ANNOUNCER: Ladies and gentlemen, please welcome Mike Sievert. (Applause.)

MIKE SIEVERT: Good morning, everybody. Well, good morning. It’s certainly my pleasure to be with you. Thank you for your participation in Worldwide Partner Conference. Today I’m going to talk to you about Windows Vista and the technologies and the solutions associated with Windows Vista. My presentation is based on a pretty simple premise. It’s the premise that a major trend — a major trend that has confounded our customers for a long time has just changed and has just changed in a profound way.

For 20 years since this term “total cost of ownership” was first coined, it could certainly be said by our customers that desktop technology, PCs and the hardware and software associated with them, while driving major and incredible productivity gains for our world economy, have also been more a part of the problems than TCO than a part of the solution. All of that has changed. And what I’m going to talk about today is how the latest wave of Microsoft technology, Windows Vista, 2007 Office system, the Microsoft Desktop Optimization Pack, System Center and Forefront Security, all working together in concert, create a concept called the Optimized Desktop and allow us to assert in I think strong terms that TCO, cost and complexity, the trend has turned in a major way.

There’s an opportunity for every company in this room to bring customers an amazing value proposition and to monetize that value proposition along the way. Today, and this week, we’re going to show you just how to do that.

Now, I thought I’d start with an update on Windows Vista itself. In two weeks, it’ll be six months since the introduction of Windows Vista. And the way I think about the update is along these three points: Certainly, our first job was to generate excitement and awareness around the world for Windows Vista. And one of the measures for that is awareness.

Now, I’ve been in marketing for 20 years. And I have to say — and this is a sign of the impact of the product that we work on, and we have the privilege to sell. I’ve never seen a statistic quite like this one: 100 percent awareness among the target audiences that we measure. That’s more than 1,000 respondents, every single one of whom said, “Yes, I understand Windows Vista.”

But probably a better measure overall of the interest in Windows Vista has to do with the sales results. What has that awareness translated to? And the results have been fantastic. As of May, the last time we reported numbers to you, more than 40 million copies of Windows Vista have been sold around the world, by far a record for Microsoft paid-for software, and certainly outpacing XP due to the interest in Windows Vista, the pent-up demand, and certainly the largest PC market that exists today than the last time we did a major PC platform update.

Strong growth in our volume license businesses, that direct relationship that we have with Microsoft customers, usually facilitated by a partner. The most popular offering, software assurance, growing at strong, strong rates through the third quarter, enterprise agreements that software assurance relationship for our larger customers, again through the third quarter, growing at unprecedented rates, record-high renewal rates and sales of new enterprise agreements to our customers. Driven in part by interest in the upgrade cycle. People have decided that they will move to Windows Vista, and the question is simply: When?

And then finally that momentum itself around upgrades and adoptions in the last couple of months has really started to take off. You’ve seen the announcements from us of the major name-brand companies around the world now moving into multi-thousand-unit deployments just over the last couple of months. And it’s always the last stage. Why is that starting to happen? Because a number of changes have happened that make that experience great for the customers over the last couple of months.

Compatibility is now at critical mass with Windows Vista. You know, when we introduced this product on January 30, like all platform introductions, we had introduced it to a world that wasn’t quite 100 percent ready for it. There were compatibility issues that remained, there were driver issues that remained. And I can tell you that five and a half months in, that situation has changed, and changed materially.

The major critical enterprise applications are now addressed. I was on stage yesterday with a customer that had deployed several thousand units and reported zero compatibility issues, even with their homegrown line-of-business applications. Those companies that do have challenges with their line-of-business applications are actively working using the Windows Application Compatibility Factory in their own efforts to make small remediations to those line-of-business applications. The packaged products are largely in place now, both on the end-user side, with major coverage for the free and paid-for software, as well as major enterprise applications.

Device coverage is now nearly complete. Nearly 100 percent coverage of devices with drivers on Windows Update. And acceptance of the logo and choice by ISBs to differentiate using the certified for Windows Vista logo is at a strong pace. The thing I think that makes me feel like we’re in a very good position with Windows Vista is the experience that the customers are now having with the product.

Certainly, the product has a superior security profile versus Windows XP. Now, security is an interesting issue. It’s not an issue that I’ll ever stand on a stage and declare success around. It’s an issue that we humbly work harder than any other company on, and I can tell you that I’m very, very pleased so far with what we’re seeing with Windows Vista. It’s been a core design point, and it’s one of the major issues driving interest in Windows Vista among our business customers around the world.

And then the reliability. We have great technology in Windows Vista that allows us to see what issues customers are experiencing with their applications and how they work with the operating system, and to prioritize those issues with fixes in Windows Update, which is resulting in a great customer experience as measured by a number of different measures, including our own customer call volume in Microsoft call centers, which is materially lower than Windows XP, driven by that phenomenon as well as, certainly, the ease of use of Windows Vista.

But what’s the partner opportunity from all this innovation? Recently, IBC just updated a major study of theirs that showed that they estimate the partner opportunity from the innovations surrounding Windows Vista to be 22 times that opportunity that Microsoft can realize from the product.

Now, as somebody very familiar with the Windows P&L, I can tell you that’s 22 times a healthy base, and that comes to nearly US$300 billion in opportunity just next year, they say, for partners. How do I think about that opportunity? I think it falls into a few categories. Certainly, for those that develop software, it’s the opportunity to differentiate software with the certified for Windows Vista logo, to show customers that your software is betting on the latest technology.

It’s also the opportunity to decrease the cost to develop rich, immersive applications, using the Windows Presentation Foundation, and .NET 3.0. For OEMs and those that sell PCs, it’s the opportunities represented by the major enhancements in Windows Genuine Advantage, our strategy to combat software counterfeiting.

Based on responses and demands from customers, we’ve made major enhancements in Windows Vista that levels the playing field for our genuine partners who’ve been undercut in recent years by those that don’t play by the rules. And I’ll give you an update, a progress report on that in a few minutes. And for those in the services business, various types of services businesses, there’s a major opportunity ahead, as I said at the introduction, to reduce the cost and complexity associated with PC technology for our customers. A major opportunity to reduce the total cost of ownership.

Now, as most of you know, maybe you’ve read the same reports I have and studied total cost of ownership, a major analyst firm says 70 percent of the cost associated with managing and operating a network of PCs is around human cost, inefficient human costs, 70 percent. In two categories: one, the end-user-driven costs, things like self-support, peer support, downtime costs, security costs, as well as IT-driven costs associated with managing a complex network and keeping it secure, 70 percent. When you include all those different categories, as you well should, it comes to $4,000 to $5,000 a year per PC to manage a network of PCs. We can do better, and that’s what we’re here to talk about today.

The technologies of Windows Vista and those associated with Windows Vista, which we’re calling the optimized desktop, this firm that studied it says we ought to have the aspiration of targeting $3,000 a year, major, major improvement. If we can make it easier for our customers to embrace this technology, that’s what our goal should be.

Now, where does that savings come from? In my mind, it comes from three basic categories. The cost and complexity associated with deploying PC technology has taken a major turn with Windows Vista. Windows Vista Enterprise affords single-image technology. Microsoft’s guidance is that every enterprise should aspire to have a single image. Windows Vista Enterprise, in its ability to work across languages, across hardware platforms, as well as Microsoft’s Desktop Optimization Pack and SoftGrid application virtualization, working together in concert, can allow you to get your customers to a single image to drive major, major savings. And I’m going to show you how this SoftGrid application virtualization can help you with that in just a minute.

PC management. You know, PC management is a little bit of an art form because there are two opposing forces, aren’t there? On one hand, IT departments know that they must impose policies in order to drive out the inefficiencies of their network. And on the other hand, they know that they need, in a transparent organization, to give their employees the flexibility to do their jobs, to run applications, to access information. And so how do they manage these two opposing forces? We’ve made that much simpler with Windows Vista. More than 500 new group policy objects allow our customers unprecedented simplicity and customization.

MDOP, the Microsoft Desktop Optimization Pack, allow them to customize those group policy objects like never before in order to drive down the cost and complexity. Reliability and the technologies built in associated with reliability have a dramatic effect on up time for end users. That’s certainly an area of focus for the optimized desktop.

And then security. And I think everyone here should think about security in two ways, we certainly have as we’ve developed this wave of technology. On the one hand, protecting company data. And many of you know that in 2005 alone, more than 600,000 laptops were lost or stolen just in the United States, one country, 600,000 laptops. How many of you have received one of those letters, like I have, one of those letters from your financial institution, or a former employer? Maybe five percent of this audience alone has received one of these letters.

I received two: one from a former employer, and one from a financial institution saying, “Dear Mr. Sievert, we’re sorry. We’ve lost your personal and sensitive financial information, including your social security number, and we’d like to offer you a credit protection service, a $29 value, for free.” We can do better than that as an industry, and we have done better.

Windows Vista brings major enhancements in the ability to secure the data of a company, whether it’s through policy that allows you to secure the removable media in a company, whether it’s bit locker, part of Windows Vista Enterprise that gives you full-volume encryption and secures that data from prying eyes. And, of course, the other aspect of security is protection from malware, probably the single biggest driver of global interest in Windows Vista is the design points of Windows Vista that harden the operating system against attacks from malicious people.

And so what is the optimized desktop? I’ve been talking about this concept. It’s very simple. It’s Windows Vista working with 2007 Office system, along with the Microsoft Desktop Optimization Pack, System Center, and Forefront security. The wave of solutions that we’ve brought to the market this year as Microsoft and the opportunity that we have is to make it easier for every company in this room to bring this unified wave to customers in a way they can accept it and easily implement it, and that’s what we’re here to talk about today.

I’m going to show you how — and before I do that, I want to give you just a little bit more information on this desktop optimization pack, a product we affectionately call MDOP. And this is a product that is reserved exclusively for our customers of software assurance. It gives them extra value around systems management, management, security, and deployment of their systems, whether or not they have the complexity in place yet of sophisticated systems management software and servers in their environment.

If they do have those kinds of capabilities, it augments them and makes it better. And if they don’t have, it’s a great way to introduce customers, particularly the broad mid market to the value of systems management so that you can establish that dialogue and move them to more sophisticated solutions that augment MDOP down the road.

Just to give you a little bit of a flavor of the solution, I’ll show you a short video clip.

(Video segment.)

MIKE SIEVERT: All right. Well, I’m going to show you just one component of the Microsoft Desktop Optimization Pack, and you may have seen that we made a recent announcement of the availability of MDOP for both Windows Vista, new availability, as well as for Windows XP.

So I’m going to show it working on both systems, and I’m going to show you the core application, probably the most popular aspect of it, which is SoftGrid application virtualization. Now, this is a major enhancement in our ability to advocate that customers move to a single image, a core image, that should contain the operating system, Office, and that set of essential applications that every customer uses.

Other applications can be managed virtually and sent down to each customer’s desktop using Active Directory according to the permissions that your customer sets, or that you set, acting on behalf of our customer. That’s how SoftGrid works. And what I’m going to show you — I’m a Windows XP user. Now, I could be a user that needs applications that use different versions of Java. I could be users that need applications that use different versions of .NET or that conflict in the registry settings. This is some of the stuff that SoftGrid application virtualization is ideal for.

In my demo, I’ll use Office. It’s easier for me to demonstrate it with Office. Let’s say that I’m an employee who’s in the accounting department. And for some reason, I need an old version of Office, Office 97. I have a line-of-business application that requires Office 97 because of the macro structure.

And so this is the SoftGrid management console. I’ve switched to a server now. Now I’m the system administrator that’s going to give the employee, Mike Sievert, access to run Office 97, Excel 97, alongside Excel 2007. These are all the applications that I have sequenced using the SoftGrid console, and I have available to deliver to all of my users using SoftGrid technology.

What I’m going to do is go in using Active Directory to the account for Mike Sievert. I’m going to add him to the group called “accounting.” And I’m going to apply that change to Mike’s account, and now Mike’s a part of the group “accounting.” Using that console I just showed you, I had previously associated the accounting group with rights to certain applications, including that old version of Office.

And so I go back to the user now — not I’m at Mike Sievert’s Windows XP desktop. The next time he logs in — I’ll speed it up by going to the SoftGrid client and refreshing applications. That application is there and ready to run. Look at it. Office Excel 97, fully ready for me to use locally with no local, logical installation. Isn’t that incredible?

I can click right into it. You can see it launching down in the bottom. It’s streaming in in the lower right. And here’s my first use experience of Office 97. I’m just going to go in for the purpose of showing you a couple things, and I’m going to make a couple of customizations to it and put some tools down there. There are a couple of tools so you can recognize those. And I will exit out of the application.

And then what I’m going to do is I’m going to switch to a Windows Vista machine, because what’s great about application virtualization using SoftGrid is that the application rights are associated with the user through Active Directory, not associated with the machine. They’re never actually logically installed in the machine itself. And so I can go to a Windows Vista account. I’m going to log on as myself and enter my password. Maybe I was migrated to Windows Vista over the weekend. And when I log in, the rights to my applications, including the rights to my old version of Office, are right there waiting for me.

And better yet, take a look at this, it’s not just Office 97 ready to run and stream in, never logically installed in my system, it’s my Office 97, my state has roamed with me. Isn’t that incredible? We’ve never seen anything like this. (Applause.) The power of a customer to move their users to a single image and use this application virtualization technology to resolve conflicts and to give users all the applications that they need in a way associated with the user, using application virtualization and Active Directory, rather than being associated with the machines themselves.

So what’s the growth opportunity for partners from all of this? I think about it in three categories: First, the ability to win new customers using things like SoftGrid, the ability to introduce technologies and capabilities like I just showed you to customers, becoming experts in your area locally in these kinds of capabilities allows you to start a dialogue and a discussion.

Being first and best at deployments on Windows Vista and understanding the capabilities and how to unlock them, certainly, can help to start a dialogue. But it’s also about driving bigger deals. And we all know that it’s more valuable to have a relationship with a customer than a set of transactions with customers. And so it’s — these technologies represent an opportunity to move beyond selling volume licensing, or selling discrete deployment deals, and establishing an ongoing relationship, moving customers to the optimized desktop, and helping them unlock all of the power and cost and complexity reductions that the optimized desktop represents.

And also, lowering the cost to serve, the cost to find customers and the cost to introduce them in an easy way to all of this technology. And that’s really been at the core of the announcements that we made this week in Windows Partner Solutions, a new set of capabilities that we’re bringing to the partner community to give you the ability to bring the optimized desktop to your customers in an easier way than ever before. What are the major components? Well, first is the optimized desktop essentials. Essentially, guidance from Microsoft on what is the optimized desktop, what’s the essential suite of hardware, what’s the needed hardware, as well as software in order to unlock the capabilities and reduce the cost and complexity of the network. That guidance allows you to move from a license sale to a higher-margin solution sale with the customer so that you can bring them this suite of solutions in a seamless way, the marketing materials, the guidance, the best practices all together.

The second is something we’re calling the Managed Optimized Desktop. This is our set of thoughts and guidance on how to build a management business around the optimized desktop so that you can take more direct responsibility as a partner for unlocking this value for the customer directly, moving beyond the license sale or a solution sale into an ongoing management agreement with your customers to outsource certain capabilities and bring them these services so that they can experience the value of the optimized desktop.

Two tools that we introduced this week to help you with this are, first, the Windows Vista Business Value Assessment. This is a great tool that I urge you to find out more about during this conference. This allows you to establish that essential discussion with your customers, to sit down with them and help them assess in their specific environment the potential for value creation from implementation of Windows Vista and related technologies, as well as the Windows Vista Hardware Assessment 2.0, an update to our hardware assessment tool, that allows you to help customers up to 25,000 PCs to assess their system-wide hardware and understand which PCs can be upgraded and which should be replaced through their upgrade cycle.

So I promised I’d update you on one last aspect, and that’s the fight that Microsoft is undertaking versus software counterfeiting. And now I know many of you, obviously, understand this issue very deeply because you’ve been the ones who have urged us to take a stronger stance in this fight, for obvious reasons, to level the playing field.

But for the uninitiated, I thought I’d put three facts up here and see which ones you think are the falsehoods and the truthhoods. And so which one’s the lie? Go ahead. Commit yourself, put your hand in the air with a number and commit yourself to a number, what is it? One? Two? Or three? Go ahead. That way you can be proud of the person next to you seeing which one it is. Which one’s the falsehood?

Well, for those of you that mentally or with your hand said number three, you were right, because software industry losses to piracy actually total closer to $40 billion. And, yes, 35 percent of the industry is associated in some way with counterfeiting, and 60 million PCs a year wind up with some form of counterfeit Windows on them.

What are Microsoft’s objectives here? They’re very simple. One is to protect the value of intellectual property. And this is pretty obvious. We’re an innovation company and so, obviously, it’s very, very important for us to take steps and measures to protect the intellectual property surrounding that innovation.

Secondly, as I said before, it’s about helping partners compete, and that’s why I wanted to provide this progress update. As I’ve traveled over the last two years around the world, particularly OEMs, distributors, system builders have urged me, have urged Microsoft, to take a stronger stand. It is tough to compete out there versus software counterfeiters that’ll deliver a PC without a genuine copy of various forms of software, including the operating system, and undercut genuine providers, legitimate providers in price. That’s been a tough situation, and this update is about showing you the steps that we’ve taken.

But it’s also about protecting customers. Our data on this is very, very clear. Tampered systems where the licensing layer has been tampered are also systems that are likely to have been tampered and injected with spyware and malware. That’s a very clear truth that we’ve discovered. And so it’s about partners, it’s about customers, and it’s about the intellectual property of Microsoft.

What’s the update? The technology in Windows Vista is dramatically different, dramatically different in three ways: One, activation is required. Now, for most customers, activation happens automatically because it happens at the point of PC manufacture, using a genuine product key that’s associated with that PC at the point of manufacture. For others, they need to enter the key with keystrokes within the first 30 days, and that’s a mandatory step in order to be able to keep using the software.

The second important update that we’ve made with Windows Vista is a concept called validation, ongoing validation that that original activation was done with a genuine key. We’re fighting software counterfeiters that use the Internet to keep cracked systems cracked, to keep those systems up to date and to try to foil anti-counterfeiting measures. And so we use the Internet to keep up with that, to make sure that those keys that were used to activate are, in fact, genuine keys. And if they’re not, to force an activation state, again, to enforce our rights to genuine software.

And then finally, tamper detection. The technology built into Windows Vista actually looks at the licensing layer, and if it detects tampers in the licensing layer, cracks in the layer, it will then take steps to put the system back into a reactivation mode, requiring activation with a genuine key. And so these steps taken together are the update that we have on Windows Vista, and they represent a major opportunity to level the playing field.

And the feedback we’ve received since we’ve been out telling customers about this has really been great. People understand that this has a major impact on their business as we move to implement these technologies in Windows Vista.

My call to action for each of you, if you’re a distributor or an OEM, it’s to make sure there’s broad awareness of the technology. If you’re a service provider, to make sure your customers are aware, because as we begin to start implementing responses to breaches in the software licensing lawyer, we want to make sure that people aren’t surprised when we implement the technologies in Windows Vista and move the industry forward together.

So that’s been my general update. I wanted to make sure to underscore, and I’ll leave you with the basic point that I started with, that this major trend in our industry, this trend of the cost and complexity associated with desktop technology being a source of TCO instead of a part of the solution of TCO, that trend has changed. The way it’s changed is the optimized desktop, that essential suite of innovations that come together in this latest wave of software and implemented in a customer environment can drive major, major enhancements in the cost and complexity of your customers’ networks and, therefore, a major business opportunity for the partners that bring them there.

How do I know? Because we’ve been out with our biggest customers around the world implementing this set of solutions for the last year, selling these solutions to our biggest enterprise agreement customers. And I told you about the sales results. Customers are voting with their dollars for the optimized desktop. This set of announcements this week, Windows Partner Solutions, is about bringing that major wave of innovation to you, and making it easier for you go bring it to that much lager mid-market customer base that so desperately needs the innovation of Windows Vista and the optimized desktop.

I urge you to attend these sessions. Come to these sessions. Learn more about the Microsoft Desktop Optimization Pack that I demonstrated to you. Bring that key we gave you with you because that will make it more fun and give you a chance to win, and I certainly hope that you get a tremendous amount of value out of this conference. It’s been a pleasure to present it to you today, have a great session. (Applause.)

END