Allison Watson: Executive Partner Summit EMEA

Remarks by Allison Watson, corporate vice president, Microsoft Worldwide Partner Group
Executive Partner Summit EMEA
Cannes, France
Oct. 13, 2009

ANNOUNCER: Ladies and gentlemen, please welcome corporate vice president, Worldwide Partner Group, Microsoft, Allison Watson. (Applause.)

ALLISON WATSON: Good morning. I’m honored to be here with you in Cannes in this lovely location that I certainly enjoyed—as I’m sure you did—breakfast on the ocean this morning at sunrise. It’s a beautiful place, and thank you for having me to your part of the world.

I really want to cover three things in my remarks today, and hopefully what I will do is frame up a larger context of the company vision and our priorities, because presenters to follow me will hopefully drill into them with the specifics that you need, depending on what business model and business opportunity you see most impactful for your particular journey ahead.

So, what about us in the next 12 to 36 months as we come out of an economic downturn, we come out with the biggest platform of launch products in Microsoft’s history, where are you going to place your bets and why should you place them?

Where are customers moving now and into the future? It’s a very interesting time as we’re adjusting our business and our customers are adjusting their business.

And finally and probably most importantly, because we’re not yet out of an economic downturn, is how we can grow share together. So we can talk about revenue and opportunity, but at the end of the day over the next 12 to 24 months it’s going to be all about growing share, taking it from other competitors and other vendors who would like to get that share as well.

Before I jump into remarks, though, I want to say thank you. I have had the opportunity to visit 10 different countries since WPC [the Microsoft Worldwide Partner Conference], and I’m engaging with partners in each country, finding out how do we have plans set for the year, in many cases how you’re going to carve out your fiscal years as we launch into the beginning of our fiscal year.

There’s been a lot of hard work going on in the last 12 months. And if I think about where I was, well, 12 months and two weeks ago, I was in Belgium and I was in Munich, and at the time we were trying to figure out what was going on with our Q1, and at the moment the Europeans started to say, well, we’ve got a really tough two weeks to close our quarter. And between September 15th and September 30th and then down to October 30th last year, as we all know, it was an incredibly tough period for everyone, no matter where we were in the world.

I want to thank you for the hard work to get us through the last year. I think that we’re on the verge of even more hard work going forward. But I think at this point we’re at a place where we know we need to move forward.

If there’s one thing that’s happened in the last 12 months inside Microsoft it’s really recommitting to our commitment to partners.

Now, if you know me, you know I’ve been in this job for a long time at Microsoft, and I’ve always been committed to partners. But as the company peeled back and realized how we’re going to grow in a tough economy, how we’re going to take share from competitors, we realize at the end of the day it is the partners that will get us there.

So, as I had a meeting this morning with the folks from Middle East and Africa, we talked about how we really have to lever up what partners can do for us and what partners need from us.

So, I thank you for the work that you’ve put in over our last year, and I thank you for the work over the next two quarters if you’re closing your year right now. It’s a very important time as we show the world that we’re coming back. And as I think Mark described to you in our enterprise business, that’s the area we probably need the most help as we close out the next two quarters and the full fiscal year. Our small- and mid-market business is starting to turn around, and our OEM business with Windows 7 is really starting to take off. But we really need that help in the corporate accounts and enterprise business to establish share regrowth with our customers.

To frame up at the beginning, what are the lessons we learned in the last 12 months, and how do those lessons apply to what I’d say we do in our business and you all probably are doing in your business? These are very important lessons that are going to carry us forward, regardless of what happens in our business and our economy.

Execution is strategic. Kevin Turner – you all may have heard him present – has probably been a breath of fresh air in our company in terms of focusing on execution. He coins the term, he says, “Strategy without execution is hallucination.” And if you think about that, we’ve really got to dig in and realize that every day, every week, every month we have to look at how we’re executing at the core. Otherwise, we won’t be able to deliver against the goals that we have.

The second thing, and it was a real wake-up call for Microsoft, I don’t know about your businesses, but the concept that growth and success and in Microsoft’s case 34 years of double digit growth without ever really hiccoughing, except for a little bit in year 2000, hit a lot of mediocrity.

So, in our business we had to peel back the onion and say what is it that really matters, and how do we really execute, and that’s something that we’re still working on.

In your business if that’s something that you were also exposed to, you start to ask how are your salespeople compensated, how are your salespeople delivering for you every day, what is the real value prop that your company brings to your customers and how are we executing that for our customers?

Next is the concept of not putting in things during good times when you have to take them out and you wouldn’t put them in during bad times, Microsoft had to look back at the things that we were doing because they had once seemed like a good idea or we had a good conversation about them. From now on we’ll look harder and say, even if times were good or bad, does it make sense to put them in?

Focusing on what we can control: If there was for me personally, and I think for most of the partners I talk to, the most important aspect of last year was focusing on what we could control.

In this time period last year, we went from double-digit server growth and double-digit PC growth, which sort of means there’s plenty of sockets out there that people need to put software on and need services around, and it turned around overnight to double digit negative growth on servers and PCs.

Did we have any choice in that matter at that point? Is there anything we could do? There was nothing we could do.

But there was something we could control. We could control our conversations with our customers. We could control our conversations with you. We could control pleasing customers and helping understand what their real pains were, and really getting to their pains so that we could deliver against them.

And probably that’s the biggest lessons I had last year, because certainly there’s a lot of energy that is still in the air about can I control this, what will happen? But if we can all focus on what we can control, I think it’s the most important path to success, and certainly one of the most important things we can do with our employees and our customers that could work.

And finally, the concept, which I think relates to the first one about execution being strategic, involves moments of truth.

One of the things that Kevin Turner has done for every one of his direct reports, and then we do it for everyone else in the organization, is ask what matters every day, every week and every month. And instead of just saying, here are our goals for the year and how are we doing and how are we doing with that customer, asking what are the moments of truth that tell us we’re moving the customer forward.

And that kind of, as I said, is the partnership when execution is strategic and when we ask what are the moments of truth in our business every day.

I framed up these lessons of the last 12 months because we’ve learned them or, in fact, perhaps we relearned them, but those lessons were ones that we need to take forward with us as we propel forward into the future.

This next slide shows that the world will continue to rapidly change. Microsoft has taken a very conservative view. In fact, we believe we’ve taken a more conservative view of our business and the economy than most of our competitors in the marketplace, and you’ll see us as we continue to talk, we don’t know when the economy is coming out of the downturn, we don’t know the macroeconomic view of the world, and we’re continuing to take a conservative view.

But we’re very well aware that our competitors are moving quite quickly. We’ll see more liquidations because people are moving quickly. We’ll see more new competitors coming into the market.

The business models people are playing with quickly, and when we talk about going into the cloud, the hosted offerings and software plus services, the acceleration of customers and competitors into those business models will move faster than at any other time in our history.

Societal and cultural change is an interesting concept, and whether we’re talking to governments, we’re talking about public sector customers, or large enterprise customers, the conversations have changed permanently. Think of the conversations in the United States, the impact that health care will have, both as a daily conversation, as well as with companies. There isn’t a customer we talk to today that doesn’t want to talk about sustainability, that doesn’t want to talk about green, that doesn’t want to talk about a culture of inclusion. As we start to talk about those core concepts, societal and cultural change, the ability for Microsoft to be in those dialogues and have them is an important part of our rapidly changing world.

The concept of rising customer expectations, because there is so much information available online, and because there are so many competitors out there, customers can devalue or commoditize our value propositions quite quickly.

So it’s very important that we understand and listen to our customers. Again, it sounds very obvious but if you really think about it their expectations are continually rising, so you need to ask yourself what you are doing daily in your business to address these expectations.

And finally, in thinking about change, we’ve got to change faster than the world around us. The world will continue to change. We have to continue to learn. And never at any point in our history in this industry do we have to change as fast as we have to today to stay ahead of things.

So what are the partnering imperatives as we stand before you today and look out, both at 12 and 24 months of revenue and share, as well as into the future?

I’ll continue to say, as we talked about starting a year ago, that salesmanship — and I use the word salesmanship, because I think every one of us in the room is probably first a salesperson, secondly all the other roles that we play — is going to be a key differentiator.

Competing to win, and I highlight on this slide with low-cost, high-value innovation, but I’d probably say the most important thing on this one is compete. And we’re going to talk about competing, and every day today as you hear from Microsoft we need to make sure we’re telling you who we’re competing against, you need to know who you’re competing against and every day remember about competition.

And finally, this concept of visionary orgs embracing change and getting ready for the future. In this particular case I’m going to talk to you today about software plus services, and I’m going to make an imperative that it’s time to make the move in your organization to software plus services, and I’ll frame up for why.

So, the first I mentioned is salesmanship. If I leave one core thought with you about being a seller it’s that every one of us carries a quota, whether it’s our business revenue, our business profitability or for a seller our sales quota.

We have to look at meeting or exceeding the quota, despite the fact that our customers are cutting budgets. And the only way to do that is to focus on growing share.

And to reinforce that, if the customer budgets aren’t going up, then the only way we’re going to grow and meet our quotas is if we take share from someone else that wants that mind share.

And in thinking about taking share, the only way we can take share is if we focus on what we can control. So, as I said before, we can focus on exceeding customer expectations, we can focus on listening to customers, and we can focus on what really matters to them.

And I focus this back on the core of salesmanship, because I think there are so many things we’ve tried in the last 10 years that because there was growth and because there was opportunity and because there were sockets, this concept of being great sellers who really listen to our customers could have been hidden as we moved forward rapidly.

So next is a slide that we’ve built and in some ways it seems so incredibly obvious, growing through efficiency. How many of you think in your markets that your customers’ IT budgets this year are essentially flat? I see a show of hands, that some of you think that IT budgets are essentially flat. What about IT budgets going up? What about going down? The majority of you would say that the IT budgets are going down.

Yet if I ask how many of you think that we’ve solved our IT problems in the world and there is less demand for IT in any of the companies that we serve, I don’t think I’d see many hands go up. IT budgets are flat to down but none of our customers would say that we’ve actually achieved all of our IT capability, nor would they think that their priorities have gone down.

In fact, I was in Paris two weeks ago, and I was in a brand new office, and as I was noticing in the elevator lobbies, they have these little stands in front of the elevators, and you would push the buttons — you all may know what this was but for me this was very new — you’d push buttons and you pushed the button of the floor you were going to, and then you got on an elevator. So, I rode three or four elevators for the first couple hours of the day, and then I got on with the woman who runs our business there, and she pushed the buttons and we walked onto an elevator, and she said, oops, we’re on the wrong elevator. I said, what do you mean we’re on the wrong elevator? Well, it turns out this control system is telling us that when you push floor two you need to take elevator B, and that’s how you’re going to get to floor two. Any other elevator you get on is going to take you to the wrong floor. And inside the elevator there’s no elevator buttons.

I thought that was very interesting, I thought these are cool elevators, and I come to find out from someone in the industry that software is what’s controlling the elevators. I hadn’t thought about software control for elevators. It saves power and increases efficiency.

And I thought that was a very simple example of the innovation going on in the elevator business, and it reinforces, if you will, whether we are done with IT. And so I frame that up as one concept that can occur in any industry.

So, it’s a very interesting time for our customers. As we listen to the radio every day, we’re in the new normal or we’re in an economic reset, and yet at the same time what are we being asked to do? Well, we’ve got new efficiency.

If you remember our server campaign from several years ago, when we launched Windows Server 2008, I think we called it “do more with less.” And at the time, that was sort of, well, Microsoft can only say do more with less because we were the low-cost, high-value provider.

But if you look at the new efficiency — and in some ways it sounds exactly the same, but for our customers it’s very, very, very different — the new efficiency equation is with less do more. It seems like the same words, but it’s a totally different concept.

So, when we sit down with customers and start having a discussion, the first thing they push us on is I have a reduced IT budget, and I need to do cost control.

Once you get over that conversation with them, they start to tell you all the other things that are their IT imperatives, that they’re being asked to do more with less.

And core themes come up, and those are frankly the same themes that Microsoft has talked about for a number of years. They’re core themes about how do they pull cost out of operations, core themes about productivity, how do they get more out of their organization and their people, and core themes about innovation.

The interesting thing though when we’re talking to customers today is that these core themes aren’t really independent of each other. It’s hard to tease out in an IT discussion which is the priority.

As an example, Continental Airlines has just released new technology that allows you instead of printing your boarding pass and carrying it onto the plane, you can create a digital version of your boarding pass on your mobile phone and walk onto the plane with your phone as the boarding pass.

So you ask yourself, in that innovation that Continental chose to drive, was that cost savings? Sure, you saved a lot of cost in that example. Is it productivity? Sure, we increase productivity in that example. And is it innovation?

So, as you get the sense, every one of these challenges our customers are dealing with in, quote, the new efficiency, are going to be a blend of the themes of cost savings, productivity, and innovation. And as you listen to customers and we talk to customers about the new efficiency, understanding how our technology innovation will lead to all three of these themes and help them realize and, if you will, justify that, is probably the key thing that will help us to compete and take share.

So let’s get on to competing and take share. I’m going to again cover five core areas that I believe are the biggest, if you will, revenue generators, competitive generators, and business generators for you as partners in the next 12 to 24 months, and then I’m going to go on to the future from there. For each of these product areas we’re talking about we’ve got to look at cost savings, productivity and innovation.

The first is all up the launch wave, and I want to frame on this slide that these are the major core products we’re launching this year. If I gave you a detailed slide, there are many more products below this.

In nine days we’re launching Windows 7, we’re launching Exchange Server 2010, and Windows Server 2008 R2.

Tell me with a show of hands how many of you are running Windows 7 on the PCs that you have with you here today. OK, that’s actually a very good show. So, it looks like about 60 percent of the audience is running Windows 7.

Does anybody want to give it back? Anybody running it want to give it back?

It’s a great product. I’d encourage you, if you were someone who didn’t raise your hand today, turn to someone that’s a neighbor next to you and say, how did you do it, what did you do, what was interesting to you?

Let me tell you what I think is our biggest problem with this wave of opportunity on this slide. This is the most innovation Microsoft has ever released in one year in our history. And I think you all should rightfully say to me, Allison, how in the world am I supposed to consume that innovation, how am I supposed to learn that innovation, how am I supposed to be the best at that level of innovation so that I can propel my business forward?

I would tell you that’s a core question. If you’re in a country today where you don’t feel that you’re given the chance to get your organization ready, either sales and marketing and technical information, against this wave, please mail me, [email protected].

I’m concerned. This is an incredible wave of opportunity, and I’m concerned that as it relates to your business that if we don’t have you using the software first — so thank you for Windows 7, I’d ask are you using Windows Server 2008, are you using Microsoft Exchange 2010, do you have Office 2010 in beta? If you attended WPC, you were given the Community Technology Preview. It’s critical that you all use the software of this new innovation wave at a decent enough, broad enough level in your organization.

We’ll talk about Windows Azure as well as that’s coming out. There should already be usage going on in your organization there.

I can’t say enough of all the different ways we’re going to talk to customers about the new efficiency, and all the different ways we can license and all the different workloads of interest we can sell. This wave of opportunity is the most important thing we have going for us, and your ability to understand it, which is by using it first, having a go-to-market on it, and ensuring that your technical and salespeople are trained is critical. And let us know what we need to do to get you there.

I want to spend a few minutes on Windows 7. Let me say at a high level that Windows 7 is ready for enterprise deployment. For those of you who are running it, you will know immediately what I mean about productivity features. If you aren’t using it, I’d encourage you by Friday of this week to get it on your PC. Find somebody in your organization who will do an upgrade for you. You’ll be amazed.

It’s ready in terms of security and access control in ways that IT managers have been craving for a number of years.

And it’s ready in terms of cost savings. Between $90 and $160 cost savings per user per year in pure IT cost alone proven so far on our early adopter case studies. That’s significant cost savings right now to an IT department. That’s something you can have in an explicit discussion.

Secondly, it’s a very important developer platform. We didn’t do it right with Windows Vista. We were changing so much underneath the covers that it was very difficult for our developers to stay on top. We have over 5,000 applications in the market ready to ship. We worked very hard with every SMB large application around the world, and every large enterprise application in the world to make sure that we’re getting on top of any Windows 7 compatibility issues that are out there. We’re getting great feedback, and we’re working very hard.

I would articulate that if you know of other applications in your market that are critical for share on Windows 7, please let us know and we’ll take an effort to get after them.

Third, it’s a very important — again, our early adopters around the world, including Atos Origin, which is both a large enterprise customer for Microsoft with 50,000 employees, as well as a large IT partner for Microsoft here in Europe. Atos got all of the benefits of being an early adopter for Windows 7. They saw the cost savings, they saw the security and management benefit, and they have employee satisfaction with productivity.

But one of the things they told us that was most important to them is that by being an early adopter of Windows 7 they now feel empowered to understand how they can bring that value prop into everything they do out to their customers. So, I’d frame that up as a great opportunity.

And then finally and probably most importantly and it’s on the slide in terms of opportunity, we have seen PC shipments start to turn around. The early forecast is we’re back up onto an upward slope. We’re forecasting 150 million new PCs in the market this year. And we’ve got coverage for Windows 7 from great high-end PCs all the way down to netbooks, so you’ll see, if you will, a pre-install commitment by our OEMs around the world for Windows 7; 150 million PCs we expect to ship.

But look at the number on the slide. We think in addition to the 150 million shipping, there’s 250 million, almost twice as many sitting in place capable of taking a Windows 7 upgrade.

I don’t know about you all, but that’s not something I’ve talked to partners about in the past in the services market is, hey, go after the Windows upgrade. We talked about deployment on EAs, but here’s a great opportunity of in-place machines with hardware and memory that will support Windows 7 at a better way than either XP or Vista.

So it’s an incredible opportunity no matter what business you’re in to think about the Windows 7, if you will, in-place upgrade opportunity, coupled with the new PC shipments.

Next let’s go into one of the major areas that partners are telling me is probably the fastest cost savings conversation they can have, and that’s around Microsoft Unified Communications (UC) solutions.

Dimension Data recently completed a case study with Interaction, which is a hosting company that’s in 14 markets in Europe. They were able to demonstrate the cost savings by using Microsoft UC for driving internal and external user communications, driving down travel costs and driving up collaboration.

If you aren’t in that business today, I’d encourage you to make sure you understand how the Microsoft OCS [Office Communications Server] platform can be laid on top of an existing Microsoft infrastructure for a great services opportunity for you as partners as well as some incremental licensing opportunity in terms of the servers on top of an existing Enterprise Agreement.

The next major area we’re focusing on would be one of business intelligence and application platform solutions. I said business intelligence; I actually need to correct that. We don’t think of business intelligence as the traditional BI world. We’re really trying to redefine business intelligence at Microsoft around business insight.

So, with the launch of Microsoft SQL Server 2008 R2 and the upcoming launch of Office 2010, we’ve made significant enhancements both in terms of the capabilities to handle business insight on the back end with scalability and throughput of SQL Server and on the front end with Excel 2010 in terms of the concept of self-service BI, which I hope someone will show you onstage later today if you haven’t seen it already.

If not, it’s an area that has huge partner opportunity. It’s also part of the new efficiency. Customers have to understand better business insights so they can make better, faster decisions on where to react to the market.

I highlighted in terms of an opportunity this new license type called EAP or Enrollment for Application Platforms. I wanted to highlight that in the last two weeks we took our sales force in the corporate account space and our enterprise space, and they were thinking that if we close between 100 and 200 EAPs this year that we would meet our scorecard goal. Well, we just revised that target upwards to a thousand.

So, depending on what business you’re in, if you’re in the licensing business, we’ve got a goal of getting a thousand EAPs. In fact, our India team plans to close 100 alone this year in India. So, we have a thousand EAPs. That will create two things: a licensing opportunity for those of you in that business, and a services opportunity where we do get EAPs closed.

So it’s something if you’re in the application platform business or the business insight business, we believe we have, if you will, a licensing vehicle that in and of itself is worth having a conversation with customers about.

I want to go ahead and talk about how HP partnered with a Turkish customer, Arçelik, and the kinds of benefits they’re getting out of SQL Server 2008. Let’s run that video.

(Video segment.)

ALLISON WATSON: You heard the themes of new efficiency from that customer, but more importantly you heard how Microsoft had to team up with a partner — in this case it was HP, but it could be anyone else in this room — to compete effectively against Oracle.

We aren’t going to win and compete against Oracle unless we team up effectively, and we have to be incredibly tight because Oracle can leverage lots of salespeople. We are talking in the Middle East, Africa region there’s 300 Oracle consultants on the ground. We have somewhere between five and 10 from Microsoft. So we’re not going to compete against Oracle ourselves, we’re going to compete only as a joint team, and it’s an incredible opportunity, as you heard the customer say, but we have to go out there together and prove it.

The next major area I think you’ll find is an obvious one in many ways, and yet an unobvious one in others. SharePoint has been one of the fastest growing, partner-led businesses in the history of our company, and there isn’t a partner I talk to today that doesn’t make a great services business from SharePoint.

And there’s incredible opportunity left in what we’ve been doing with SharePoint, but there’s a new opportunity for SharePoint as well. And as you think about where you can leverage the SharePoint skills that you have when it comes to the new efficiency and what our customers are trying to do, think about the area of using SharePoint as an external-facing Web content management platform.

We gathered a set of, if you will, competitive recruit partners into a roundtable at WPC, and we wanted them to beat us up on everything Microsoft wasn’t doing right about our platform and our developer tools and how we really weren’t right for the Web. And we had a little bit of that, but the majority of the conversation involved a set of partners that had actually gone in and explored SharePoint, and they kept saying, SharePoint is a fantastic property for us to use, and here’s all the things that we want that are in addition to using it as an external Web-facing environment.

So, here again we have a partner, AKQA, who partnered with, and built an entire external-facing Web site using SharePoint as the vehicle.

So in this case you can leverage your existing SharePoint skills for not only more internal portal and collaboration, but also in the new efficiency as our customers are struggling to make sure they make their Web presence known, get more customers into their environment, and when they get customers into their environment keeping them and engaging them in the conversation. SharePoint is an important platform and one that I think you can leverage in ways that you maybe haven’t been thinking about in your business today.

The last area that’s a major revenue and share generator and competition in the next 12 to 24 months is around virtualization. Now, I’m assuming, I’m hoping everyone in this room already gets this slide and that it’s just, oh yeah, that’s Microsoft’s virtualization slide. We’ve built virtualization into Windows Server 2008 and with R2 we have Live Migration and some of the key features that we were missing, and we built it into System Center as a product platform that rides on top, and we have an enrollment called ECI. None of those words have “virtualization” in them. And we have a very big competitor in VMware that’s talking out about virtualization, and they’re talking about virtualization in cloud computing. Microsoft’s virtualization story is very broad and very deep, and we’re going very hard on it.

So, I wanted to highlight all elements of virtualization. It does make Microsoft’s platform for virtualization differentiated in the marketplace.

Again another example of a customer, in this case in Italy, the partner went in with Windows Server 2008 R2, and the customer has virtualized 100 percent of their servers. They’ve taken out 50 percent of their costs and they’ve removed 20 percent of the servers from their server infrastructure. That’s just one example.

I also meet with a variety of Web hosters, and once Web hosters start to go in and figure out how to manage their Web infrastructure in the cloud, they are always evaluating VMware. If we can get in there with Microsoft Hyper-V, it’s amazing the difference the Web hoster sees in the potential to virtualize their environment at a better cost and a better value proposition all up for their stack.

So there’s a pretty big opportunity with virtualization. I’d highlight it. I think it’s misunderstood, because we talk about virtualization, virtualization, virtualization. It’s important that you all understand it across the range of activities and talk about the new efficiency and taking cost out of our customers’ environments.

Those I would say frame up the most important revenue and competitive opportunities in the next 12 to 24 months. In every single area I just covered we have probably our best and strongest competitor in the marketplace that we’ve ever had. That means together when we’re out talking to customers, there is someone else coming in either the day before or the day after.

I was in Orange County earlier last week, and there was a big Northern Californian company coming to visit me the day after to have the same conversation with that customer or partner about how to grow business together.

I frame that up to emphasize that you need to be really, really focused on who you’re competing against, both at the technology layer and the services layer.

My final concept today is visionary orgs embracing change. And I like the Charles Darwin quote. I always think of it in my head as “the strongest survive.” That’s the rule of the species of Darwin. But actually the quote is that it’s not strongest of the species that survive or the most intelligent; it’s the ones that are most responsive to change.

So I want to frame up my last set of comments as I implore you to get into the software plus services game, not because it’s something Microsoft wants you to get into today, but because our customers are going there, the industry is going there, and if we don’t go there we aren’t going to be around on the other side of things.

This last segment is if you haven’t embraced software plus services in your business in a very real way today, and figured out what it means to you. If you haven’t trained yourself and your sales teams on how to talk to the customer about software plus services, then it’s something I’d implore you to go home and put on your agenda in the next 30 days.

A little bit about the momentum, and we show you momentum slides, but the slides get bigger every year. Because of the new efficiency and new economic reality, the hosted services market is expected to be a $16 billion market in the next two years. If you think about where that came from, it was virtually zero two years ago. Thirty-two percent of orgs are telling us today they plan to expand their SaaS usage.

And I would say most importantly on the right-hand side of this screen for everyone in this room is that 20 percent of enterprise e-mail is expected to be hosted in the next five years. If you put small- and mid-market into that number, it goes up to 50 percent. So, 20 percent in enterprise, 50 percent in small- and mid-market using e-mail as a hosted offering in the next five years.

We surveyed our partners out there. Forty percent of them say they’re moving rapidly to software plus services, and they plan to have a managed services item offering available in 12 months.

And yet when I’m out in the market talking to partners, what I find most often is that very few partners have actually really committed to software plus services. They’re communicating to it as a defense. I’d ask you today to think about how to commit to it as offense, and to think about how to move your business there.

Microsoft is committed to partnering in the software plus services market opportunity, and we’re committed to get you there with us.

So I want to reinforce at two high levels what our vision is and how we are talking software plus services, because I get asked this by customers and partners all the time.

Our vision, as you heard SteveB and many other executives explain over the last several years, is seamless experiences across your life. We’re spending R&D dollars on natural user interface and having seamless operating data and environment and experiences across the PC, the phone, and you’ll notice the TV. And at the back of that we believe the cloud infrastructure and the server infrastructure are required to make these seamless experiences work.

That’s the vision and where we’re spending our R&D and how you’ll start to see more and more technology from Microsoft released against this experience.

When we come out with Office 2010 later this year, you’ll see a new release of BPOS [Business Productivity Online Suite] on top of that that starts to understand the relationship between these, if you will, back-end user interfaces and starts to allow customizability between them. So, we’re on a journey and getting there.

What is our platform? Our platform is really these sort of, if you will, building blocks. The first is datacenters. It turns out Microsoft’s been getting very big in the environment of being a cloud-based or hosting-based company. We have opened 10 datacenters across the world, and we’re planning to open more either directly or with partners over the next few years as we plan to have, if you will, hosting capacity directly from Microsoft.

Additionally, we’re talking with partners across the world about how to build out their hosting capacity.

If you look at the sum of Microsoft’s datacenters, plus the sum of partnering datacenters running Microsoft software, you will see millions and millions and millions of instances of server capacity virtualized up and built for cloud computing established on the Microsoft platform.

So we have a global foundation, and we’re committed to the global foundation, and there are going to be very few companies that have the right global foundation to be in software plus services.

On top of that are the core building block services, in Microsoft’s case Windows Azure, which will be officially launching at the PDC in about a month. It’s available now in a technology preview, and it’s available to all Microsoft partners to start developing on.

But it’s the building block services that are taking Windows Server as the core and building it up for scale-up and scale-out, and Doug Hauger will spend more time on that. I encourage you to attend. I think it’s a really important session to understand Windows Azure as it relates to the businesses that you’re in and what our customers are asking for.

And then on top of that are really three core pillars. The first is that Microsoft will continue to invest in what we call Live services. That is our brand for consumers. We have a different brand for consumers than we do for our business customers.

Today, we have over 450 million users of Hotmail. We process billions of e-mail messages per day, and we have millions of users of Windows Messenger.

In the case of our Live platform, as you know, most of these products are consumed for free. Most of them are consumed by consumer choice. And you will see us driving innovation to make our consumer experiences more and more interesting.

In the second bucket of our online offering is Microsoft Online, and this is where the product Business Productivity Online Suite and its products underneath, such as CRM Online, come to play.

Those products are paid products. We’re differentiated in the market because we believe consumer products are free and there’s a set of Microsoft Online products that are paid.

When Google is out there competing against us in the marketplace, it’s very hard to understand what they’re selling for free and what they’re selling for fees. I think you need to know that and be prepared, because Google has one brand that they’re trying to bring from the bottom. We have two separate brands in the marketplace.

Microsoft Online Services are out there today. They will continue to grow. We’ll have not only an on-premise offering but also an in-the-cloud offering, and these companion offerings will go together in licensing, they’ll go together in terms of technology, and they’ll go together in terms of federation as we build out our vision.

I wanted to highlight the last thing on this slide in the upper right-hand corner, third-party apps and solutions. If you look at the screen real estate, that small box on the slide should actually be the biggest box on the slide. Because if you look at the vision of where we’re taking this cloud computing platform, far and away the biggest consumer and user of the cloud platform from Microsoft will be third-party applications and solutions that solve business needs for consumers around the world.

So as you think about the businesses that you’re in, the businesses that you want to get in, or partnerships you want to create with other partners, a core part of your strategy should be thinking about what applications you use that take advantage of the cloud platform both today and into the future.

Now let’s look at building a profitable software plus services business. I’ve got some data here today. It’s only on BPOS, and this is from 40 different installations by partners with an average seat size of around 150 to 200 seats. So it’s a relatively small deal size, probably much smaller than everyone in this room does.

But what our partners are telling us from the actual deployed environments is they’re making $167 of revenue per seat. As you can see it broken down in the circle there, consulting and migration and integration services make up about 60 percent of that $167, and the remainder 30 percent is made up of managed services and partner-of-record fees, which are recurring year over year over year. So that 30 percent recurring revenue comes in and just starts getting banked up. And part of building a profitable software plus services business is building an annuity business in the services business you run.

What I did on the right-hand side is I just wanted to spend a little bit of time with you to think about the business you could be in, just on Business Productivity Online Suite.

Imagine you add — I hope you will tell me I’m extremely conservative — five customers a year, and that each customer you added was going to add 250 seats of BPOS. I’m assuming that’s on the very low end of anyone in this room.

We did some calculations, if you will, of the partner-of-record fees you earn from Microsoft, as well as the services fees that you would earn if you earned $167 a seat, and you’ll see by adding five customers a year with 250 seats for three years, you’ll have approximately $300,000 in incremental revenue in a software plus services business.

I frame that up for you. You can use whatever numbers you want to put into a spreadsheet, but I’d encourage you and implore you to build a software plus services business, whether it’s a custom app business on Windows Azure, whether it’s a BPOS business or whether it’s a hosted opportunity business, now is the time to go into the business.

And we’re here to engage you and we’re here to support you in building that business because together it’s Microsoft and our partners. That is our strategy that we’re making our bet on.

I frame up on the next slide a whole set of things that we’re doing to enable you to build a business around software plus services. We have the profitability modeler tool. I did a quick spreadsheet on the prior slide, but we have a full profit model underneath that you can use with whatever assumptions you want. I have had partners justify their investments in S+S because they used this profitability tool.

We have the dashboard that allows you as you build a set of customers up using Microsoft Business Productivity Online to track where your customers are, when they’re up for renewal, and how much fees you’re going to make.

As I said earlier, probably the most important thing you can do is use the products that you’re selling inside your organization.

So we announced at WPC that every Microsoft partner who signed up for BPOS has 250 free seats of the service to use in your company. I’d again encourage you, depending on where you are in your business, whether you use 250 seats or whether you use five seats, please start using that technology inside your business so you understand it.

Partner Link is a feature that allows you to do marketing and embed yourself into the marketing toolset.

Admin on Behalf is allowing you to do administration across multiple customers on a console.

And finally I have Demo Showcase that’s a Windows Azure-based demonstration environment that you can use up in the cloud to demonstrate, whether you’re showing your applications, Windows Azure applications, or BPOS itself to customers. And again it’s an interesting way to show cloud-based applications to customers in cloud-based ways. You can really create any form of demonstration that you want inside that environment.

Next are two examples of what’s going on. Here we have our partner in France, Exakis, which worked with Crédit Immobilier de France on a Notes migration opportunity. In this particular case CIF wanted to evaluate what to do with their 30 branch offices and 3,000 employees relative to their core messaging and collaboration infrastructure. They went into an evaluation of Google Apps and Microsoft BPOS with this partner. This partner went in and took a very close conversation, and there was a very hard-core, very hard-core evaluation done between Google and Microsoft.

At the end of the day, obviously because it’s in my slide deck and I’m not up here representing Google, obviously we won the deal, but I’d frame up that Google was there. Google is in every one of our accounts. And if you’re representing Google, I’m going to get the guy next to you to come into the account and try to beat you out of there. It’s one of the important things. But Google is in our accounts. Fifty percent of mailboxes will be online in five years. This is a great example of a very large customer in France making the decision today. It’s important that you all go out there and make a plan to call on our customers together to talk the software plus services transformation story.

The next story is a little bit interesting as well. I assume many of you all know Mamut. They’ve been an important partner in Europe for us for a long time. They took a different approach. They got early on in the software plus services game with us and they said, we’re going to build our own applications using the Microsoft-hosted platform of offerings.

As you see it’s sort of the circle of Microsoft offerings that they’ve recombined into unique offerings for Mamut, serving small and mid-market enterprises.

You’ll notice some important things. On the right-hand side you can see what the customer-facing offers look like. They don’t look like BPOS and e-mail and other things; they look like business offers that small businesses are trying to consume in the cloud.

But notice on the left-hand side licensing per user per year of 200 to 800 euros, and the service agreement attach from 29 to 100 euros per user per month.

So Mamut has figured out a pretty profitable business serving small and mid-market using the Microsoft-hosted platform as the foundation for building their core business applications.

In closing, I want to frame up that all up I’ve covered the opportunities in the next 12 to 24 months, I’ve covered making a bet and hopefully framed up why software plus services is a bet you must make when you go home, and the final thing I want to close off with you on is that we’re in a tough competitive economy. We’re competing for share and we’re competing for share of our customers in the new efficiency.

I get asked, what are the characteristics of Microsoft’s most successful partners, and ones that will take us into the future?

Number one, you’re committed in our launches to deploying, adopting and embracing our technologies. If that isn’t part of the core plan you’ve been on, I’d encourage you to go home and think about how you deploy and adopt so that you’re better able to represent our products, as well as make gains for your own business.

The Microsoft Partner Network has a tremendous amount of resources available to you. And whether you’ve been coached on them directly or you have feedback from me about what you need to make it better, I’d encourage you to leverage the Partner Network to drive new business.

You’ve got to differentiate Microsoft not at the product level but at the stack level, because it is our value prop. It’s the stack plus the cloud that differentiates us from our competitors in the marketplace.

In terms of taking share, I’ve said it quite a bit, but we are going to be looking for partners that want to compete along with us. I think many of you maybe have an active and productive business on VMware because frankly we didn’t have the right thing to offer you up until this point, but now we do. So we’re looking for partners who are going to take sides and help us take share. Partners who are working together in our network, we have that benefit. Obviously you’re here today, so you realize the benefit of that.

Driving up customer satisfaction is critical, as Mark Hill said to you earlier.

And finally and most importantly for me is we need you to challenge us to make us better. Our commitment to partnering is unparalleled in the industry. It’s unwavering in terms of the future. And yet we know we need to do better at all times.

So, that’s my e-mail address, [email protected], and I’ll encourage you to challenge me, give me feedback, and also let me know your stories as you take share in the marketplace.

Thank you very much, and here’s to a great year. (Applause.)


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