ORLANDO AYALA: Good morning. Good morning. It’s a great pleasure to be here. Welcome again. Today, for the next 30 minutes — actually for the next hour Simon and I are going to focus on a very important topic.

My initial speech has been on several types of subjects, but today I couldn’t be more excited to spend the next 30 minutes talking about our customers. We know at the end of the day it’s the work we do jointly is the one that is going to take us to the next level of success, delivering that volume to the customer.

So I decided to title this presentation, “It’s All About Evidence.” We can stand up here and talk about many things, but at the end of the day when the rubber hits the road, it’s all about what did we do for that customer to do better. That’s what matters.

At Microsoft we started a journey very deep a few years ago about customer centricity, and I cannot be more excited to be here today to talk about some of the cases and some of the opportunities that we have started to enable in a very visible way to provide that evidence I was talking about.

Perhaps a good way to start is to think about as a company how can we bring new insights with respect to how we should look at the marketplace. The industry has this type of segmentation that in our opinion is actually quite insufficient. People talk about number of employees, number of PCs and all these things; the reality is that many of these elements of segmentation are actually quite artificial, customers don’t work this way.

Last year we focused on really thinking about this problem in a little bit of a different way. I’m not saying we’re discarding this way of making the segmentation on trying to find our best way to target customers, but I would say the industry is very insufficient these days on how we look at opportunity.

So as a company we have committed to look in a more precise way about how can we go and learn from customers, thinking about targeted opportunity in a different way and reflect that in the way we go to market, in the way we work with you to target that opportunity in a better way to deliver that customer value.

So you’re going to hear from us how perhaps an enhancement of this taxonomy can be done, thinking a little bit in a different way, asking for instance would it be a better taxonomy to think about server penetration in a customer, to really think about the complexity of the business?

A good example of this was the fact that we made a couple of visits out there — we made many visits — but one of those was in New England when we found this real estate company, very few employees, probably in the range of 40. Well, these people have actually nine servers and an IT budget of more than $300,000 a year. With the taxonomy the way it was before, we have never talked to that customer. But, hey, it was about the scenarios that these people were doing in real estate, basically managing real estate property, that we found out this segmentation and the way the industry is looking at it is quite insufficient. So we are taking it to a level of really understanding and we think there is actually a category of companies that a better segmentations could be companies with zero or one server versus companies with multiple servers.

So expect from us this has been a very important part of this job we’re doing to understand customer requirements in a better way, but this is just one part of it.

What will be the next element, which I think is very important? And when you ask me, in the last 12 months, Microsoft, did you make progress in several areas, we made some progress in some, and in some others we didn’t make as much progress as we wanted to. But one area I felt we really did make progress was really trying to understand that this segmentation causes a lot of distortion. People say, why do you talk about this little company sitting there with few employees? Well, I think again the industry is not doing very well in understanding that this is a whole value chain very, very connected. You may say, “I don’t sell to small businesses.” I’ll tell you I don’t think that’s right. Somehow down the road, somehow in that value chain, you are going to see your customer really reaching out to a series of companies as a part of that value, and eventually create that opportunity.

So when you look at it in this way at the market opportunity it really takes a different perspective, a different understanding to see how these pieces connect one to another to be able to really pinpoint opportunity in a different way. And that’s a piece of innovation that we want to be leading as a company out there, is really helping ourselves, helping our partners targeting better the marketplace in the context of more relevance to the customer, because that’s what really matters.

When you think about this ecosystem actually quite connected — it’s in consumers, small businesses, medium businesses and large businesses — you can create an incredible amount of scenarios that can generate tons of opportunity and that’s exactly what we are going to talk about next.

So I said in the end we’ve got to understand something, that there’s a lot of pain out there. Many of these customers are living through some very painful situations where data and information is really not available for them to do their business. So I wanted to share with you just an example of four things we are doing.

Customer wallows. You say, what the heck is that, customer wallows? Well, people say customer wallows — you go to Africa and the animals get into a pond and drink water and stuff. Well, it’s not that, we don’t do that at Microsoft. But what we do is really get into these meetings from our CEO Steve Ballmer and even Bill Gates, and we sit down and really go deep understanding these things and decide, for example, let’s go and visit 50 mid-market customers, and Ballmer goes out there to one part of the U.S., and we get the executives to go and talk and really understand what’s going on.

There are good rules here. One of the rules is I can say dumb things in these wallows, I’m not going to be blamed for that. So it’s really giving people the opportunity to come and basically be very open on how we share our experience with customers.

Another example, Microsoft Across America. We took this tour around 3,000 miles, visited 4,000 small companies out there, really trying to understand how they use technology, where’s the pain, how can they do better? I don’t know if you know that. You say, what the heck is that cultural anthropologist thing in that slide? I tell you we’re in the software business.

Well, let me tell you every business group is really trying to understand how to use technology, how hard, very professional, actually scientists that go out there and really try to understand behavior on how our products get used by some of these customers. Recently there was an article published by one of these individuals from Microsoft really featuring the opportunity to go out there and live with the customer for a whole entire three months, really trying to understand what they did, how they really used technology.

Another great example is the Small Business for a Day. It’s a program that we really tell our people, go adopt a customer, go with them, live with them, see what’s going on to understand what’s happening, what’s going to make the difference for them.

So this is an area where I feel very, very good. You heard Sanjay talking about technology — and we love technology — of course innovation is at the core of providing that opportunity. But in the end it’s really about understanding where is the pain to be able to resolve it that is going to make us great. We cannot be just good, we have to be great, and that’s around understanding the customer pain.

So I decided I was going to do something unique myself. I like the programs and I participate myself on this and I say what a great opportunity. I have a brother that’s relocated in the United States, and he bought a business, a hobby shop. And I said, hey, we say we are good, let’s show how good we are. Just walk out there and see if you can do a good job for my brother. And don’t think that selling to family is easy, it’s the hardest thing you can do, very hard because you’ve got to live with the decision at dinnertime and that’s not a good thing.

I’ll tell this story later on what happened, but I lived with this for around six months and I’ll tell you it was really, really a wake-up call. I call it from PowerPoint to reality, because that’s what it is. PowerPoint can hold a lot of its stuff — very good, PowerPoint, I like PowerPoint, I love it but trying to land that stuff to reality when the things can get really tough and hard. So I decided I’m going to move on the side of the customer now and I’m going to live it, and let’s say, OK, Microsoft, show me how good you are.

So let me just share with you a little video that I decided to capture just on my experience. Roll video.

(Video segment.) (Applause.)

ORLANDO AYALA: Well, the first thing I learned on the business issues is you do this involving a partner — I didn’t do it too well, being a consultant.

On a serious note I’ll tell you truly the amount of learning of this experience was immense for me, and I’ll speak a little bit about an example at the end of my next few minutes here, because what I really want to do now is I want to invite the partner who really helped us take this business to be a world-class business with the solution that we implemented using Small Business Server, our retail management product with partnership with a couple of ISVs.

So please welcome Dan King, the president of New West Technologies. (Applause.) Hi, Dan.

DAN KING: Hello.

ORLANDO AYALA: Good to see you.

DAN KING: Thank you.

ORLANDO AYALA: We have been working together for some time now.

DAN KING: Yes, we have.

ORLANDO AYALA: All right. OK, Dan, I know there’s a serious version of that video, which one day we’ll play. But I know there was a lot of learning for us just working on trying to take this to the next level. As you know, one point of margin in this business can be the difference between living and dying.

DAN KING: That’s true.

ORLANDO AYALA: It is very tough, close, the retail business is pretty tough. So you found our pain. Tell me about that pain.

DAN KING: Yeah. Well, the pains and challenges that we experienced when we did our discovery with Oscar and Jeremy and Abernathy was real common to other hobby shops in the industry and really small businesses that we encounter most of the time.

ORLANDO AYALA: No different from large businesses really in many ways.

DAN KING: No, I don’t think so. The payments and the cash flows were a challenge for them. They were using slow Visa terminals that provided a very poor customer experience. They had supply-chain management, which was very paperwork intensive. Their inventory management again was a manual process, fairly inaccurate due to the fact that a lot of human interaction, if you will. And also their Web store was a big challenge for them, again another very manual process.

ORLANDO AYALA: Dan, it was amazing how through the Web store, frankly, online presence accords with the ability of RMS, to be able to capture customer data and create the ability to learn more about customers, you truly address a lot of these pain points in a very precise way. So tell me a little bit about what you guys really did in terms of resolving these things.

DAN KING: Yeah, the Web store was really a key component to the whole sort of automation process and time savings for them. We really allowed the orders from the Web site to flow down into the RMS product automatically, saving lots of time there. It also allowed for more standard payment types, like Visa and MasterCard.

ORLANDO AYALA: They were using PayPal and it was a pain in the butt, frankly.

DAN KING: That was the only payment option they had before, and I think that was a big limitation for their customers. Also related to the payment process was the end-of-day settlement was a long process that they would go through, and now it happens automatically.

ORLANDO AYALA: Yeah, it’s amazing. My brother says, listen, this is just amazing — this gave me back time to have dinner with my family. Pretty amazing.

DAN KING: Yeah, yeah, he was pretty excited about that part, as well as really the customer loyalty component, because it allows all of that data to be captured into the system —

ORLANDO AYALA: Put your card, tax receipt is right there. So he was showing me — they’re building a very strong database of customers that they can go back. When the customer goes through a return, they don’t even need to show them the ticket, they come back and he has captured basically online so he can just know the customers gave me a good return.

OK, in terms I know you are expert, I know you have a MBS competency, I know you are an expert in POS and also in advanced infrastructure, but you didn’t have all the solutions, so I know you needed to do some partnering out there to do a great job for my brother.

DAN KING: That’s true. Yeah, we needed to bring in a couple of different partners in this environment to really round off a solution to be complete for those folks. So in the Web site we brought in Storefront to help with the Web site integration and then in the payment processing area, TPI Software, who is sort of an expert ISV in banking payment processing systems came in and really helped.

ORLANDO AYALA: There’s actually a couple of ISVs. One was a Web front.

DAN KING: That’s true, yeah.

ORLANDO AYALA: So with you two ISVs came together and I guess we produced a real amazing solution.

Now, I know that in the end, great, I think my brother is already quite excited about the opportunities here and how we’re going to take this to the next level. But for you I understand there can be opportunities. So how do you feel about taking this thing to the next level, from your perspective as a partner?

DAN KING: Well, from our perspective what we’ve done here is really created a verticalization to the RMS product for the hobby store industry. So since then we’ve been able to reproduce it.

ORLANDO AYALA: How many stores do you have now?

DAN KING: We have probably a half a dozen to a dozen hobby stores that we put in since then.

ORLANDO AYALA: So it was really the replicability of the solution that eventually will bring the greatest opportunity for you?

DAN KING: That’s true, yeah. And it allowed us to implement the project in roughly half the time we did before. So it makes us look good in front of the customer, and ultimately a great customer experience for them.

ORLANDO AYALA: OK. Well, Dan, thank you very much. On behalf of my family, the Ayala family, thanks for all the help.

DAN KING: Thank you.

ORLANDO AYALA: And I really appreciate the partnership, and this is basically making what I say, the ecosystem working for our customer. It was great to be able to partner with you, and I’m looking forward to doing even better — 13,000 hobby stores in the U.S. — let’s get them all.

DAN KING: Yeah, yes, sir. Thanks. (Applause.)

ORLANDO AYALA: Now, all this sounds like a Cinderella story — ah, I came here and solved the world’s problems. It was not without pain just to close the case. There was one little glitch from PowerPoint to reality in this case about the hobby store. My brother has a banking relationship that’s been a very strong relationship for a long time with Wells Fargo. And as part of the proposal we made at the company, we got a deal with Citibank that allows actually lower fees for the cards. When I told my brother he said, “Oh, well, that’s a great thing. You know, I definitely want to do that.” And indeed we made the change, he changed providers in terms of the bank provider.

And I received this call to my office. He said, “Brother, I know we did the video and it was so fun, but now you are there at Microsoft and I’m the customer, come here, because I have a problem.” I said, “What happened?” “So, guess what? My cash flow moved from overnight to four days. You understand you’re going to kill me with this? You’re going to go and see this stuff” — you know? It’s a good example of how as a company we came with a solution that included an opportunity to lower the fees but we didn’t have in our minds the fact that they live day in and day out on cash flow.

So again I wanted to share the whole experience because throughout this there was pain we learned from both sides and we are getting things even better. We went out there, we took the plan and we opened it up with more providers so now we have a better value proposition for the customer.

So this is the story of the small business. Clearly I could stay here on and on, on the benefits for medium, small business and others, but this is another very important case actually that happened in Denmark. And this is basically the agency of an association for engineers in Denmark where they have been faced with a lot of challenges with respect to the deregulation of how this association gets created. The opening of the European market has put a lot of pressure and they say we’ve got to add value beyond just providing this interface to negotiate wages with the government.

So we got together with HP and another local partner, and what they really wanted to do was to take their membership to the next level of value, to really be giving the opportunity to the engineers not only in Denmark but across the European Union to be able to share knowledge in a major way. So they moved entirely the membership experience, 100 percent of it, to an online type of capability. Again, they are facing this pain of change, how competition is coming, how the integration of geographies is happening and it’s threatening basically their business model. Again, this is the case of a larger type organization, more complex, with more servers but one in which the full stack of Microsoft products have provided a very concrete answer with respect to the business problem they have even being an association of engineers, which happens to be kind of a different, unique type of business.

So we’re very excited also here to the fact that again we got together with these partners, lived with them to understand what they really wanted and we were able to respond very precisely with respect to what solutions we’re going to provide them with the right answer; so lots of learning.

In the end, as I said before, it’s all about the scenarios. We can talk as long as you want, I was telling my brother’s small business, don’t talk to me about that stuff, I don’t know what you are talking about. I know about cash flow, I know payments; don’t come and talk to me about this other stuff. Yeah, just show me the money and then we can talk about other things. And that was without a doubt the most important thing that we were able to do for him is really relate to that type of pain that he was having. Pain in the case of this association in Denmark, it’s about integration, efficiency, the service evolution they wanted to make to remain competitive.

I push here the technology that really helps us. As I said, software innovation is super key. And as you can see in there, I want to reemphasize the fact that it was through partnering in completing the ISV solution can help in many cases to complete that solution. And, of course, on the partner side, to remain this impact in terms of the value that you added, the Microsoft Business Solutions was part of the solution in the case of a store, also in the case of this association in Denmark that’s really bringing the integration of all these pieces where you can really excel in the marketplace with us.

I am going to close by saying — not quite closing but in the next few minutes — by saying it is all about ensuring that we can multiply the opportunity. We’re making deep investments in the next 12 months in some very important aspects of how we’re going to do and go to market with you in terms of customer connection. We do dream to provide the solutions to 40 million enterprises, not just a few, not just IBM or Oracle or any of these people that want to sell very expensive boxes and services to a few customers; we’re in a different business. We want to sell to 40 million of them.

And we will add headcount and through you, you will be our sales force and our marketing force and services force out there.

So we are investing this year in a Web destination that we call it for now C3 — don’t pay that much attention to the name because we have not taken it out there, but it’s really a Web destination for our customers in which we’re going to craft many things for them, the ability to have protected access to that Web site in which they can see their licensing history and all the elements that can help those mid-market customers really do much, much better in terms of the relationship with us and with you. So we’re investing deeply in that.

In the small business we created Small Business Center under MSN.com. We have 12 of those Web portals already in place in different locations, we are going to go to 30 in the world all under MSN.com. Again, it’s a place where small business can go and relate to the solutions, the connection of partners, how we connect to partners, so we are making deep investment in this customer connection online so we can go broadly to create opportunities and connect you with them to generate this opportunity.

What is the opportunity for you? I truly believe the competencies that are going to be detailed for the next few days and in the next few weeks with you through our engagement in the field are going to be very important. That’s the cornerstone of our relationship will be around these competencies because they are the ones that are going to help you differentiate yourself.

In the case of Dan, he’s an expert on POS. He has the MBS competency, he can go out there and show that he has the right type of differentiation.

In the case of a small business, by the first half of fiscal year ’05 we are going to have this small business affiliation. We call it for lack of a better name a Partner Batch for Small Business, so we can really certify you with a series of training and marketing in sales, in the technical side to really certify to be an expert on the small businesses.

So again all this is partner opportunity. Demand generation, we’re investing close to $2 billion in marketing this year. A lot of this money is going to be scenario-based solutions that we want to go with you to market and do a great job for the customer.

Last but not least, we had an entire day with MBS yesterday, a very exciting time. I will tell you we have declared this fiscal year the year of ERP and CRM. This is going to be a banner year for MBS and we had actually record sales, ramping sales moving quarter to quarter and we are very excited to report that the close of the fiscal year was phenomenal for MBS and really appreciate your MBS partners helping us get there. Thank you. (Applause.)

So again we’re increasing this velocity. We want 40 million customers, absolutely we want them, and we are putting in all the pieces to understanding customer and understanding pain and understanding all the elements that we need to do really a phenomenal job on generating opportunity for us.

Now to close, in the end, as I said, it’s all about broadly delivering the best, undisputable customer value, that’s what it is. A little bit of the examples we gave today, you would say, what are all these other things that are in there. Well, to us they are beautiful opportunities for business, personal productivity, team productivity, improving operational efficiency. There are scenarios after scenarios after scenarios.

Why are we committing ourselves to do these and understanding customers? Well, I want to do that because I want to get to a point that I can give you a multiplier that is actually quite predictable: for every dollar of Microsoft revenue how many dollars are we generating in services. I want to get scientific about that. There will be scenarios in which that is one-to-one, there will be scenarios in which that is basically one-to-five, even one-to-seven. But we’ve got to get to that and understanding the scenarios are going to help us find that ratio, so we create the opportunity for you massively.

I was discussing with Dan we should understand what is this hobby store that really requires a server, that requires a payment organization, but that, I’m not trying to create complexity, that’s the business of IBM, they want to maximize basically services to create complexity that a customer doesn’t need and trying to resolve everything for the customer. What I am saying is there will be server-based scenarios in which we can actually deliver a great ratio of dollars to Microsoft versus dollars to the partner.

As I said, to close, in the end this is going to be about repeatability. In the case of Dan specifically, I said we learned a lot with this hobby store. The next game is we have around 1,300 of these stores scattered in the West side of the U.S. I want him to go out there in an increasing ratio, now that he did the learning with our hobby store, increasing it two to three times, that’s where the money is.

We just finished a series of studies around this. In fact, one was published in a lot of detail in Germany, which again if you have not seen the study I really encourage you to read it and we put it available to you, in which we have concluded, together with them after reading this stuff, that the average partner out there is having a ratio of $1 to 7.5 in services.

Let’s say I don’t go as aggressive as that if we really focus on repeatability. My goal in the small and medium business next year is $11 billion. In fact, I’m moved to create the opportunity to sell, let’s say, five times that. I see a $55 billion partner opportunity out there for us and we’ve got to get very good at this.

So we are here to create good opportunity for customers but in that process I really understand we have the accountability and the responsibility to ensure that you have a great business with Microsoft. I hope I have given you a sense of the approach we’re taking of understanding the customer and translating that into opportunity to that customer and to you.

Thank you and I’m looking forward to a great fiscal year ’05. Thanks! (Applause.)