Speech Transcript – Bob Herbold, UpSide Summit ’98

SEPTEMBER 16, 1998

MR. BRANDT: I think we’re going to have Bob Herbold here in a moment.He should be coming up on the screen.

Bob Herbold, as most of you know, is the Chief Operating Officer at Microsoft.He is also the executive vice president, and he heads Microsoft’s corporate marketing.

Bob is joining us from Redmond, I believe.We’ve got a live link going up here.Bob, can you hear me?

MR. HERBOLD: Absolutely.Are you ready to go?

MR. BRANDT :I am ready to go, can you hear me?


MR. BRANDT:Great.We’ve got you on the screen, and I can’t see me, and I can’t quite see you from where I’m sitting either, but we thank you for taking the time to participate in our conference.


MR. BRANDT: And I understand that Microsoft was unwise enough to try to schedule an analyst meeting at the same time as our conference.

MR. HERBOLD: That’s a fact.

MR. BRANDT: You’re a little bit tied up in Redmond right now.So, I thank you for taking a little bit of time.


MR. BRANDT:Now, you want to talk a little bit about technology leadership.I’m going to let you go ahead and start the conversation, and we would like to get some audience interaction as well on this.

MR. HERBOLD: Sure.What I’ll do is go through some slides that talk about the industry a bit, the impact that the industry is having, and what we view as the issues.

I should begin by thanking you for the opportunity to speak to this group, and the conference today.And we regret that we can’t be there live, but so be it.Here we are, and we appreciate the opportunity to talk.

Let me go through the items that I want to go through briefly here, and then we’ll quickly open it up for a Q & A.In terms of the subjects I’d like to address, this is a thriving industry that really is driving America’s growth.Competition is fiercer than ever.It’s a very positive future that we see, and we want to talk about that a bit.I want to describe Microsoft’s businesses, and our values.I also want to give some perspective on the Department of Justice activity.We’ll also discuss private and public policy, and the importance of this industry becoming involved and really working to drive it.

And also, at the end, I’ll mention some big issues relative to these public policy aspects that I think the industry really does need to bind together and tackle in unison.

With that, let me talk about the industry itself, which is actually rather amazing.If you look from the period from 1990 to ’96, the number of software companies has almost doubled, from 24,000 to 44,000, literally an exploding industry.The large majority of these are small companies.It doesn’t take a lot to get into this business.It’s a very thriving business.When you look at the number of employees matching up with the explosion of companies, what you see in that period is a dramatic increase.We’re up to 600,000 people in the software industry as of 1996.The estimates are that that will double over the course of the next seven years.If you go back to 1990, that employment was about 340,000.So, it almost doubled as well with the number of companies doubling.So, we’re talking about an industry that is literally exploding right in front of our very eyes.

One other aspect that’s important in terms of this industry, which I think is a good measure of the health of it, is that technology accounts for almost 75 percent of the venture capital investment today.Software and communications total nearly $2 billion in the second quarter of ’98 alone, and that’s a 35 percent increase versus a year ago.So, a dramatic increase in the number of companies, a lot of capital going into this business and these industries, relative to other opportunities that venture capitalists can go with.So, we really are seeing a very healthy situation.

And because of that, what’s happening is, this industry is the driving force in the economic growth of this country.If you look at direct software sales and related services, it adds about $100 billion annually to the U.S. economy.And also, if you look at the software industry and compare it to the growth of the economy, it’s a little better than two times the rate of the U.S. economy.So, we are really being a major force here in terms of our role in the economic development of this country.

A couple of stats are really mind-blowing in terms of capturing that very thought. Information technology, and here I’m talking about hardware and software and services related to that, account for 8 percent of the national economy at this point.And if you look over the last five years, the economists who study this carefully, they will point out that in terms of the growth each year, information technology is generating about a quarter of that growth each and every one of those five years.So, this is an industry that is really exploding and being a powerful force relative to our economy.As we all know, this is the center of the universe in terms of information technology.The United States of America has a very strong global leadership position.So, this is a gem for our country.

Okay, let’s talk about competition.One of the aspects of competition in this industry, which makes it so incredible, is the low barrier to entry.Anybody with a good idea, a reasonably priced computer is all it takes to put that idea into action, and get a business started.That can really have an amazing impact. You look at the number of new bright ideas, many of them related to the Internet, but some of them related just to pure software ideas, that have spawned in the last 18 months and created companies which have surprisingly large cap values at this juncture, but more importantly are playing a very surprising strategic role in our economy.And that’s very healthy.It leads to a lot of competition, though.

So, in this industry no one really has a guaranteed position.Not only are you competing head-to-head with companies in regard to existing products, in most cases what’s occurring is new ideas are coming from different angles, different ways to do things in regard to old tasks that get morphed into different ways to do things so that the consumer wins relative to new opportunities.Everybody has to innovate in this business to survive.If you have a product and it is sitting idle in this business for six months, it will be very surprising if you aren’t in trouble at that juncture.You constantly have to be listening carefully to what people want to do with these technologies, and then building those capabilities into your products.

Okay.Let’s talk about the future for a moment.There are some amazing estimates out there in terms of Internet commerce.If you look at 1996, we were at about $600 million of Internet commerce, and BSA estimates in regard to the year 2000 is that that should be up to about $66 billion by that point in time, an incredible increase.

Also, if you look at this industry in terms of the future, you can’t help but notice that many markets have quite a ways to go to catch up with what’s going on in the United States, and what’s going on in parts of Europe.

Secondly, in terms of deeper penetration in home and school, as Steve was mentioning earlier, ease of use will drive that penetration higher.Capabilities that are useful to people, but being able to get at those capabilities with the greatest of ease, that’s what people want.There’s huge opportunity there, and it depends on our creativity as an industry as to whether we can deliver that.

There are a lot of new uses in the enterprise as well.It’s so surprising today how easily large corporations can put together key applications that drive their business that are really important infrastructure compared to five or six years ago when these massive projects had to be launched that took years and years, and tens of millions of dollars.Today, you can get off-the-shelf software, you can build intranets, you can reengineer things in a way that you can standardize data, use existing tools off the shelf, and be up and running in months as opposed to years.So, it really is a very rosy picture in terms of where all these technologies are leading us in terms of the future.

Also, you can’t help but notice all the discussion relative to digital convergence, the PC, the television, electronic media, cable, telco and the like.Tremendous opportunities to sort that out and find out what is the best way to provide all these offerings to the consumer in a way that, once again, is easy and useful to people.

A lot of new platforms.The platform, you know, formats are just exploding.On the low end, set-top boxes, hand-held machines, embedded devices, and at the high-end, you’re taking PC servers and clustering them in a way that brings dramatic power in terms of transaction processing.So that whole spectrum truly is being filled out, and that’s the way it should be.That’s what consumers are telling us that they really want.

So, we really believe that this industry has 90 percent of its opportunities still ahead of it, and that’s a very positive thing to be able to say, given what has gone on in the last 10 years in this business.

Let me shift gears a bit and talk about Microsoft’s business.We constantly discuss it in the context of four parts, because they’re quite different.Desktop systems, in terms of 32-bit operating systems, we’re doing well with Windows 98.It’s off to a great start.We’re doing well with Windows NT Workstation.On the other hand, as all of you know, there are a lot of bright ideas out there in terms of how is the desktop going to operate in the future?What about different approaches from a hardware standpoint?What about different approaches from a software standpoint?A lot of bright ideas.It’s our job, and it’s the industry’s job, to let the consumer vote in terms of what is the best approach.

The second area of our business is desktop applications.It’s a curious one, because if you go back to the late ’70s and early ’80s, we had a good product in MultiPlan, had a high market share, and we lost all that business because we missed the technology window.Others took it over, and toward the latter part of the ’80s, we emerged again with the tools that ran in Windows, and that led to the Office product, and that’s a healthy product today.

I think that story, though, is really characteristic of what this industry is all about.You’d better be on your toes, you’d better be listening carefully, watching where the industry is going, and not miss these technology windows.The third area of the business, I’d have to say that we’re somewhat the new kid on the block.In terms of NT operating system for the server, it’s a good product.At long last we’re winning reviews.That’s always our objective.So, we’re gaining some share.Our messaging system, called Exchange, is off to a great start, and we’ve got some customers who really use it very extensively, and those represent good examples for us as to what the system truly can do.In database business, SQL Server.

Selectively, though, if you look at these products, it’s vintage Microsoft.We’re working in this area, we’re trying to listen carefully, trying to improve our products at each step, so that, at long last, we really can be competitive in these various areas.

The fourth part of our business, interactive media.The dream of a mass media out there where people have devices that they use through the course of the day that enable them to get at information conveniently, information related to work, information related to their personal lives, that’s the dream we all have in terms of this total area.And we hope the number of households dramatically increases in regard to the penetration of these technologies.I agree with Steve, it’s going to take ease of use for that to happen.All of us in this industry are hustling to try to find ways to bring those characteristics to the consumer.

You see Web TV indicated here, that’s primarily a device we use to understand what it would take to bring the web to people, but also to understand what it would take to have a set-top box on top of a television that is truly a smart tool that enables households to bring a lot of bits into the home and sort them appropriately, depending on the tasks that are going on in that particular home.

MR. HERBOLD:(In progress.)Now, let’s talk about values for a moment in terms of, what’s the make-up of this company?What are the things that are important as to how they run their business day-in and day-out?You have to put on the top of the list that we are really passionate about how technology can improve people’s lives.If there’s anything that drives this company, that’s it.When we go out to recruit people, we look for smart folks, but most importantly, we look for folks that truly are excited about this industry. They can hardly tear themselves away from their work because they want to see software in action.They want to see it have an impact.They want to see it be popular.They want to see it be useful to people, so that people truly can improve their lives.That’s number one in terms of what drives us.

Secondly, we have to listen to customers.We have to watch how they use the products.We have to understand their ideas on how to improve things and constantly be improving, improving, innovating in regard to ways that we can bring features to people that they’re asking for. Or maybe they’re not directly asking for them, but we can tell by their behavior that if we brought it to them, they would really be excited about it.So, listening is absolutely critical.

Third, we work hard to innovate and to invest in the future, so that we’re looking at our products today in terms of what people want in them, and trying to constantly be hustling to improve those products, but also to take a long-term view of that.And so, we invest heavily in R & D, we invest heavily in pure research because we think, over the long-haul, if we’re really going to serve those consumers the way we want to, that’s an absolute necessity.

We partner with literally thousands of technology companies, be they hardware companies, software companies, and the like.What consumers demand of all of us collectively in this industry is that these products work well together, and that they bring capabilities to people so that it gets easier and easier.And that absolutely requires all of us to work together to make sure things fit together in a way that it makes it easier for the consumer.

Lastly, we always work toward greater efficiency.This is a company that puts a great deal of premium on being very efficient, not wasting a lot of money, trying to keep it lean, because we know what a fragile industry this is.But efficiency clearly is a core value here at Microsoft.

I hope that gives you a snapshot of how we think about the company.Now I want to switch gears and talk about the Department of Justice case for a moment, because it is so, so important, not only to Microsoft, but also to this industry.When you boil it all down, and read through all those press clippings and the like, there really is one issue at stake here, and that’s that core principal of all companies, including Microsoft, having the freedom to enhance their products to benefit consumers.And that last part is key.

When we come up with a bright idea, any of us in this industry, based on listening to customers, we have to have the right to quickly move and integrate that into a product that we may be marketing, or integrate it into or build it around a new product that we may want to market.But the important thing is, provide better and better benefit to the consumer.That’s what we’re trying to protect as an industry.

And stepping back, it may be Microsoft today that is having this dialogue with the Department of Justice, it could be many other companies in the future.And consequently, this is an important principle, not only for Microsoft, but for this industry in general.It will also importantly dictate the future role of the government in information technology.One of the most important things one of the judges came back with in the appeals court was that they didn’t think that the government really should play a role in the design of software.And we truly believe that.That free enterprise needs to be alive and well, and those core principles of listening to customers, building features into products that you think customers want, and let the free enterprise system take it from there, we strongly believe in that.

Okay.Let’s talk a bit about relevant decisions and comments.We believe the court of appeals decision in June of ’98 obviously it very strongly supported this right to enhance your product so that the consumer wins.In fact, that brief went into detail in regard to exactly how those judges were interpreting the situation, and why they were coming to the conclusion they were.And it was very simple.They believe it’s right to build new features into products when the consumer wins.And that’s the test that they held up.And I believe that is the right test in terms of each and every step in this industry should be focused on improving the life of that consumer, and by offering new capabilities that make it appropriate in this industry to take these products forward in this way.

Another aspect of this discussion around the Microsoft case that is important is an observation by Alan Greenspan in June.I have a quote here.It says:
“I’d like to see far more firm roots to our judgments as to whether particular market positions do, in fact, undercut competition.”
What Mr. Greenspan was arguing for is, we need to stop projecting as to what might be happening, or applying economic theory as to what might be happening, and look for facts in regard to exactly what is going on in this industry.

He then went on to say:
“The reason why we need to do that and look for those firm roots is because history is strewn with people making projections which have turned out to be grossly inaccurate, particularly in this industry.”
This is an industry that moves incredibly fast.Rarely do you find an industry where the core technologies are just romping along in terms of improving every six, nine and 12 months.And, consequently, we are in a situation where change is absolutely part of our lives, and that is what Mr. Greenspan is alerting us to.

Okay.Let me shift gears for a moment, and talk about public policy, and the importance of this industry becoming even more active than it has become of recent.IT is becoming an absolutely vital part of this society.These technologies are enabling people to run more efficiently and more effectively in such a way that literally education, retailing, just about any aspect of our life is being affected, big time.And in some cases entire industries are being turned on their ear in terms of how they do their work.

It really is time that we all take a leadership role on key issues.Now, the good news is, we’ve seen some good examples of that in the last 12 to 18 months.Take TechNet as an example, a group that is focused, in terms of at least the meetings anyway, down in Silicon Valley, that many companies are involved from this industry, and they’ve isolated on a few important issues, and I think have had an impact.We need to see more of that kind of thing, where the industry is taking a leadership role on the issues.

Why?Because the government sees all this activity in this industry, and the important aspect that it is having

— or the important impact it is having on this economy, and they will play a role, whether we want it or not.So, consequently, if our industry fails to act, things are going to happen anyway.So, it’s important that we become active players in this.

Now, in terms of big issues there are several, in terms of this industry getting involved.Intellectual property protection, we all understand the piracy issues in this industry, they’re incredibly serious.Secondly, immigration, many of us have been involved in terms of trying to get approval in Washington, D.C., to increase the levels of people that we can bring in to help us run this industry, because there is an incredible scarcity of talent.I think encryption is a fine example where all the companies have bound together, and I think done a fairly good job of making their point of view very clear in Washington, D.C., around the importance of this issue, if we’re going to remain globally competitive.

Trade and market access, those are obviously important issues.Electronic commerce is a big deal.We saw those numbers before, they’re absolutely incredible, in terms of what we will be facing in the future, as far as consumers taking advantage of these technologies.There are a lot of important policy issues related to electronic commerce, and naturally privacy.Probably the key one, in terms of consumer confidence taking advantage of these new technologies in the future, people need to know that they don’t have to worry.And when you do market research in regard to what are the things that are holding people back, in regard to participating in this industry, privacy generally is pretty high on the list.So it clearly is a big issue, and certainly qualifies to be on this list.

With that, I will conclude.And we can now step back and take questions from the audience.And I have my earpiece in, and hopefully they will be fed to me accordingly, and we can interact.So thank you very much for your attention.

MR. BRANDT:Thank you very much, Bob.

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