ANNOUNCER: Ladies and gentlemen, please welcome Microsoft President of Entertainment and Devices Division Robbie Bach. (Applause.)

ROBBIE BACH: Good morning everybody. I want to kick off a series of discussions that focus in on entertainment, and the advertising world in the entertainment space. And I think probably the easiest place for me to start is to start talking about how we think about entertainment broadly at Microsoft. And that falls in the context of a vision for what we think of as connected entertainment. And the basic idea behind connected entertainment is whether you’re on a mobile phone, or on a TV, or on a PC, whether you want to play music, watch a video, play a game, look at your photographs, you’re going to be able to have access to all of that material whenever and wherever you want it, and to not have to think too mechanically about where things are stored, and how that’s managed, and what’s done with it.

Now, that requires a set of integration across technologies, and across services, and across hardware and software that we will drive, and have been driving now for several years, and will drive for three, four, five more years to make that vision come to life. But you are seeing the first seeds of that happen today. I think there’s a couple of characteristics of it that are important when we think about advertising, and we think about how that’s going to evolve in terms of reaching audiences.

And so I kind of think of three things on these lines, the first thing is that this environment of connected entertainment is the way it is because it’s intensely social. If you think about the audience of consumers that are growing up now, they are, in many ways, the most social audience we’ve ever had. And they want to experience their entertainment in a social environment, and they want to experience it with their friends, whether that’s in person or whether that’s virtually.

So if you think about something like our Xbox business, we sold almost 19 million consoles now in the marketplace. But the statistic that’s more revealing to me is, we have 12 million people who are members in our Xbox Live Service. And those people are there not just because they play a game, or download a movie, or have some entertainment experience, they’re there because their friends are there. And they are there looking for other people to work with. Right now, we have peaked at over a million people simultaneously playing games on the service. So you think about the wave that’s happening with that audience, and that number is just going to grow.

Likewise, take our Zune music device. We now have about 2 million people who are experiencing something called Zune Social, which is an online community where people are able to share their play lists, share their ideas, communicate, and experience music in a social context. So this whole social perspective is very important, because it’s bringing the audience. It’s going to bring the people together in a world in which companies and brands can then communicate their value propositions to them. So that’s the first thing.

The second thing that’s characterized as connected entertainment world is it’s very personal, and these people want to have a personal experience that’s customized to them. And here the whole idea from a media perspective is, how do we deliver a targeted message that people feel isn’t some generic, broad communication, but one that’s specifically targeted for them.

I’ll give you the example, we have a product called Media Room, which is our IPTV service. You see it under the AT&T brand U-Verse, in the UK you see it as BT Vision, in Germany, in Switzerland, and in other markets around the world. We’re the leader in that IPTV space. One of the cool things that we will be able to do is enable people, because it’s an IP connection, so we have not just an artificial video connection, but real intellectual property connecting things together, we will enable people to target very specifically messages to specific set of customers and individuals. That’s a personal delivery that’s very, very important.

Finally, this whole wave of connected entertainment is about interactivity, and it’s about people not just watching something, but experiencing something and participating in it. To me this in some ways is the most exciting thing from an advertising perspective, because I can be interactive in the ad, and the ad becomes part of the experience. In fact, from the consumer’s perspective it isn’t an ad, it’s just another thing that they’re experiencing that influences the way they think about the product, think about the brand, and think about things they’re trying to do.

So for us this whole area of connected entertainment is an ideal way to reach new audiences with new experiences, that we can think of advertising experiences, but that they will think of as just something that’s part of their social, personal, and interactive entertainment experience, and that to me makes it the most effective way, or one of the most effective ways, to reach people with new messages.

So let’s talk about that in a little more detail, and sort of drill down a little bit on it. One way to think about this is to look across the world of where people are going to experience this entertainment. We sort of think of there being a three-screen world. There’s the PC screen, there’s the TV screen, and then there’s portable devices, whether that’s a phone, or a portable music player, some other portable device, but a portable screen that people are working with.

Across those three screens we’ve been working to integrate both in the backend our advertising system, and the advertising work we do through both aQuantive, acquisitions we’ve done with Massive, and ScreenTonic, and work we’ve done internally with Microsoft, to really improve our delivery capability in the advertising space across all three of these screens. And we think that’s enabling us to develop richer advertising experiences. So what I want to do now is we’re going to through each of these screens, and talk about the PC, talk about the TV, and talk about mobile, and talk about how we’re reaching people in all those different environments.

So if you think about television, let’s talk about what’s going on in gaming. If you had asked me five years ago, six years ago when we got into the Xbox business would advertising be an important revenue stream for the Xbox business, I would have said probably not, I would have said gamers don’t want ads to interrupt their games, they’re sort of allergic to that kind of communication, they want to be focused and dedicated n what they’re doing, that seems like a stretch. Well, today I’m here to say that it actually is becoming a meaningful source of revenue and profit for us. It is becoming an important way for us to engage with gamers, and done right our gamers love it, and they think of it as part of the experience.

I go back to those 12 million members on Xbox Live, they are seeing, as we’ll see in a moment, advertising experiences that are a natural part of the environment, and they’re enjoying it. It enables us to engage with people who are what you’d call deep gamers, people who are playing games like Grand Theft Auto, or Halo 3, or what you think of as more hardcore games. But, it also enables us to reach audiences that are playing more casual games, things like Guitar Hero, or Rock Band.

Think about this statistic, 10 million tracks of music have been downloaded on Rock Band, 10 million tracks. So those are people who are online, on Xbox Live, engaging in music, and there is an opportunity to communicate and market to those people through that. So our job is to create an environment where the industry and our partners can reach that audience with a great message that fits with their gaming and TV experiences.

So to show you how we’re doing that, I’m going to bring Mark Kroese on stage. Mark runs our advertising group in the Entertainment and Devices Division. Mark is going to take us through some of the things we’re doing on the TV.

Hey, Mark.

MARK KROESE: Hey, Robbie. Good to see you.

ROBBIE BACH: So we’re now on Xbox, we’re going to start on the TV, and you’re going to take us from there.

MARK KROESE: That’s right. We’re going to talk really about how the Entertainment and Devices Division is really bringing new, new media opportunities to brand advertisers. If you think of like search and display advertising in the context of a Web browser as new media, think of what you’re about to see as new, new media, because it’s advertising that for the most part occurs beyond the browser, so in games, in video, music, and mobile.

So this is a three-screen demo, so we’re going to start on the Xbox and the TV, then move to the PC, then move to the mobile devices. And there’s really three recurring themes here. The first is really deep, deep user engagement, the second is results, and the third is this idea of value exchange between the brand advertiser and the user.

ROBBIE BACH: And that’s this whole idea of it being a positive experience for the people who are experiencing the advertising, not something that gets in the way of what they’re doing.

MARK KROESE: That’s right, very, very stringent in terms of what kind of things we’ll want to expose this Xbox gamer to here. Here you can see I’m signed in on the Live page with my gamer tag, and that’s there’s two ads on this page, one for Nike Spark, and one for Doritos. And I’m going to move over to the marketplace tab, and you can also see that there are two ads here, one is for Nissan. Nissan really had a great opportunity here to integrate their brand with the Nissan Forza II Motorsport Challenge. So here they connected with gamers in three different ways. One was by sponsoring the tournament itself. So all of a sudden the value exchange is, I have a chance as someone in this game to win a car.

ROBBIE BACH: Right.

MARK KROESE: So that’s a nice thing, that’s value. The second thing they did is they created a tournament pack. So here you can download a Nissan car into the gaming experience, and actually be driving around the game in this tournament pack. We had like 350,000 of these things downloaded, 6-plus million game sessions, so a lot of minutes.

ROBBIE BACH: And that means basically the gamers are not only engaging with the games, but they’re engaging literally with Nissan’s products in the game, and having that experience in an interactive way.

MARK KROESE: That’s right, driving a Nissan car throughout. And the third way that they’re connecting with the consumer is, if we roll the video here, they are  in the game they’re being exposed to Nissan advertising in and around the game. So there’s all sort of display advertising. As you know, with the Massive ad network, and Massive technology we are able to dynamically serve advertising into games. And so over 60 games do that now.

ROBBIE BACH: The thing that’s cool about this for gamers is, these tracks do have ads. It’s not like you put something in an artificial place, that’s part of the environment. When you’re in a baseball stadium, you’re at an NBA arena, you’re on a track, there are and there, and now people actually see them, and they’re interactive, it feels even more real.

MARK KROESE: It makes it very real.

Going beyond gaming, another way that a brand advertiser, McDonald’s, really connected with the Xbox audience is through offering a free video download. This is a very simple idea, where the gamer is accustomed to coming to the marketplace and actually buying a movie for download, and here McDonald’s said, hey, we’re just going to sponsor that, and you can just download Austin Powers, a very audience-appropriate game. And it has turned out to be the most downloaded movie on Xbox to date.

ROBBIE BACH: So here there’s more of a shared interest reference, where people are saying, hey, McDonald’s has provided me this opportunity, and that has some brand reference for me, maybe I’m going to go. This audience tends to eat at places like McDonald’s a fair amount, so maybe there will be some shared value that goes there.

MARK KROESE: That’s right. So it’s back to that idea of value exchange where it’s very clear to the gamer what value they’re getting. Let’s hop back over to the Xbox tab here. Now we’re going to show what we call a branded destination experience. If you were in the Web think of this as a microsite, but since this is beyond the browser, it’s something that we worked with Nike to build to launch their Spark Training line of products. So this is an immersive experience, lots of user engagement here, where the athlete or the gamer can come in here and check out different things, like you see I had my gamer tag, I had the Nike Swish here, this is where I downloaded it from. So there’s various things I can download. I can watch videos. I can actually even watch TV ads here. So this is all streaming, streaming video, from the Xbox. Let’s go check out one of the Nike football ads. We’ve found that this has been a very, very immersive experience.

(Video segment.)

ROBBIE BACH: And again, for our target audience, this is as much a video experience as it is an ad. They just look at that and say, that’s entertainment. Now, Nike looks at it and says, yes, and it’s my brand, and you’re going to remember my brand, and that’s going to pay back to me later on as you’re making your purchase decisions in the market.

MARK KROESE: That’s right. I mean, I bought some Nike shoes, but I didn’t run that fast. I’m still working on that.

ROBBIE BACH: I’ve got to work on the parachute.

MARK KROESE: So the last campaign we’ll show here on Xbox is for Doritos, and here we just completed a one-year campaign called Unlock The Xbox with Doritos, and this ad shows up in multiple places. A one-year ad campaign where we really capitalized on the interest in user-generated content, and we invited the Xbox gaming audience to participate in a user-generated game contest. So they got to envision whatever game they could think of that most personified the Doritos brand on Xbox 360, thousands of entries, literally thousands and thousands, and it was narrowed down to five finalists, and ultimately one winner, which was recently chosen.

ROBBIE BACH: Now, that winner then, that game is now in production, correct? We’re actually going to produce it and distribute it on Xbox Live Arcade.

MARK KROESE: That’s right. So gaming house NinjaBee is producing that, and it will be available later this year.

ROBBIE BACH: And here, again, you get the idea, Doritos is sponsoring this, but Doritos is actually in the game, and the gamer is engaged in building something which, you know, maybe they would never have an opportunity to do, and the outcome of their work, even if they didn’t win, the outcome of somebody’s work, somebody they can relate to, shows up and they go buy and play that game. So it’s a win for Xbox, it’s a win for Doritos, and customers feel like they’ve had a great experience in the process.

MARK KROESE: And to complement that highly engaged experience of thinking about the game and envisioning the game, this campaign also ran on Xbox.com, as well as MSN.com, so we had a combination of broad reach and deep user engagement. The results were just phenomenal here. In the end, Doritos enjoyed a 15 percent lift in brand awareness after one year of this campaign. We even went back to their marketing team and said, are you sure 15 percent? But they’re sticking by that number.

ROBBIE BACH: So if you can build these kind of experiences, whether people realize it or not, they are engaged in an advertising opportunity, and absorbing that, and reflecting that back in what we see in performance in the marketplace.

MARK KROESE: Right. It’s all about that value exchange. So there’s four quick examples, and I’ll be back in a few minutes to show some more.

ROBBIE BACH: Okay, great. Thanks, Mark.

So now we’re going to switch and talk a little bit about reaching consumers who are on the go. So whether this is on a mobile phone, on a portable media device, we’re also going to talk a little bit about he PC in this context as well. And so let’s think about that for a minute. I talked earlier about Zune, and we recently updated our Zune software and services, provided some new characteristics, some new capabilities. We are now seeing about 95 percent customer satisfaction with that product, and that’s not just about the device. Certainly the device, you can see one here, it’s a really nice device. We’re very proud of it, and we think it delivers what people want in the device itself. But for us the really exciting thing is the way the people are reacting to the software that’s on the PC, and this concept that we call Zune Social. And this is effectively a service on the PC. You sign up. You saw earlier a gamer card. We have the same equivalent called a Zune card in the music space, where you have a custom place where you can fill out your preferences, show and track what music you’re listening to, whether you’re listening to it on the PC or listening to it on your Zune device, share that with your friends, and really have a social experience around music. Now the cool thing about that is, we’ve just come out of beta, we have about two million people up on the site actively engaged in music, and it really does enable us to reach that audience, again, as you’ll see in a moment with new advertising opportunities.

But we’re not just going to stop at the PC. We’re also going to expand in the work that we’re doing in the mobile space. And we think mobile is a tremendous opportunity going forward. You think today about around the world about a billion phones will be sold this year, but really only about 100 to 150 million of those phones have some basic advanced functionality that would enable you to do a rich delivery of advertising, or some other type of medium. That number in the next three years is going to at least triple. So think in the next three years 400 to 500 million phones shipped in a year capable of delivering rich messages, whether those are ads, audio, video, what-have-you. Think of it in this context, the way you would have thought of an original Xbox game, those phones will have the capability to play those games. So think about the environment that you can deliver in that marketplace.

Today, we announced this morning that we’re expanding our display ad market into the Windows Live for Mobile space in the U.S., in the UK, in France, and in Spain. You’ve see the launch advertisers listed here. We think this is a great step in the process of building another avenue for people to reach, and another screen for people to reach. Now, again, like in gaming, you know if you had asked me three or four years ago, when I’m making a phone call do I want to get an ad? And the answer would have been no. But the fact is, the devices are going to be used for much more than just telephony, and because of the richness of the experience, if we can build the advertising opportunity into the experience, we think people will appreciate it, reflect it, and value it for the information that it delivers.

So what I want to do is bring Mark back up on stage, and he’s going to talk about what we’re doing both on the PC with Zune Social, and on mobile devices.

MARK KROESE: Awesome. Now we’re going to talk about this idea of value exchange, and how to take it beyond gaming and video on the Xbox, and into the Zune Social, and the mobile environment. So here we have a prototype or sort of a proof of concept demo, and this is going to go into a pilot later this year. So this is something we’re showing here that’s not broadly available. And we’ve taken the Doritos brand, and we’ve taken the liberty of saying, since that was the last campaign, let’s see how we would extend that brand advertising through the rest of this demo. But this is not something we’re actually doing with them. The last stuff we actually were.

ROBBIE BACH: It’s already done.

MARK KROESE: It’s already happened. So, okay, here we have a microsite that is  now we are back in the browser for the moment, and we have a microsite that is built around an event called the CMJ Music Festival, and it is a Doritos branded microsite. So the idea here is that there is this music festival called the CMJ Music Festival. It’s a five-day festival in New York, a thousand different bands, and what they’ve done is they’ve taken this hip hop star, Bun B, who is actually announcing a new album today, and they said, we’re going to make you the emcee for this event. So we think of him as your virtual DJ for the event. He’s the person that’s out there listening to all the tracks, figuring out what’s hot, and bringing it together.

So Bun B’s Zune card is right here on the page. So this is something that he’s inserted in the page, and if I, as a fan of this event, want to say, what’s Bun B think is hot? I can just go here and get a sense of all of his different recommendations.

In addition to music, he’s compiling some sort of musty video. So I can go ahead and see this video. You’ll see the Doritos brand front and center here. And this looks like a great thing to watch later, so I’ll go ahead and just download this, and check that out later.

So, again, this is the notion of value exchange. I understand the Doritos brand is sponsoring a lot of this stuff, and instead of trying to track it all on my own, I’m coming to this site.

ROBBIE BACH: So what you have here, each individual has a Zune card, but you can also use a Zune card effectively as a promotional vehicle, and as a way for people to get information about events, or sites, or whatever it is, and Bun B is the sponsor paid for by Doritos to make that happen for us.

Now, I can do this, this isn’t just going to be me going to look, I can share this with other people, right?

MARK KROESE: That’s right. Now you’re tapping into the very viral nature of how this all works. So if I want to go ahead and send a friend request, this means I’m going to go ahead and befriend Bun B. So whenever he makes a new recommendation, it’s going to flow down to my Zune card. We’re now kind of linked, if you think of it that way, right. I can also do something that’s more deliberate, which is I’m going to go, Robbie, and I’m going to send you this card, because I think that he is your kind of guy.

ROBBIE BACH: Yes, just me and Bun B.

MARK KROESE: Yes. So you should  and we’ll get to this later. So I’m going to go ahead and send you this as an e-mail, and we’ll talk about that in a few minutes.

ROBBIE BACH: Right. So this now starts a viral process where people can forward more and more information around more effectively. We’re not actually doing any of the marketing, neither is Doritos, but the Doritos brand is getting carried around.

MARK KROESE: Right. And that viral process will happen, of course, rapidly within the Zune community, which you talked about which is two million strong, but also it can extend to much larger social networks. So, for example, here I have my personal Facebook profile page.

ROBBIE BACH: That’s a very Hollywood looking photo, that’s very nice.

MARK KROESE: It’s amazing what you can do with Photoshop. I’m good with Photoshop.

ROBBIE BACH: It looks good.

MARK KROESE: And since this is my Facebook profile page, or I could do this in MySpace, what I’ve done is, I’ve embedded my personal Zune card in my thing, so I don’t have to go ahead and reinvent that or anything. So anyone who is now tracking what I’m listening to, since I’ve befriended Bun B, is going to go to the CMJ site and by extension be exposed to the Doritos brand.

ROBBIE BACH: Now, it goes beyond this, though, as well, because there’s a content offer that goes along with this, correct?

MARK KROESE: That’s right. So because we have a sponsor in Doritos, when I download Bun B, when I befriend him, and I sync my device, I actually get all of the songs that are his favorites downloaded to my device paid for by Doritos.

ROBBIE BACH: So, again, from the customer’s perspective, the fact that there’s a promotion here, and that seeing advertising is a good thing because now I get music, it’s on my device, and I can take it on my Zune device with me at any time.

MARK KROESE: That’s right. This is the third part of the way that the Doritos brand is connecting. You’re connecting in the Zune Social, they’re connecting on the Facebook or My Space site, and now we’re actually bringing that connection down to the device. So let me make sure we get the camera shot right here.

All right. So I’m going to go ahead and scroll into the social part, and now I can see that Bun B’s Zune card is on my device, and all of the music picks that he’s associated with it. So I have some Doritos branding attribution and all of Bun B’s favorite songs on my device with me.

ROBBIE BACH: So literally the brand we’re marketing here is traveling with us. So it’s going from screen to screen. We saw it on the TV, we see it on the PC, now we see it going to a mobile device. And Doritos is getting attribution across the way, and the customer is getting value at every step of the way.

MARK KROESE: That’s right. So that’s bringing it down to the device.

ROBBIE BACH: Right.

MARK KROESE: But, we’re not with devices. So the next way is on the mobile phone. So of course earlier I sent you an e-mail from the Zune Social, and so this is your phone, of course. Let’s see if we can get this lined up here for the shot. So we have the Windows Live page here, with Windows Live services, and I’m going to go ahead and go into your mail, into your Hotmail, and you notice as I launch this we’re going to see an interstitial ad, and this is for the movie Iron Man.

ROBBIE BACH: Right.

MARK KROESE: And as we see that ad on our way to our inbox it’s going to end up on the top of your inbox.

ROBBIE BACH: Right.

MARK KROESE: So I could click there and I could check out that ad, but instead what I’m going to do, being new here, I’m going to go ahead and check out this message from Mark. So it says, new message, and okay. Now what we have is we have an adver-game embedded inside this message, and I’ve got to be clear, from this point forward we’re talking concept demo here. This is not  

ROBBIE BACH: Doritos has been nice to let us put their brand, but this is stuff we’re still experimenting with.

MARK KROESE: Right. So this is an adver-game, and I’m going to go ahead and click on this. And this is  we’re going to have some fun here. In Entertainment and Devices we like to say we’re the fun in ad-funded. So we’re going to go ahead and launch this game. If you’ve ever played Asteroids, this is using Microsoft Silverlight, it’s all written in Silverlight, so if you’ve ever played Asteroids you’re going to 

ROBBIE BACH: It’s called Blow Up the Chips.

MARK KROESE: Yes, and again, to do this all I have to do is tap and now  

ROBBIE BACH: Here we go, let’s see how he can shoot on the run.

MARK KROESE: Okay. I can get the paperclip guy, no one ever liked him. Here I got another one. Okay. That’s should  I think that should qualify me for  so now what I’ve done is I’ve satisfied some requirement of the game, and I can see that Doritos is sending me a coupon. So we’re looking at that whole value exchange again saying, okay, I’m being rewarded for my participation. And since this is a touch screen phone you can just scratch and win, what do you know.

ROBBIE BACH: It’s magic. In fact, you won every time in the practice this week.

MARK KROESE: That’s right. I just feel like a winner today.

So now I have a bar code and I could literally take this into a retailers and go and scan, and get and redeem my chips. Of course, where is the retailer you might ask. There we go. So all of a sudden we have all the location-based services, and I can find out the name of the location of the nearest retailer.

ROBBIE BACH: And you can get directions there.

MARK KROESE: Get directions, do all the mapping, and so on, and so forth.

ROBBIE BACH: This is  think about what you’ve just seen, we started on the TV, and we went from the TV to the PC, to a portable music device, all the way to the phone, to a local retailer. And building  we did it in a couple of different campaigns, but you could build an integrated campaign that started from one screen, and went all the way to the other end of the spectrum. And all along the way the consumer has received value, they have had a positive experience with the brand, a positive experience with our product, and hopefully built some great affinity with our advertisers.

Mark, thanks.

MARK KROESE: Thanks a lot. (Applause.)

ROBBIE BACH: So, as I said earlier, mobile Internet usage is up quite sharply. You are going to see us be increasingly aggressive in building out those kinds of scenarios. That’s a concept demo, but not something that is far in the future, that’s something we have the technology, and we know we can deliver that. We’ve got to build the back end systems to make sure we can do it well for advertisers, but that’s something that is going to happen.

So when you think about, in summary, everything that I’ve talked about today, its actually relatively straightforward. We think there are screens and areas beyond the browser for people to reach. We think you can reach them, whether it’s on a PC, on a TV, or on mobile devices. We think there are integrated campaigns that can be built, that don’t necessarily feel like campaigns, and that don’t necessarily feel like advertising, in a world in which people want to be entertained.

And we can add real value to the customer, and real value to the advertiser in the process. And I think our goal, as I think about building advertising as a revenue stream in the business I run, our goal is to make it an open opportunity for advertisers, and for people in the advertising industry to really take advantage of an amazing target audience.

Thank you very much. (Applause.)

(Video segment.)

ROBBIE BACH: Now my role shifts a little bit. I go from being presenter to Tom Brokaw, I think. So this is the role I’m going to play now.

As you know, Starcom MediaVest is one of the largest marketing communications companies, we’re honored to have the CEO Laura Desmond here with us. She’s driving a lot of change in that organization, to reflect all the change that’s going on in the marketplace. We thought it would be a great opportunity for a Q&A session to share some ideas. So please join me in welcoming Laura Desmond. (Applause.)

So I know in the business that we’re looking at, Laura, in advertising there’s a lot of change going on. Mark and I tried to talk a little bit about that. But, tell us where you see the need for change in your organization and how you’re thinking about driving it?

LAURA DESMOND: Really, someone said it earlier, you have to eat your own dog food. And about three years ago we sat down as a management team and we said, all right, we’ve had a pretty good, successful 10-year run, media specialization, media as a business seems like it’s here to stay. Is past prologue? Can we expect the next 10 years are going to play out like the last 10, and the overwhelming answer to that was no.

We’ve sort of rapidly shifted in the last 20-25 years from media really was our focus. When I came in that was what I did. The first year, which was essentially what are the media partners saying, what are the day parts, really focusing on those spreadsheets. So we moved into brands, and as we took a look at where our landscape is shifting to, we finally said in 2005, we’ve got to be a consumer company, and we’ve got to put consumers at the center of everything we do, how we think, how we work, what we do. And so eating your own dog food really meant taking a look at our company and saying, are we organized around consumers, and are we ready to almost treat them, in a way, like our clients, and our clients will become our partners in the pursuit of great consumer relationships, and loyalty, and great consumer experiences that build their products and brands even more.

So as we started with that big ambition, if you will, we really said, you know what, everything is on the table, there are no sacred cows. We’re ready to reorganize our research. We’re ready to invest more in proprietary data. We’re ready to inspire and change the way we evaluate and motivate talent. We’re ready to explore and experiment into thought leadership areas that we wouldn’t necessarily have done before. We’re ready to build new capability and discipline, whether it be search, whether it be performance marketing, whether it even be creative, or connection experiences, if you will.

So it really started with the landscape changing, the 21st Century world of marketing is soundly about consumers. If you want to build core capability around consumers, you’ve got to be prepared to organized your company differently, which is what we took on in 2005. And we hope, we believe, we’re not content, that we are ready for a future world, which looks a lot different than it did 10-15 years ago.

ROBBIE BACH: Yes, I’ve been at Microsoft 20 years, and we’ve gone through a couple of those transition points, where you really have to think about the business differently. And there’s always this sort of moment of truth that comes when you then take that into the marketplace, and you’re getting feedback from partners, and customers, and the like. I’m curious, you’re sort of early, I’d say, in the relative terms in the experiment, but what kind of feedback are you getting, what are people liking about it, and what are the downsides, upsides? Talk just a little bit about that.

LAURA DESMOND: For us our moment of truth was really almost accepting a moment of vulnerability, which was the single most important thing when you’re going to be a consumer organization is recognizing and accepting that the single hardest thing in this new changing environment is to get their attention.

ROBBIE BACH: Right.

LAURA DESMOND: So as we focused in on consumer attention economy, as a real organizing principle, it was almost us saying, you know what, it used to be good enough to do reach and awareness, now it’s not, you’ve got to engage, you’ve got to get them to interact. So in some ways what we did first with our clients, because they are our partners was we said, you know what, we really see the world as going into a consumer attention economy. We really believe that traditional media, the way we’ve defined it, isn’t enough, here is our organizational design, and we asked for feedback. It was very iterative with them.

We have some really terrific trusted clients, like General Motors, and Proctor & Gamble, and Coca-Cola, and Wal-Mart, and we felt that that kind of open source feedback with them was critical to us landing on somewhere, because at the end of the day our employees work for our clients day in and day out. They’ve got to believe that their client partner is backing where we want to go, so that they can be a thought leader, too. So we were very iterative, and very collaborative in that respect.

ROBBIE BACH: And so what do you think, if you’re in the audience here, and you’re thinking from a marketing perspective, you’ve now run part of the experiment, what are the  I try to get things down to a list of three, or a list of five, but whatever the list is of things that you think are key insights that you guys have discovered in this process, that people should take away and think about in the context of their own business.

LAURA DESMOND: Sure. I mean, Kate talked about it a lot in the videos you saw. Twenty-four months ago we fielded a new research tool called Intent Track. And what we basically have said, beyond consumer attention and connections that captivate, the first thing we said is, we’re going to make a bet on intent. When you think about it, a lot of your business model, and the Microsoft advertising business model, is based on intent, it is based on consumer’s desire to do something, and activate digitally, or on the Web.

So we made a big bet around Intent, and we’ve organized research around what drives consumer intent, and what we’ve found is that intent works extremely differently in digital environments than in let’s say more analog environments. What we’ve found is that there’s a really big connection between different media that match to intent for different products.

So, for example, Kraft, one of our clients, for cookies and crackers the single biggest driver of searches is shopping lists. And we’ve mapped different media to how do you get to the shopping list. For Coca-Cola, we’ve mapped that to in-store, which is one of the reasons that we really think shopper marketing is critical, and you’ve got to meld that up with consumer market. So those are some of the things we found with that.

We spend a lot of time with measuring emerging media differently. Another huge bet for our company is something we’re calling The Pool, which is a real proprietary way of us measuring all kinds of different emerging media vehicles, with a real focus on advanced TV, and how consumers are engaging. What we found from that is it’s real simple, if you target better, if you target the message to a more specific behavioral target group, you can get lift, more than the old way. And I think everybody, and every client in this room, and agency would say, we’re doing a great job of targeting, but when we’ve been able to refine messages, and put them in exactly the right kind of spots with a higher composition of targets, we see an incremental lift.

ROBBIE BACH: In the digital word targeting means something different than it used to.

LAURA DESMOND: Absolutely, and I think the challenge is  for you is how do you keep refining it, and I think the challenge for us, to some extent, is how do we take what we learned, and we know that works, and then layer it back into whether it be first screen, or mobility, et cetera.

ROBBIE BACH: Yes, and we have to find a way to refine it in a way that’s comfortable for people from a privacy perspective, and at the same time enable you to do effective targeting, at the technical level.

LAURA DESMOND: Absolutely.

ROBBIE BACH: Let me ask you one other question. So you start through this process, you’re seeing what sounds like real benefit, people really engaging with you, what are the two or three things that surprised you, in particular things that surprised you that you weren’t expecting to be challenges, that you’re now working through these things? My experience is, you go through phases. You do the first phase, you make a lot of progress, you get 70 percent done, but you’ve got the next 30 percent. What are the couple of things that you saw that make you say, hey, we’ve got some new challenges?

LAURA DESMOND: A couple of things, I think over the last two to three years we’ve seen a real accelerated shift to our clients valuing, can you do it globally, can you do it at scale, can you do it fast, and can you take those ideas and just copy the hell out of them everywhere?

ROBBIE BACH: Right.

LAURA DESMOND: And so what that’s forced us to do is to not only organize our business differently, but organize  which is a big thing, but also organize our media partners differently.

ROBBIE BACH: Right.

LAURA DESMOND: So, for example, one of the things that we’re really proud of is really seizing a platform with global search, and doing that with one of our clients, we think, extremely well. Another thing that we’re trying to do now is say, okay, mobile is going to be global, and social is going to be global. So how do we get ahead of that curve, and what we’re finding, and honestly Microsoft does this well, what we’re finding is that some media partners are really able to go global, and innovate, and scale at speed, and some are not.

ROBBIE BACH: Right.

LAURA DESMOND: And I think that’s one of the advantages that Microsoft has, is you’re already a global company, you’re already a customer service company, and so what’s surprising us is we’re now starting to look at partners under a different set of criteria than the same old metrics like reach, and audience, and so forth.

I think another thing that surprised us is in this  again, if you’re going to be a consumer-led company, and you’re going to organize the way you work differently, and this is easier for our company, because we’re 2,500 people in North America, we’re 6,00 people around the world, we’re not a company of your size. But, if you’re going to do that you really better become an open source company pretty quickly, and you’d better listen to your people, and your talent differently.

We’ve actually started a different way of working. We give our folks access to data, and company information that might have only been held at the senior management level before. The reason we’re doing that is, if you’re going to move fast, if you’re going to move at scale, if you’re going to move globally, you’ve got to get everybody working off the same data about the company, and clients.

A friend of mine, and I love this quote, which is strategy is human. I think honestly, you can have the best organization design, you can have the best plans on paper, you can have the best data points, and the best pipeline to fuel your thinking, and if people don’t believe it, the talent don’t want to activate against it, it’s not going to happen. So we’ve really become a different kind of company in terms of the way we treat our talent, as a result.

ROBBIE BACH: That seems like the perfect place to stop. Laura Desmond, thank you very much.

LAURA DESMOND: Cool. Awesome. Thanks a lot. Thank you. (Applause.)

ROBBIE BACH: So in my continuing role as MC, just for the moment, I have the honor of introducing James Cameron and Jon Landau. These gentlemen are master storytellers, as you know. They both are Oscar winners, and they are working together on a very exciting project called Avatar, which is really about the future of 3D video, and changing the experience of the way people engage with video.

So we’re going to talk a little bit about that, give you some prospects on how things are going, and we’re going to start that by going behind the scenes, and taking a look at some of the work they’re doing.

(Video segment.)

JON LANDAU: We’re going to change the format that you’ve been used to. We’re going to just have a conversation and ask some questions back and forth amongst ourselves. What they just showed sort of touched a little bit on our relationship with Microsoft, but the relationship started not because of Avatar, but before Avatar in 2002.

JAMES CAMERON: Yes, going back a long ways. It was standing on the stage with Bill Gates in Los Angeles in 2002, introducing Windows Media 9. And I think because it was so media-oriented, and they saw it as being a way for people to acquire content, visual content, media content, I was there representing the visual side, and LL Cool J was there representing the music side. We were the kind of two show dogs that were there.

I must have stood up and said a couple of things about my vision for the future that made some sense to Mr. Gates, because all of a sudden I had Microsoft banging on my door, and asking if I wanted to work with them in some capacity, and then we spent a year figuring out what that might be, what our common interests would be, and we developed a fairly sound strategy to proceed, and it led to a number of really interesting things, from the purely visionary, think-tanky Rand Corporation kind of stuff that we were doing with Microsoft Research, looking at the ways people see, the way video can be compressed, and working with images and things like that on a very technical side, to some very pragmatic things, as was mentioned in the clip, developing a digital asset management system for production.

As I said, my terror was that we would lose our data, and we were entering into the single most complex, I believe, piece of digital production ever. We knew we’d be doing 1,500-1,600 shots for a movie two-and-a-half hours long, and every shot  many of the shots would contain not a single digital, or CG character, like a Gollum, or a King Kong, or a Davy Jones, this has been demonstrated, but hundreds, literally hundreds of photo-realistic CG characters, and every one had to be tracked for every take, every bit of capture, and so on.

So Microsoft threw software at us, and technology people, and we worked together, and I think we kind of were their sandbox to kind of understand film production at the cutting edge, and even beyond the cutting edge, because there were literally days when we were making Avatar where my technical group and I would just stop working, and we’d go sit in the middle of the capture volume, where we were working with the actors, and we’d just kind of grab some chairs, as we are right now, and we’d sit and talk about what we were doing wrong, how we were going to do it better, how we’d solve the problem. You don’t do that on a movie, normally, but we were so far out in the frontier, Lewis and Clarking through the wilderness, that we had to stop sometimes and just talk about how we were going to solve out way out of the predicaments that we’d got ourselves into on pretty much a daily basis.

Now, that made it very stimulating, that’s what I was there for was the challenge of that, and it was a lot of fun. I think as a result of it what’s emerging, what we’re seeing glimpses of now as we’re getting shots finished for this film, which we should mention comes out on December 18th, ’09, so we’re still deep in the process, we’re getting glimpses of the finished product, and it’s quite transportive. I think we can  I don’t know whether it will be a great film, or a bad film, from a narrative, or a critical level, but I can say with great certainty right now that it’s, on a moment-by-moment basis, the experience of it will be unlike other movies.

JON LANDAU: One of the things you and Bill talked about, I think, back in 2002 is that we have to set a higher bar for the consumer, for everything we sort of present. And I look back on movies that I wasn’t even involved with you on, and I think that you’ve always found a way to use technology to tell stories that cannot otherwise be told, and to present things to the audiences that couldn’t be told. So talk about technology and how that enables maybe?

JAMES CAMERON: Well, I think, first of all, all of my films have been about technology and about our human relationship with technology, even Titanic was about how technology lets us down and creates a microcosm of kind of the end of the world. But, of course, they’re always told in human terms. So it’s the human relationship with technology. That’s taking place on the screen, and it’s also taking place behind the camera, and I’ve always tried to be right at the cutting edge of what’s been going on.

With the Abyss, we did a photo reel CG character for the first time with human faces, and human expression. In 1990, it was released in ’91, Terminator 2 had the first all CG character that was a main character of a movie from beginning to end, and the first computer graphics on camera dialogue. And then, you know, Steven Spielberg ran with the ball a little bit with the Jurassic Park films, and created organic creatures that were generated in CG, and the whole thing kind of exploded after that. And with True Lies, we pushed the bar higher and higher with composite technology, and things like that. Then with Titanic, I feel that with Titanic, it was the first time that I, as a filmmaker, really struck the perfect balance between the technology and the humanity of the movie. It was something I had been working toward and not achieving. And I because I forced myself, and disciplined myself to do it, I don’t think the technology or the visual aspects of the film overwhelmed the human component, and it was ultimately the human heart of the movie that made the film the success it is.

And, of course, I’ve not forgotten that lesson. I keep that in mind every day on Avatar, because Avatar will be a big visual treat, and we have to keep that beating heart alive at the center of the movie. And I think that’s the best lesson for any filmmaker. The thing that’s interesting is, we’re all here today supposedly to talk about the three screens, but I’m on the fourth screen. I make content for the fourth screen. It then scatters down to the other screens, and there’s a very intimate and complex give and take feedback relationship between the other ways in which people absorb their media and the big screen, the fourth screen, the giant screen, the one that I make my movies for, and that’s a very complex dance. It’s one that gets more interesting as there are not only more means of digital production available to us, but more means of digital distribution. And some of them we’re just exploring now. But the interesting thing is that  and I’m kind of going off on a rampage.

JON LANDAU: No.

JAMES CAMERON: But I’ve been thinking a lot about this just sitting in the green room. The interesting thing is that we have this proliferation of ways of taking in rich media, videos, movies, and yet at the same time the actual movie business in the theater is still going strong. The exhibitors feel assailed, of course, but I would say that if you kind of valued up the revenues for what is lost to piracy, lost to the other three screens, then I would think that movies are doing better now than they ever have.

And I think it goes back to this idea of the social experience. You can have an HD screen in your home. You can see something that is essentially the same image quality on a pixel counting basis that you can in a movie theater, but people still want to go to movie theaters. And I think there are two reasons. One is social, you have to have something to do, and you want to do it with your friends, or on a date, or some kind of social relationship. And you want to feel a sense of the timeliness of a movie. Movies are not available before the fact, they’re available, sometimes you can download them day and date, but you have to go see it in the movie theater if you want to be hip, if you want to have your finger on the pulse of what’s going on, and talk around the water cooler on Monday morning.

So I think those two aspects, still good movies, great talent, but the social aspect is, I think, what’s changing the most right now because people want to talk about movies before the fact. There’s this whole kind of meta data surrounding movies, and these social spaces. People are talking about films, the little tidbits that they get, and this is a very, very powerful marketing possibility that the studios are just now waking up to is that there is this whole zeitgeist around a movie before people have seen the movie.

And it can be used to not only create a tremendous amount of anticipation, but it can draw people to the movie before the fact, and there may be some advertising extension in that as well, especially for advertisers that are connected to the movie through various promotional tie-ins and things like that. People are interested in downloading the trailers, and there are intense and global discussions about major movies before those films are released. And it creates a kind of a perfume or a stench around the movie before the fact. People often  I think they have a good sense of is this a movie that they want to see, and it creates the want to see.

So I think that it has a great deal to do with how we market the films now. Viral marketing is a critical part of marketing as we see the sunset of the power of network marketing for movies, you know, we have to have other ideas.

JON LANDAU: Now, one of the ideas that you had, and I think there’s an interesting parallel with what Microsoft has done with Windows, is you said many years ago, before we started this project, that 3D is the future, 3D is the future of entertainment, and you made an analogy of Microsoft and the Windows platform.

JAMES CAMERON: Yes. It’s interesting, we were talking in the green room, and right now I’m all about 3D. What’s sort of drawing me back to feature filmmaking after having been off doing deep ocean expeditions for seven years, and developing my stereoscopic camera systems, and so on, is the idea of merging what I learned shooting stereo for documentary features back into feature filmmaking. And I’ve been predicting for a number of years now, over five years, that the digital revolution in cinema projection is going to enable a revolution in stereoscopic viewing. And we’re seeing that right now, that’s coming to fruition kind of pretty much right on schedule, if not ahead of schedule. We now have a thousand digital 3D capable screens in North America. We’re projecting up to 5,000 ideally, and hopefully by the time Avatar releases in ’09, and the global exhibition community is lagging a bit behind because they tend to be more fragmented than the kind of monolithic structures that we have here in the U.S., but it’s definitely all happening.

So the question is, what happens next? We’re already seeing a shift to 3D in gaming, in console gaming. And, in fact, the game for Avatar will be offered, it’s being authored by Ubisoft, and they have figured out a way to have Xbox and the other guys that I shouldn’t mention in this room, both support very, very high quality 3D. And I’ve seen it. I’ve played some.

JON LANDAU: 3D stereoscopic, and not 

JAMES CAMERON: Not 3D graphic  see 3D is now, unfortunately, it’s a somewhat bastardized term, because the computer graphics industry has appropriated it to mean polygonally-dimensional characters that are generally speaking represent a two dimensional display. So I usually use, internally, you know, for our technical production team, I use the term stereo. Some people get confused and think that I’m talking about audio, I’m not talking about audio, I’m talking about picture, short for stereoscopy. But 3D, I think, is still the term the public understands the best. That’s caused a lot of confusion over time, and I think from a marketing standpoint we’ll still use the term 3D.

But it was occurring to me as we were sitting back there that what gave Windows it’s initial power, way back on day one, was that it organized information spatially. Things were on top of things. You would put the thing you didn’t want to be working on in the back, and you’d move the things that had the priority up to the front. And while there have been a bazillion bells and whistles written on that basic idea, and it’s been incorporated into every operating system, and so on, it’s still the fundamental idea is that we’re thinking spatially, but we’re not displaying spatially. And I think there’s a very good  if I talk about my vision of what could happen, I’m not saying it will happen, but I think what could happen, and I think people should be prepared for it, and they should have a strategy for it, what could happen is that now that the digital cinema revolution is taking place, which is enabling the stereoscopic renaissance, and DreamWorks has announced that all of its films, all of its animated films are going to be done  are going to be authored in 3D, and they’re going to be projected in 3D. That’s a huge statement. Disney has made a very similar commitment to do their animated films in 3D. And, in fact, Disney led the charge with some of the early 3D releases, before the platform really even existed, they kind of willed it into existence.

JON LANDAU: You willed them into thinking about it.

JAMES CAMERON: I had the cook’s ear at the time, and the guy who came up with the projection system that is making this all possible used to be a vice president of Walden Media, and the first film that Walden Media made under their new corporate banner was a little film called Ghost of the Abyss, which was in 3D. So I had these guys, I was evangelizing to them about 3D. They listened. This guy quit his VP job at Walden Media, went out and formed Real D, which is now the enabler for the technology that’s allowing this 3D revolution in cinemas. This is kind of  I’m getting there, but I’m going to get back down to the consumer level here fairly soon.

So this is all happening, this big kind of sea change out there in the exhibition community is happening. The big news this year at NAB, the National Association of Broadcasters annual get-together, and Show West, which is really more for the exhibition community, the big buzz was that the killer app is 3D. The thing that’s going to save exhibit or revitalize exhibition is 3D. So people are charging in that direction. The animated films are being made in 3D. More live action films will be made in 3D, Avatar is  I’ve already shot the film, it was shot in 3D, looks great, I think it looks really cool. I think people are going to really enjoy it. We’re doing the CG portion of the film now.

But what happens next? Well, I think gaming is going to be changed by 3D, and it’s a question of the consumer electronics companies are going to have to make players available, they’re going to have to make screens available. The Ubisoft people have the Avatar game running on Xbox, just a regular out of the box Xbox. You put on the glasses, and you’re in a first person shooter game, and you’re there. Especially given that it can run on the new big flat displays, plasma displays that everybody is buying now. The ones that are stereo-enabled out of the box, like the ones that are being shipped by Samsung right now, they shipped two million units that are stereo-capable monitors, this size right here or larger, I think they’re 50-inch monitors. You play the Avatar game on a 50-inch monitor, you put those glasses on, you’re in the game. It takes the first person shooter, or the first person player concept to a whole order of magnitude higher level experientially. There’s been a lot of talk about immersive media, this is the ultimate immersive media.

So it’s my fundamental belief that when you’re viewing in stereo, which is what we do all day long, every waking minute, we view in stereo, but when you’re viewing media in stereo, more of the cerebral cortex is being activated more neurons are firing, more processing is going on, more blood is pumping through the brain. And studies have been done on this. Learning rates are higher, engagement levels are greater. So what does this mean now that the technology is here, now that the camera systems are here, and now that the post-production and real-time switching technologies are here or being created to support things like Avatar, and 3D sports.

JON LANDAU: Talk about that just quickly, you know, your camera system has already gone out and shot NBA All-Star Game Live, and NBA Basketball Game Live, concerts, videos, there are opportunities for TV.

JAMES CAMERON: Hannah Montana, you know, which was a big hit with teenagers, cost $6 million to make and made $65 million. It was shot in two days with our camera systems, and basically created almost like a live shoot in the sense that it all had to run through a truck, and had to run through switchers that could handle the 3D, and all this technology is sort of being all whipped together now because the demand and the excitement around it is outpacing the technical development.

JON LANDAU: I think one of the things that you’ve preached, Jim, I think a lot of people have misconceptions of what 3D means and what stereo means. They often times think of it as gags coming off the screen. But really what you’ve been telling everybody, it’s creating a window into a world.

JAMES CAMERON: It’s a window. It’s basically, I’m sure many of you have seen stereoscopic content of some kind, whether it’s at a theme park or maybe in a movie theater, but the experience of it is that the screen goes away, and you’re looking through a window into a reality, which feels very palpable, and very immersive to you. So I think that what could happen is that as more content goes into the theaters, and more content is produced in 3D, and more people start jumping on the possibilities of sports in 3D, pay-per-view sports being sent to digital movie theaters that can actually play live images on a 40 or a 50-foot screen, this is a whole area that hasn’t really been explored yet, exhibitors are going to put in these expensive projectors. What’s different about the project they’re putting in from the projector they’re taking out that runs film, well, film is from last month, or last year, or 10 years ago, that digital image can be running live, and it can be running in 3D live. So you can be sitting there looking at something that’s like an IMAX 3D movie, except that it’s live, it’s a live event, or it’s a live play, or it’s a live concert. This is the alternative content portion of the digital cinema revolution that I believe will be enabled by both digital distribution to the theater by whatever means, over fiber, or downloaded from satellite, coupled with the stereoscopic revolution which is taking place right now.

So as there’s more content, as there are more stereoscopic screens, it’s a chicken and the egg, or it’s a positive feedback loop, more screens, more filmmakers want to play in the space, more successful films, attract more filmmakers to it, more content gets made, it’s a self-propagating reaction at that point. We’re not quite there yet, but I think we’re on the cusp of it, and I think that the people need to have a strategy for it.

Then what happens next after that? If you’ve simultaneously got people authoring games in 3D over here, that’s starting to put pressure on the consumer electronics people to build the screens, to build the displays, whether it’s small displays, laptop size, or big home flat displays, and so now you’ve got more authoring going on there, more content, pretty soon people are starting to get accustomed to the idea of viewing their world and their media stereoscopically.

So then what happens? Well this is where I’m getting out into some purely speculative territory, but I can envision a future, and not that far away, where broadcast television, news, sports, and so on, are all being delivered stereoscopically in HD. The technology is here now, it’s just a question of systems integration, and people willing it into existence over the next few years, and I believe that will happen.

So now people are thinking spatially, and they’re reacting spatially. And as advertisers, you need to think about how you’re going to utilize this new dimension, and this new engagement of the eyeballs, because we’re in the business of counting eyeballs. When you’re counting 2D eyeballs, the question is it’s not just how many impressions, but how deep are the impressions? The impressions are deeper in stereo for all the obvious reasons. And there’s plenty of good research on this in terms of learning rates, and retention rates with respect to watching stereoscopic images.

So I’m in some hypothetical territory here. I would like to remind, I like to tug on the hem of Microsoft and remind them that they need to be thinking about some future version of Windows that ships fully stereo-enabled that goes in concert with these devices, and that they should be talking to their various partner, and so on, technology partners, about this, and I think it’s going to happen.

JON LANDAU: One of the things I think we found, when you talk about advertising and people’s engagement, I think we deal a lot with visual effects, and I always felt that on Titanic that it was the first time visual effects were used to make people feel a part of history. And now with Avatar, we have the opportunity to make people truly experience something, because when you look at something in 3D, it’s one less suspension of disbelief, and everything plays more real, whether that’s our character, or advertising.

JAMES CAMERON: Yes, that’s really a good point, because what we’ve found  you know, we were a little trepidatious going into this that we were shooting a movie in 3D, and that many of the main characters would be computer generated synthespians, that they would be characters that exist only as pixels, only as ones and zeros. And we wanted it to be photo realistic, which we’ve accomplished, and literally to the extent that we just like to sit there and run the shots over ad over again because they’re so cool, we didn’t think it would be that good, honestly. But now that we’ve achieved it, you know, it’s put to rest a number of our fears, but one of the things that we discovered very early on in the process of looking at CG characters in 3D was that what looked pretty good, but still maybe a little tiny bit fake in 2D looked more real in 3D.

Now I call this a psycho-visual illusion that when you perceive the depth of something, your brain is queued hat it’s a real thing and not a picture. So even though there are flaws in the picture, the brain is being queued at another level, secondary information, that’s telling it that it’s real. And it’s discounting the part of the image that makes it look fake. So we were nervous going in that we would be shooting in high definition and stereo, people would be given more information, more visual information than they’d ever had before in a movie, and, boy, could we step up to that level and make our characters photo-real. It turns out that it actually works in our favor. So if your takeaway from that is the fact that when you’re looking at something in 3D you believe it more, it seems to me that this is a natural thing to support all kinds of media in 3D, whether it’s games, whether it’s sports, news, advertising, all of these things could be made more vivid, and create a deeper impression. I’m fully satisfied that that’s the case. I think presumably there should be some studies done to really verify this, but in my experience working with 3D for 13 years now since I did an attraction for Universal Pictures, Universal Studios called G2 3D, that was my first foray into it, so I’ve been in this game for 13 years now, I’m fully satisfied in the absence of empirical data that this the case.

Maybe this is something that can inspire some thinking about a kind of stereoscopic strategy for you guys when you think about advertising in cinemas, and as the technology develops to get into the home, get it onto small devices. One thing I should point out  is that our 

JON LANDAU: No, we’ve got time.

JAMES CAMERON: Okay. One thing I should point out is that the technology exists now and it’s quite good for small display devices to be stereoscopic without glasses, and by small I mean down to the size of a 50-inch monitor, as opposed to a movie screen. Some of the monitors that are shipping now require glasses, but laptop size displays and phone size displays, and Zune size displays could be auto-stereoscopic very easily, it’s just a question of licensing the technology and incorporating it. So I think that’s what allows it to be ubiquitous. People don’t want to have to put the glasses on to watch stuff.

JON LANDAU: Speaking of ubiquitous, one of the things that you wrote 14 years ago, you wrote your first script, I tell people it’s the first time in 30 years where our industry is creating a whole universe, a whole world that goes beyond just the movie. And one of the things you are incorporating into that world is that all of our displays in the movie are in 3D.

JAMES CAMERON: Right. Well, the future that we’re showing in Avatar, within the movie, everything is in stereo. Every  somebody pulls a snapshot out of their pocket, it’s in stereo. Every display device is in stereo. Every bit of data that people are interacting with in this future is in stereo. And so we’re having lots of fun formatting for that, figuring out, how do you do this, how do you feed people information in stereo, how do you prioritize spatially, and it’s actually been a lot of fun.

JON LANDAU: And we do even have some subtitles in our movie, which is how do you address text in stereo. We found that, again, easier.

JAMES CAMERON: You get this interesting effect with the subtitles. At first, again, we were nervous, is this going to be our Achilles’ Heel here, this story takes place on another planet that has its own indigenous humanoid population, and they don’t  their native language is not English. So part of the movie is subtitled, as we get deeper involved with this culture. So we started looking very early on at stereoscopic subtitles, and we found out that the text is very easily read, and very easily distinguished from the scene that’s taking place behind it in a way that’s not intrusive, is easy to take in, and it feels much less intrusive than when the text is pasted onto a 2D image because you kind of feel like you’re looking around it for what’s happening behind it, and it’s not interfering with what’s going on.

So I think, you know, what people I think are being conditioned to in their visual space is this idea of layering. They’re accustomed to this idea that there will be small displays on top of a primary image and there will be picture-in-picture images around that. And it gives them a feeling of power, in a sense, they can select where their focus, where their subject of interest is. And so taking that into the future, if we’re capable of using Z depth to do that as well, we can layer and we can layer spatially, and let people exclude spatially that which they don’t want to be looking at, but they’ll be taking it in subliminally. I think this will have an impact on how we format images, and how advertising is drawn into the visual space using stereoscopic tools.

JON LANDAU: I think digital technology has also given not just us a tremendous amount of flexibility, but also the theaters. We’ve talked about the theaters, and how it relates even to advertising, being able to repurpose very quickly once they convert to digital the specific advertising to show or show times even with just a push of a button.

JAMES CAMERON: I have this idea that the digital theaters, they’re being put in to support movies, that’s how the exhibiters think, and the exhibiters don’t have a lot of experience beyond that paradigm. But what you’re going to have is that in every neighborhood around the world, you’ll have potential digital gathering places. And if you look at any movie theater on a Tuesday night, generally speaking, even for the number one film, I guarantee, you go into a movie theater right now on a Tuesday night, and go into the screen that’s showing Ironman, it’s probably one of two screens in a multiplex, because they’ve got to account for the Saturday night peak load, you go in on a Tuesday night, there’s three people sitting in there. The room is basically empty. They could easily, using digital technology, collapse that down to a single screen, still have plenty of room, use that other room for something else.

So now you’ve got essentially this kind of new network out there, a very powerful way to reach people, provide them new content. Not going smaller and smaller and more portable, but creating  tapping into the social psychology of it, finding that village gathering place. Fuel costs are going up, we’re not going to be able to travel as much, just as a species. Global security issues are going to reduce the amount of travel. And for people to have the experience of seeing a famous ruins in Thailand, or the Olympics, something like that, they may, rather than pay $20,000 for a package vacation, they may be willing to spend a couple hundred dollars to go to a movie theater on a pay-per-view basis and feel like they’re there, because that’s what the stereo does. You’re not just going to view the content, you’re going to participate, and you feel very immersed, and you feel very participatory.

I think this is going to change the paradigm for how movie theaters are going to be used. I think it’s going to change the paradigm for how we shoot media visually, and how we manipulate it, how we author it, and I think we’re really just on the very leading edge right now of something that to me is very exciting, because I think that stereo production is the next big thing, because we think in stereo, we’re born being able to see in 3D, and most animals have two eyes, not one, and there’s a reason for that. It’s called natural selection. Stereo gives us an edge, tells us how far away that bison is before we’re going to throw our spear at it, so we survive as a species. So I think we want that edge, I think we want that survival edge in our media. I think you guys should want it in your advertising.

A lot of this is speculative. It hasn’t been proven yet. The parts of it that I predicted early on are coming true right now. So building on that base, I’ve always been most successful when I just followed my instincts and went down a path because it felt right to me. And so far I keep expecting to have somebody tap me on the shoulder and say, hey, stop this, except it’s working, we’re getting a lot of positive feedback for it.

JON LANDAU: It’s definitely working. One of the things, though, that I think no one can lose sight of, and you don’t, Jim, is you have to ground whatever you’re telling, whatever the message is, whatever the story is, whether it’s a narrative or an advertising, in something. It’s not about the technology that surrounds it.

JAMES CAMERON: Exactly. We can’t sell Avatar on the technology that went into it. In fact, I’m hoping that the studio won’t really show very much before the fact of how we did it, because it’s a bunch of people standing around in black leotards, basically, with motion capture markers on their bodies. I think that how it was done, peeking behind that curtain, isn’t as interesting as what’s on the screen. And I think one of the questions I constantly get asked is, how does all this new technology affect your storytelling? And the answer is really not very much. It enables the telling of stories that would have been difficult or impossible, or would have had to have been done in different ways. We can now pretty much visualize anything we can imagine. If you’ve got the money and you’ve got the time, if you can imagine it, you can do it. But you still have to have a great script, you still have to have great actors, and it’s still about the human heart of the whole thing.

You know, it’s the more things change, the more they stay the same. And the thing that’s interesting to me is, you know, there is some discussion of the three screens, and I make movies for the fourth screen, but they still filter down to these other screens. And movies are still a very, very powerful kind of spearhead with global reach, not regional, something global that transcends all cultures. Titanic was the number one movie in every country in the world that shows movies. And the second they could show movies again in Afghanistan, it was number one there years after it was initially released, when they threw the Taliban out the first time. So the movies still have this great power to kind of hypnotize an audience in a way that is unique.

And the theatrical experience is still unique as well, because as much as people seek out interactivity, and control, and socialization around something, which they do, and we know that. I mean, we’re basically all kind of social grooming monkeys, the way we behave, there’s a lot of chatter, there’s a lot of talk about everything. We all want to do the little kind of sanity check, is it okay to like this, is it okay to like that, before we actually have an experience. There’s something kind of sacred and unique about the theatrical experience because you’re sitting there, you can’t get up, you can’t change the channel, you can’t pause it, you can’t take a phone call, and it’s the one place, maybe one of the last few places in media, where you sacrifice the interactivity to have an overwhelming experience.

But I think people are treating it differently now. They want to talk about it after the fact. They want to talk about it before the fact. They want to share what they know. They want to share what they’ve seen. It used to manifest itself as going and grabbing your friend and taking them to the movie that you had just seen. Now it manifests itself as activities in the blogosphere, and sharing your reactions, and talking about it. So there is a whole social experience around that singular personal moment of watching a movie. Of course, these are all opportunities.

JON LANDAU: It’s also something that I think humans have seeked out for centuries and centuries, which is a communal experience. I think as we come up with devices that allow us to do so much in isolation, I think there’s still going to be that yearning to share that communal experience, and a comedy certainly plays funny in a room full of people laughing.

JAMES CAMERON: Absolutely, you don’t want to see a comedy by yourself.

JON LANDAU: I think, again, going back to the technology on advertising, you made an interesting decision interest eh beginning of the process and you touched on, we’re using what we call performance capture to create a lot of our CG characters in the movie, but you made the decision that we’re not going to use performance capture for any human character in the movie, because there’s an innate quality you want to be able to see. In other words, you don’t want to replace that with a synthesbian, you want to keep the human there. And I think that plays for everything we do.

JAMES CAMERON: Yes, I mean, we made a few decisions going in, we’re mixing live action and computer generated imagery, and computer generated characters, which sets the bar very high, we can’t hide behind some stylistic choice that’s kind of below photo reality, we have to match that, because the scenes have to inter-cut. But, the other choice is that the characters that we’re showing there, they’re humanoid characters, but they’re not human, but they’re played by actors. So for me the line we chose not to cross is to not animate the performances of our humanoid characters. They’re all captured performances, performed by actors. And so it’s the little foibles, the little things that people do, that they don’t even know they’re going to do right before they do it, that give it reality, and give it truth.

We have a remarkable cast. I think it’s going to be a tremendously emotional film, as well as a visual joyride. But, I think the point is, there are always going to be actors, people respond to people. People respond to people, and they respond to the kind of universals of the human condition. They want to be able to recognize something in that person up there on the screen that is a little piece of them, whether it’s an action scene, where they think to themselves, what would I do in that situation versus what the characters are doing, or if it’s a moment of great heartbreak, and you’re thinking, wow, something like that happened to me, and I felt that way, or I hope something like that never happens to me, but this is a chance for me to feel it as a kind of simulation before the fact.

This is the great power, the great spell that movies have. And they do it through that individual up there on the screen, who is having those feelings and going through those situations for you. So despite all this technology that we’re using, it’s still very much actor-driven. It starts with the actor. It starts with what’s going on in their eyes.

JON LANDAU: I think you touched on even our CG characters, that we’re driving them with human performances, because I think that what a great animator does, and what a great actor does are sometimes antithetical to one another. An animator forces animation into a situation, while Dustin Hoffman might sit there and do nothing.

JAMES CAMERON: And the choice is to do nothing, or the choice is to do something so subtly that it almost looks like they’re doing nothing, but they’re not. And that’s  those are sometimes some of the most powerful moments in films. So by having an actor be 100 percent responsible for the performance of a computer generated character, I told the animator, guys, I don’t want you to do very much, fix it when the data is bad, or maybe if a hand is not touching something it’s supposed to touch, because of the nature of the performance capture technology it’s not a perfect science, fine, you guys animate that. You can animate all the creatures, all the kind of flying creatures, and ground-dwelling creatures that inhabit this planet, but the humanoid characters are mine. Those actions belong to the actors, and it’s my job to mediate that, and make sure that that gets up on the screen without being diluted by downstream creative choices, performance choices.

JON LANDAU: And I think that applies also to advertising, to other mediums. I think that an audience is just more accepting when there’s a truth in the performance that you just sometimes can’t get it in animated character.

JAMES CAMERON: Sure, if you look at the evolution of visual advertising, and how there was certainly a period of time where it began to emulate movies more, and more, and more, almost to the point of telling little stories, and using cinematic type cinematography, and settings, and styles, because there was something that felt more truthful about that. You’ve got 30 seconds to sell that piece of truth, but it’s very effective, it’s effective in the same way it’s effective in a movie theater, where you can cast that spell for two hours.

JON LANDAU: Right. We are about at the time to wrap up, and I think 

JAMES CAMERON: Do you want to open the  

JON LANDAU: Do you want to open up for just a couple of quick questions, if anybody does have some questions before we say thank you to Robbie, and Bob, and everybody. Any questions from the floor?

Yes, sir, over here.

QUESTION: So the question is really more about the movie industry, because a lot of the movie industry obviously relies on sort of post-theatrical business models. What’s your vision for the future of that, and obviously there has to be something there, I mean, DVDs, things like that?

JAMES CAMERON: Sure, you’re talking about with respect to 3D? Okay. That’s one of the reasons that I’m hoping that 3D becomes more ubiquitous, is because it’s a reality of our business that the theatrical revenues are seldom sufficient to cover the cost of the movie, and we make our money downstream in DVD, and downloads, and network sales, and so on.

So for right now we have to offer the film in 3D, and in 2D, and we have to be 100 percent certain that the 2D experience of the film is still a world-class experience. We don’t want people to feel that there’s too much of a tier system going on, they’re not getting the real thing. And then we just have to hope that consumer electronic companies get in gear, and get the players, and the screens in the home. But, again, it’s understood why they haven’t, because there isn’t enough content. So, again, it’s a chicken and egg  

JON LANDAU: The analogy I would make, Jim, is sound, where I think that you had a marketplace where movies went into the home and had mono sound. That was all that was available. And now the consumer electronics companies have 5.1 sound, and it will eventually get there, and those films were presented in 5.1 in the theater.

JAMES CAMERON: Right. People are good consumers, they know that they will spend more money for a premium experience, but that they can have the stripped down experience and still enjoy it, and not pay as much money. And they know that’s true of their home system. If they choose to watch something on a portable device, they’re obviously not interested in the image quality as much as the narrative storytelling, and maybe the immediacy for them. So people select. They select the nature of their viewing experience. And ultimately what you’ll get is that people will be able to select for stereo, or they’ll be able to select for 2D.

Right now that selection is made for them, because the players don’t exist. The nice thing about, for example, Blu-ray, is it’s got tons of bandwidth, so you don’t have to compress the HD image very much, if at all, to get it onto Blu-ray, a Blu-ray disk, the whole film in stereo. So that’s a good thing, because there’s a lot of headroom on the disk.

JON LANDAU: I think we have time for maybe one more question. Is there another question somewhere? Yes, sir. Just shout, we’ll hear you.

QUESTION: A question, you’re bringing together technology and human elements. Do you visualize the whole movie before it can start, as you kind of bring all this together?

JAMES CAMERON: The interesting thing is that the technique we created to produce the visual effects shots had within it a very powerful pre-visualization capability. When we set up our volume  our volume is about the size of this room. And it contains 120 cameras faced into the center. And people wearing suits with motion capture markers allow us to capture all their body motion anywhere within that volume, and their facial performance is captured by a head rig that they actually physically wear.

JON LANDAU: With a video camera like Madonna would wear a concert mike.

JAMES CAMERON: Yes, it looks like a concert microphone, but it’s actually a video camera, and there is some very sophisticated downstream processing of that image that extracts the facial performance from that. But, the point is that in that volume we can do, we can create anything we want, we can switch environments almost instantaneously. So we’re not sort of going from soundstage to soundstage, to soundstage, to shoot that set or that set, we bring the sets to us. So we were able to go through and pre-visualize the whole movie, using doubles, essentially, kind of body performance doubles, for our actors before the fact. We’d shoot scenes, we’d block scenes, we’d change the environments around, move trees, move mountains, move buildings.

JON LANDAU: And Jim would have a virtual camera where he’d look through the lens, he would see not the actor standing in front of him, but a crude CGI representation, and not the stage, but the world. So he was actually the filmmaker. Our goal was to let technology enable a director, and not limit a director.

JAMES CAMERON: It became a VR space, and in that VR space I could interact with the characters in real-time, and I could see them as their characters. I could have done it with goggles, I suppose, but we choose to create a virtual camera system, which I basically hold in my hand like this, and point it, and I can zoom in, and that sort of thing. It gave me a way to kind of, in a sense, pre-visualize the shot. So that became our pre-viz, we called it scouting, or rehearsal, that sort of thing. We’d even edit those clips together and have a rough version of the scene before the actors ever came in. So we were well ahead of the curve.

Unfortunately, we didn’t have enough time to pre-viz the whole movie. So we wound up sort of pre-vizzing as we went, we’d capture for a couple of days, and then we’d go in and scout for a day, and capture for a couple of more days, because it took us quite a while to  it took us almost a year to get just our basic technology up and online. It was quite a mammoth undertaking. But, that’s how I would do the next film.

I would literally shoot the whole film first, edit it, before I work with the actors, and then bring the actors in, while keeping myself very open to what an actor will bring to it, in terms of new blocking ideas, and so on, because you have this great dexterity to change almost instantly. You can even go back to a scene months later and do it again, if you get a new idea, because the set exists in the computer. That’s why I asked for Microsoft’s help in creating the Digital Asset Management System, because every blade of grass, every vine in the jungle, every cloud in the sky existed digitally, and we had to be able to find it later. We created this whole world, in all its profusion of detail, and we had to be able to find it, and track it, and find what went with what shot, and what scene, and all that sort of thing.

JON LANDAU: I think this is a good time to wrap it up and say thank you to Robbie for inviting us, and we look forward to working with Microsoft in the future, and bringing a lot more ideas to fruition. So thank you all very much.

JAMES CAMERON: Thanks everybody. (Applause.)

ROBBIE BACH: Tank you very much, Jon Landau and James Cameron. One of the things that we talk about a lot in this industry, and in conferences like this, I think, is how digital advertising is the confluence of art and science, and how we’re trying to work, particularly Microsoft obviously, focusing a lot on the science part, but really trying to support all of you in both areas. And I’ve just been listening to Jon and James, just saw that incredible connection, obviously, how in their world incredible confluence of art and science from Titanic, and then all the way through to Avatar, and all that they’re doing there. So it’s very exciting.

So I wanted to just tell you briefly about what’s coming up next. As I mentioned this morning, we wanted  you told us that you wanted more opportunities for direct interaction with our technologies, and our people, you wanted to get your hands on some of the technology. So we do have Experience Innovation is what we’re calling it, and you may have seen some of it already, but as you walk out, around, I encourage you to explore completely the environment we have set up throughout the conference center. There are things on engagement mapping, and Ford Sync, and lots of different things. And also there’s food, so help yourself to that. And right after the break, which is a couple of hours, we’ll come back with Arianna Huffington, Cyrus Krohn, and Mark Penn, by the way, they will all be here in 3D, right here on the stage, and in deference to James Cameron, also, I’ll be back.

END