, which means, in fact, that the forms of the creative, the creative in the media, the creative in the advertising, the technologies which will be available for targeting, will all be fundamentally different, and be able to be improved by software.

Some of you might say, “No, no, no, no; come on, 10 years? Ten years, 10 years; Steve.” You know, I’m looking out in the audience, and I see a lot of paper and pencil out there, and I’m really saying everything you read, you will read on a screen. And you’ll say, “No, no, no”, and I’ll say, well, what if in 10 years we can give you a screen that’s this light, this thin, this manipulable, that’s connected to the Internet; that’s what hardware is going to permit over the next 10 years, and the ability from very functional software and very functional hardware to consume any kind of communication digitally will be very strong, very, very strong.

If you want to negotiate with me that it’s going to take 12 years instead of 10, okay, 12 years instead of 10. And if you’re going to say to me, “My parents will never get there,” and I’ll say, you’re right, maybe your parents will never get there, but then your kids will get there in four years, whatever the case may be.

And it is very important, because as soon as you assume everything is delivered digitally, all media and all advertising will have to take that into account. The notion that you have things that are just text or just pictures or just video goes away, because everything is digital.

The notion that we have a rich database of information to use to deliver exactly the right message to exactly the right person at exactly the right time can be assumed in all communication.

The notion that other forms of communication, personal communication, personal authoring, contribution, none of that will be separate from the consumption of produced media.

So, this notion of all media going digital, it means all media will have interactivity, community. You will have so many new sources of media. The blogger of today will be viewed as just a footnote, in a sense, of the much broader blogging phenomenon of five or 10 years from now. The places and ways in which people spend their time will continue to expand, and the need for technology to help you get messages to people in the context they want will grow.

Commerce, the differences between buying and receiving a message will increasingly diminish, and all forms of marketing then — or most forms of marketing will, in fact, go digital.

So, I believe in that as a powerful concept. Coupled with that is the notion that people will be able to connect to this rich world of media and communications and advertising in many, many forms.

The thing that we think of as the TV today will be an intelligent screen. The thing that we think as a PC today is an intelligent screen, the videogame console; even a watch, a mobile device obviously, a rich place in which to participate in this world in which all media goes digital.

People ask, what about digital rights, where is the content stored, how does it flow, can we access it. You give our industry 10 years; all of the things which we think of as complicated today will be simple, and rights holders will be able to decide how they want their content used, where it gets to flow, and no matter where it’s stored, you’ll be able to access all of your personal content, and all of the world’s media and content from anyplace, as long as you have the right permissions in a simple and easy form.

This connected home phenomenon, as we often like to speak about it, will actually happen over the next two and three years. You already see it in some of the projects where companies like AT&T are moving to deliver next generation TV and video services over the Internet. We’re working on projects like that also in England with British Telecom, with Swisscom in Switzerland. The phenomenon is taking momentum today to move in this direction.

So, I think we have to think about all things going digital, and a world of connected devices, and the free flow of this media, this content, and this advertising as being fundamental to the environment in which we will all work.

The question you have to ask, the question I’ll try to at least give some context on is what does this really mean, what does it mean for the consumer. That’s where we start: How will the consumer spend their time, what will be the key activities for the consumer, what will the consumer expect in advertising and other communications? I’m a big believer in advertising as a business model for everything that happens online. The opportunities to create an interesting dialogue with consumers once everything moves to be delivered over Internet technologies I think will grow.

And yet the sensitivities people have as soon as you say that the communication is digital seem quite high today. We used to have this discussion with our engineers where they’d wonder, can we put another square inch of real estate on the screen, can we make it available for advertising; and I always remind people, you know, you sit basically four or five minutes out of every 30 and you watch advertising on TV. People have an amazing capacity and willingness to accept messages if they’re viewed in context.

So, our ability to deliver interesting media experiences, software experiences to the consumer over these Internet networks, and to make sure that the advertising communications are relevant and interesting and in context for the consumer is a very big deal.

Marketers, what will happen with marketing? I want to come back and talk about that.

What will happen with publishers? I use the word “publisher” here very, very broadly — very, very broadly. A publisher is anybody who has an interaction with a consumer that they’re willing to turn into a monetizable opportunity for an advertiser or for a marketer. Bloggers are publishers, professional content providers are publishers.

I dream of the day when I can watch the high school basketball games from Detroit Country Day School that I attended in Detroit, on my big screen TV. Detroit Country Day School will be a publisher in the digital future, if I have anything to say about it.

So, the opportunity, the places in which people will think about wanting to include marketing messages will continue to increase.

In this context of consumers, marketers, and publishers, I often get asked the question, will the role of agencies change, and the answer is sure. Everybody’s role changes. The way we all think about these things changes. But I think the agency both as a source of counsel on marketing mix, and as a source of creative thinking and creative power, the role of the agency perhaps even expands, because the range of things that can be done creatively will expand, and despite the incredible software that will help people place media, the range of options and choices will continue to expand.
So, yes, it’s a disruptive world, but we’ll talk about how for all of these constituencies there really is quite an interesting opportunity.

If you stop and think a little bit about the overall media environment, we are today really just in the infancy online. And as we think about what software can do, I think it’s amazing. In a sense I will say advertising and marketing in general is perhaps one of the lesser automated businesses of today. Financial services is very automated. Healthcare I think we all understand is perhaps under-automated relative to all of our expectations. Advertising, marketing, media tends to be more towards the healthcare end of the spectrum, and I think software will take marketing and marketing measurement and accountability really to the next level.

Now, as we think about this, I think the long term for me is actually the clearer. You have questions you have to decide also in the here and now. You judge every time you think about digital opportunities. You’re not investing today digitally in the future of television; you’re talking about the Internet, where do you advertise, is it a direct response type of ad, is it a brand building ad. How much money do you put in advertisements of all forms, how much money and effort should you put into your own destination Web site? I think these are all very important and critical questions.

I think that the popular wisdom today is that the best thing to do online is direct response, and yet as we think about this, and you really think about what we call attributable conversion, we think a lot of the buying that happens on the Internet actually starts with brand campaigns, both on the Internet, as well as offline, that eventually lead to the kinds of conversion you see through direct response.

So, we’ll continue to talk with you and your folks aggressively about this notion of using the Internet even today, before all of this disruptive transformation, for all elements of the marketing mix.

If there’s one area that I think now people perhaps are under — I won’t say — yeah, under-investing in is a good way to say it, it’s perhaps your own destination Web sites. If you go back to the dot-com bubble, everybody wanted to invest in their Web site, and every CEO wanted to jump on everybody and say, “We’ve got to get a lot of hits. Whatever a hit is, I’m not sure, we’ve got to get a lot of those things on our Web site.” And people understand, you know, you really have to be thoughtful, because just taking a corporate Web site and saying, okay, we want to drive people to it, it can be kind of a dull experience. You have to think about where it really makes sense, depending on the business that you’re in.

We happen to have the most popular corporate Web site in the world, because it’s a place not only for marketing, it’s a place for customer service. That makes sense for our company, and every customer service interaction for us becomes a marketing opportunity.

But each and every one of you I think has to think about your own corporate or brand Web site presences as a chance to tell an interesting story, even in the here and now.

As we move to the future, I use this little framework to help me describe how I think advertising and marketing will change. The first question is, what will you buy? You know what you buy today. You know what you buy in offline media. You’ll be able to buy in this digital future, this disruptive future, you can buy context, what are people doing; I want to reach people when they’re watching a given television program. You’ll be able to buy demographics. But you’ll also be able to buy behavior. Again, everything here is subject to the privacy frameworks that develop through both self industry regulation, as well as regulation that could come from government.

But some of you might say, “Hey, I want to buy everybody who visited the BMW Web site or searched on the word BMW within the last two days”, because we’re announcing a new, I don’t know, competitive automobile, and we want to tell its story. You’ll be able to buy all of those things through rich online software that knows about user behavior, and can help you buy a variety of different consumer attributes.

You’ll have to decide how you want to place things. You want to decide this ad runs at this time in this place, or are you going to let smart, intelligent technology decide for you, or at least for what percentage of your budget are you going to decide, I’m going to let the software just decide where to put my ad based upon a set of criteria that I specify.

You’ll buy both on rate cards, but increasingly on auction. As you buy search ads today, you’ll also be able to buy TV ads and many other things through the richness of good software.

Format: You’ll be able to deliver textual information, pictures, videos. Today, we think about those at least in the online world as separate categories: video ads, display ads, search ads. Those will all be one unified concept in this disruptive future.

There will be a question of what do you actually pay for. You pay for the impression? That’s the typical offline world case. Online we’ll be able to sell impressions, clicks, actions. I’m only going to pay for people who actually click through and looked at more information on my corporate Web site. So, you’ll be able to decide — or somebody who actually bought something from me.

And you’ll be able to deliver these rich marketing opportunities to things that have very little screens, to things that have midsized screens, and things that have very big screens: PCs, TVs, and phones.

So, we see all of this coming together with a rich foundation of software to support how people interact with it.

On one side you’ll have publishers, and they will have tools to participate in what I will call a software marketing platform. They’ll say, I have the following kind of inventory, I’m willing to accept the following kinds of ads; please go monetize my inventory for me under the following rules that I have described through the tools.

You’ll have marketers who say I want to buy the following kinds of audience, and I want to pay on the following basis, I want the following kind of payment.

And this incredible marketing platform that lives out in the Internet cloud will decide how to deliver relevant advertising, how to optimize revenue for both parties, both sides of the equation; will serve as the marketplace for buying and selling and auction; will provide the kind of measurement and analysis and optimization that marketers so very much want.

It will have the customer intelligence, the data about what customers have done and not done that is super important to actually make this marketplace match up well.

And over time you will have a marketing platform, we’ll have one, competitors will have one, there will probably be two or three out there in the Internet, at least I think we all should hope there will be a couple or three, and those big platforms will have tremendous scale.

I’ll be so bold as to say if in 10 years all media is delivered over Internet networks, all of what we think of today as the $550 billion of advertising spend, marketing spend, will move to go through these kinds of automated technologies.

As a software company, we think about this too from the other side. We build software applications that are going to need to monetize through advertising. We too will be a provider, if you will, of media experiences like search, communications, community.

Some of those things will actually also be tools again for publishers and marketers. I dream of the day when I can be sitting there in front of my television, watching the Master’s golf tournament, see Tiger Woods make that brilliant chip on number 16. I want to be able to yell at my television set, “Hey, Bill, did you see Tiger make that putt?” And I expect my television to wake up, to recognize my voice, to say, when he says Bill, he almost always means Bill Gates; to find where Bill is in the world, to see whether Bill is willing to be interrupted, to pass along the message, “Hey, Bill, did you see Tiger make that putt,” Bill would hear at his beach cabin someplace in the remote northwest. And Bill should be able to then say back, “Hey, Steve, did you see that it was a Nike 1 ball?” And I should be able to click it and buy it right there, order it up.

But that’s the integration of some of this community and communications technology directly in with the media and advertising experiences of the future, and that’s where we think this thing goes: rich software with rich tools to support the publishers, the marketers, the agencies that support them, and, in fact, the software companies who also increasingly use this form of monetization.

Creative will change. Creative will be as disrupted as anything else, and I’d like to spend just a few minutes and have Brian Goldfarb from our team come up on stage and show you already some of the next generation types of creative things that you’ll be able to do with digital media. So, please welcome Brian Goldfarb. (Applause.)

BRIAN GOLDFARB: Thanks, Steve.

Good morning, everybody. Good morning. I heard like one person say that. Good morning!

AUDIENCE: Good morning.

BRIAN GOLDFARB: Excellent.

So, Silverlight is the new cross-browser, cross-platform plug-in that will usher in a new generation of media experiences and applications on the Web. It has rich graphical control, provides high quality media experiences, and improves economics. That enables you to respond to the increasing customer demands for richer user experiences online.

Now, as we see the Web becoming one of the primary touch points for your customers, it becomes increasingly important to maximize the satisfaction and the opportunities around those online experiences.

So, let’s go ahead and dive in and take a look at what Silverlight offers in this space.

Now, the first example is about capturing attention and eyeballs, and making them satisfy — and it’s a simple game, vector graphics, a little interactivity. I can log in, capture a little information, and just play the game, but I’m getting a brand impression, I’m keeping people’s eyes on the site. Nothing terribly fancy going on here, but it’s just one example of the kinds of rich experiences people are having online today, and technology that Microsoft provides to make it possible.

But where Silverlight really begins to shine is in media. We scale video for mobile devices all the way to 720p HD video in the browser.

So, here’s an example from Fox — and if you weren’t awake, now you are. This is 720p HD video in the browser from Fox. They wanted to showcase their summer blockbusters. This is incredibly high quality content. You get some basic interactivity where I can jump between chapter points in the video, and I can change between different movies that I’m interested in. I’m getting that high quality, and for Fox, being able to deliver their movie content in HD was absolutely paramount for them to deliver the kind of user experience they want.

Now, another example in the media space is what we call Silverlight TV. This is a simple player in the browser. You’ll see picture-in-picture content. But what’s really interesting here is not just one picture-in-picture; you actually have nine simultaneous video streams happening at once. And we can easily swap between those streams. I can also bring the experience full screen, out of the browser, and I have the same interactivity elements that I had inside the browser window.

Now, Home Shopping Network saw this, and delivered their HSN.TV experience on Silverlight where you could do independent channel changing across all of their sales programming.

But what’s fascinating is they were able to integrate with back-end technology and contextualized experiences. So, like the Nike ball, if I saw the product I wanted, I could simply click on it, and be delivered directly into the commerce solution to go ahead and fulfill that purchase; so truly an end-to-end integrated experience from television, online, all the way to the sale.

STEVE BALLMER: Just a reminder, this is kind of today’s state of nature. So, when we make full prediction about 10 years from now, the technology really ought to be just fine.

BRIAN GOLDFARB: Yeah, the technology is certainly there.

Now, I’m sure all of us have experienced booking travel online. Now, most people consider it one of the more painful things they have to do in life, and they have lots of choices, from Canoe to Kayak to Sidestep to Travelocity. Each of these sites is selling a commodity good, airline tickets, and they differentiate based on user experiences.

So, we wanted to go ahead and make an experiment of what it would be like to simplify the airline booking scenario, and this is an example, a prototype of what a next generation user interface could be for booking travel, so simply much more intuitive to drag from Seattle to Phoenix, as I was trying to book my flight down here. Let’s go ahead and fly on the 16th. It’s going to integrate with my back-end systems here, and you’ll notice I get my flights instantly selected. When I cursor over, I get examples visually of the flight path that this takes; so very, very easy conceptually.

I like that. One day soon hopefully we will have these types of experiences. I always book the most connections.

STEVE BALLMER: Flying through Helena; that’s the experience you want everybody to have? (Laughter.)

BRIAN GOLDFARB: For me. It’s the most cost-effective, because that’s the bottom line here. So, I’m going to go to Helena, then Vegas, then Phoenix on America West.

Anyway, so, what does this mean for online advertising? It’s an interesting question. Today, for video we’re accustomed to the pre-roll/post-roll bumper ads, 10 seconds in front, 10 seconds at the end. They’re very easily ignored. They break the content flow, because they have the ad, the content, then the ad.

Today, customers are bombarded with thousands of marketing messages every day. So, how do we get above the noise? What if we could provide contextualized and integrated advertising scenarios in video? What if we could do that and dynamically alter the content in real time when the viewer is viewing it, based on information we know about the user? And what if it was easy and cost-effective to deliver that?

So, here is an ad example with some content, and you’re going to see a broadcast like toast for the recently launched Halo 3 pop up, integrated into the content. I get my brand impression, but it’s happening overlaid on top of the content I’m viewing.

Now, I’m going to bring in a ticker. This is real time data flying in over the content that I’m viewing. It can be dynamically altered based on any information I have about the user, whether it’s time, what they last searched on, et cetera.

Now, I can also take advantage of video scaling technology inside of Silverlight to do some scale ads. So, I can scale the content, never breaking the flow, but delivering a Vista ad impression, which I can have up there for a few seconds, and then I can scale that back out.

So, I’m delivering my brand impression, delivering my content, but simultaneously having no break in the flow.

Now, this just scratches the surface, as Steve said, of what’s possible today. So, when we look at the future of what you can do in online advertising, there is a technology that we’re delivering in Silverlight called Silverlight Sea Dragon, and I’ll just change over to a different machine here.

Sea Dragon technology provides incredibly high resolution image zooming on very large sets of content. Now, you could think about the investments you’ve made in traditional print advertising; how do we bring those high resolution investments to the Web in interesting ways?

And so what you see here is your traditional search results page, but on the right we have some sponsored ads from Land Rover. When I cursor over this icon, I’m brought into the Sea Dragon experience.

So, we can double-click to zoom in, and you’ll notice I can zoom out, but I can also start zooming in this incredibly high resolution image. It’s a brochure like I’d get at the store. And wouldn’t it be nice if I could zoom all the way in and look at the details on the dashboard, or zoom out all the way and actually have some text in the brochure that at the high level I can’t read, but when I zoom in, perfect clarity.

Now, this technology scales for mobile devices with slow connections, all the way to the fastest broadband connections today, and you can imagine being able to contextualize all of this inside the search traffic we have today.

So, two last things, one around Halo 3. This is an interesting statistic. We ran advertising on Microsoft.com for the Halo 3 launch, a small, little event that we had a couple of weeks ago. And we ran two types of ads. We ran static image ads, and we ran Silverlight ads. The initial response rate, which is an important metric in advertising, for the Silverlight content was over two times higher than the traditional static advertising. So, these interactive, compelling experiences really capture the user and draw them in to experience more information.

So, what you’re seeing here is really the present and the future of technology for delivering user experiences online, for capturing user’s attention, for increasing customer satisfaction, and for integrating your investments in all different types of media into this new generation of the Web.

Thank you. (Applause.)

STEVE BALLMER: The stuff Brian showed you I think is the stuff of every form of media and advertising 10 years from now. I’m very excited about the disruption, because I think the disruption is going to bring so many new opportunities for consumers, a much better way to sort of enjoy oneself and spend one’s time, and great new software that will permit marketers and publishers to really participate and help with the explosion of media content, of advertising, but also of well targeted messages that really deliver great return for advertisers.

What’s our role at Microsoft? We’re focusing in on a few things. That marketing platform in the cloud, whether it’s our acquisition of aQuantive, or what we’re doing with our adCenter technology, we are investing as aggressively as we’ve ever invested in anything in the world.

Number two, we have a set of services for the audience, community, social connection, search, and a variety of other experiences, software experiences, that I think will be important advertising opportunities.

You’ve seen a little bit of the work we’re doing to try to help the creative professional get in front of the curve, and really design next generation media and advertising experiences.

And last but certainly not least, you can count on our partnership. Whether you are a marketer yourself, whether you are a brand holder, whether you are an agency, we think there’s an exciting future for all of us and for the publishers as we move to the future, and we look forward to working with you deeply and cooperatively.

I want to thank you again for the time today. I’ll look forward to some questions. If we don’t get to something that’s on your mind, I’m SteveB@microsoft.com. Feel free to ping me via e-mail, and I’ll appreciate hearing from you. Thanks. (Applause.)

MODERATOR: Thank you, Steve. That was a great look into the world of the future, and of today. To the audience, we invite you to pass along your questions. We only have a few minutes, but let’s see what we can get going.

I’ve already gotten a bunch. You’ve given us a look at what technology can do for us. But many people in this room have, we’ll call, non-tech kinds of products and services. We could be in the airlines, we could be in the various forms that are not high-tech. How do we reach those advertisers? How do we leverage your technology, the digital landscape, to make advertising real for them?

STEVE BALLMER: Well, you start with this notion: Even this year, literally hundreds of thousands of people will be watching with signals that are fed to them over, essentially, Internet or Internet technology. That’s very important because we’ll start to see even what you would call the basic television viewing scenario, you’ll see this as AT&T and Verizon and others bring these services to market. They will start to offer a different level and different kinds of targeting, different kinds of interactivity, different kinds of additional software experiences because they’re already, if you will, riding on the standard Internet platforms.

I don’t think about this as technology for the technology people. This is really the technology that’s going to support everybody, from young to old, from rich to poor, everybody’s media experience, sometime within the next ten years. And so the only question is whose audiences and whose customers are moving more quickly to do their reading over digital technologies, who’s getting the TV signals fed to them soonest because of the work that the telecom providers do. So I think it will be something that needs to capture all of us here in the next few years, even if you don’t think you have a particularly tech-oriented client base.

MODERATOR: Are we ready for it? And if you look at the advertiser-agency business system, we’ve often been criticized for being somewhat archaic, being a little bit in the stone age, taking a very long time to get the business system up to speed. What kind of advice do you offer to us, and how do we get this going?

STEVE BALLMER: I always flip the question around for our people when they say that. I say, look, there’s a lot more advertisers and agencies and marketers out there than there are software companies, and our job has to be to provide people with the tools that can kind of intersect where the marketing community is today with the sort of technological opportunities.

With that said, I do think, you know, the more people are doing to get at least a team of creatives up to speed on doing this next generation style of creative, the more people are doing of all forms, brand, direct response, and Web site online, the smarter everybody will be. Because there will be sometime before ten years from now when we’re going to hit kind of a knee in the curve, and everybody’s going to have to say, “Oh my gosh, we’ve got to get everybody trained quickly.” And having a nucleus of people who are ready out there, I think, is fundamental.

MODERATOR: Are there devices out there which — all in one that will allow us the kind of instant connectivity, that one-to-one relationship that we marketers are looking to have with our consumers and with our customers?

STEVE BALLMER: Kind of what I’m trying to say is every device will be that device. Every device will be fed with intelligent signals that come over the Internet and, therefore, every one of those devices will be able to be personalized by the user and personalized in the marketing messages that are coming down.

The platform will say, “I really only want to see people who I know have done something that has to do with insurance in the last 30 days. I don’t want to interrupt people who are in a different phase of their lives.” And you will really be able to be very targeted and very relevant to, I think, everybody.

MODERATOR: You’ve got two great consumer products, one being Xbox and then, obviously, the Halo 3 on top of that. When you look at that, how have you leveraged this new media landscape and digital technology to sort of blow the doors off?

STEVE BALLMER: Brian talked a little bit about our online campaign. We have one other — I will say advantage which everybody will be able to have. Our Xbox user community very strongly participates in something we call Xbox Live. It is a community where people relate with other gamers. We can also provide a set of digital marketing messages right there in the community interaction on any new game that’s coming out, et cetera. So in a variety of ways, you would have to say in the case of Halo, it’s been word of mouth, blogs, digital that has carried the day. We’ve done a little bit of traditional marketing, but not very much considering we had the best opening day in entertainment history.

MODERATOR: Talk to us about consumer-generated media. Is this sort of the major leap to getting consumers involved in their media and in their products and being able to feed back to the marketers?

STEVE BALLMER: I think there’s going to be sort of two dimensions here: The amount of consumer-generated media, we have really only scratched the surface, I really mean that. When I talk about things like the video of my old high school’s basketball game, the number of places that people will find things to put up on the Net, and with great search and great marketing and advertising tools will be able to provide in a cost-effective way, it will be stunning.

The big challenge for marketers will be people are going to spend their time in more and more fragmented ways. I don’t predict the end of sort of produced professional entertainment, and I think that’s going to keep a very significant role. But the percentage of time that people spend in the tail, so to speak, is going to continue to grow, and the software is going to have to let you do a better and better job talking to people who are spending their time in what we could call tail media.

MODERATOR: Gotcha. You know, you made a comment in your remarks about when you deliver messages in context, people will watch the advertising. I mean, this is sort of the Holy Grail for what marketers are trying to overcome, or people not watching advertising. Do you have some examples of where that really makes sense, or how we can actually cut through that clutter?

STEVE BALLMER: Yeah. I think the most obvious cases to look at are Yellow Pages offline and, if you will, search online. You know somebody is in — when somebody types “Land Rover” you’re pretty sure they’re interested in Land Rovers. And the more information you can give them, even if it’s a piece of information that somebody decided to provide by paying for the opportunity, the more information that is in context and relevant, the better off we are.

The more we know, though, about customer behavior, the more every ad is relevant. I’m sitting there watching — let me take a good example. Suppose I’m sitting there — my wife’s sitting there watching with me a sports event on a Sunday afternoon. Our marketing platform understands that this TV has frequently watched a bunch of very different kinds of programming. This marketing platform understands that my wife has been working very, very hard to decide on the tiling for our new beach house. You would not expect a tiling ad, you know, sort of fine Italian tile in the middle of let me call it, you know, the Seahawks football game on Sunday afternoon. And, yet, that’s the world we’re talking about, a marketing platform that would let the marketer get the right message on that TV screen at the right time. And I think people would say that would be in context. It’s not in the context of the show, but it could be in the context of my behavior and sort of expressed implicit desires.

MODERATOR: One of the important things that we’ve always struggled with is as we try to make advancements in this advertiser-agency-media value chain, the big question is: Do we have the talent necessary to move forward at the right rates of speed? What’s your assessment of the talent in that value chain?

STEVE BALLMER: I think talent is excellent for what is being done today. And then the question is: What new talents need to be injected, either new people or new skills, and how do you get there? How do you get an element of the agency, of the media buyer, of the account manager, of the creative type, of the brand person who will have the skills to have the vision to say, “Now is the time to do something else.” Here’s the next opportunity that comes for us.

I actually think that, you know, kind of every year as we bring more talent into the work force, people out of school, you have a chance to kind of refresh your base. The people who you will hire directly into product management, brand management roles, into agencies, right out of school, they’re going to bring fresh perspectives that are kind of what I’ll say more open, perhaps, to some of these new technology approaches.

MODERATOR: One of the things that was started and had heavy conversation five years ago was the convergence of TV and the Internet. Many thought that we’d be there by now, yet it still is behind the eight ball. What do you see is the core problem in getting that to be moving forward at a faster rate? And when do you think this will happen?

STEVE BALLMER: Well, at this stage, I don’t think there are huge problems. It’s just going to be a question of how quickly, through technology like our Media Room software, which is kind of what AT&T and Verizon, BT, Swisscom are using, how quickly will that technology allow those providers to deliver what we can think of as TV services that aren’t just TV over the Internet, but they’re TV with advanced interactivity and advanced targeting over the Internet. And we’re moving quickly down that path. You know, AT&T is out aggressively signing up subscribers. And I think what we’re going to start to see is the TV-meets-Internet phenomenon happening over the next year and two years. And the question is, really: How quickly will people see the features that differentiate that TV experience from the — let’s call it the old cable or broadcast TV experience.

MODERATOR: Right. I couldn’t let you go without a question about your recent acquisitions. Tell us a little bit about that and how you see that integrating into Microsoft’s next steps.

STEVE BALLMER: Digital, digital, digital, advertising, advertising, advertising. And we’re — we are — what’s the joke about the — at the egg and bacon breakfast, who’s more committed, the pig or the chicken? You know, we’re the pig at the breakfast. We are committed. We believe in the future of digital advertising. We believe that software is key to that future. We think there’s a lot of technology. We’re building it, we’ve done a number of acquisitions for mobile with Screen Tonic, Massive for in-game advertising, aQuantive to have a rich set of tools to complement the tools we already had inside Microsoft with Ad Center and Ad Expert. We’re in it, we’re driving hard, we’re going to spend what it takes from an R&D, a capital expense and acquisitions perspective. We want to be the leading provider of the software that really powers the digital media and digital advertising of the next decade.

MODERATOR: Excellent. Great question here. Are there any bandwidth issues with the evolution of what is taking place that we need to be cognizant of or take into our consideration set?

STEVE BALLMER: No. (Laughter.) No. Don’t worry. Everybody will take care of them. No, I mean, we can talk about if it’s something that you want to do day after tomorrow, you can have a dialogue with somebody about whether there’s sufficient bandwidth. But as we take the long-term view, is there anything in the telecommunications infrastructure that would not enable the world to move completely to digital? Whether that’s wireless or wired, whether that’s mobile or fixed. I’ve got to tell you, they’re doing a great job. The hardware guys, the chip guys are doing a fantastic job.

I was with the CEO of Ericsson, who is the leading provider of mobile base stations. And you listen to these guys and what they think they can do in terms of high bandwidth mobile communications, I just say again, simply, no. No issue.

MODERATOR: One last question. If you leave one message for the audience what to do tomorrow when you go back to your offices, what would it be?

STEVE BALLMER: Well, at the high level, I would say to everybody — kind of get back to the point I made a little bit in the speech. You can ask yourselves — I’m sure everybody will basically say we think we’ve got direct responses today on the Internet reasonably well covered. I’d ask you to say again, is there more you ought to be doing for brand? And is there more you ought to be doing to make your own Web site an interesting place for — or your brand’s Web site for customer service, for customer connection, should they be media properties in and of themselves? Some people are doing very clever things to promote community and interaction and entertainment around the brand and through the Web site. And I encourage people to think about that and the brand aspect very, very heavily.

MODERATOR: Ladies and gentlemen, Mr. Steve Ballmer, thank you. Appreciate it. (Applause.) Thank you again, Steve.

END