Speech Transcript – Bob Herbold, Piper Jaffray Pacific Northwest Investors Conference

Bob Herbold, Executive Vice President and Chief Operating Officer

Microsoft Keynote

Piper Jaffray Pacific Northwest Investors Conference

Seattle, Washington

March 10, 1998

Thank you very much. It’s a treat to be here. There are three things I want to talk about this morning. First of all, the information technology industry in general.

Secondly, we’ll say a few words about Microsoft and some of its products.

Thirdly, I want to talk about what we call the next mass media.

This industry is really incredible. If you look at it from the context of telco, hardware, and software and you merge the three together, what you realize is it’s about the fastest growing business sector in the world. In 1997 it passed a trillion dollars and during the period from 1991 to 1997 it registered a 44% increase. This is quite an industry.

In fact, from the standpoint of looking at it over the next couple of years, what you see is, with the usual kind of projection rates that we envision, this will become the largest industrial sector by the year 2000, with about $1.3 trillion dollars of revenue associated with it.

The basic phenomenon that’s driving all of this is quite simple-

people love to use these technologies these days because they can do some amazing things with their companies, their organizations, and their homes as far as running things as well as providing useful information during the day, entertainment, etc. You think about the notion of an intranet, which is a firewall based system that companies can implement within their organization to provide all of their employees data in an incredibly convenient way. You look at the cost savings opportunities and the efficiencies as far as providing people information when they need it. It’s incredible what you can do these days using these application tools as reengineering devices. That’s what’s really driving the growth.

I’ll speak a moment about the software industry in general. If you include telco and hardware as well as software, you see some very aggressive growth rates.

If you focus just on the software industry in this country, what you see is amazing growth from 1990 to 1996.

A 71% increase in this industry in jobs.

And I can tell you right now there’s well over 100,000 jobs going begging that are simply vacant because we’re having trouble as a country coming up with enough candidates. So there are a lot of creative ideas out there, as far as training individuals and getting them qualified for this industry, because we need them badly. Also if you look at it from the standpoint of the number of software companies, you see the same kind of increase, an 81% increase in software companies from 1990 to 1996. This is a very healthy industry. Now here I’m talking just about software, not including hardware and teleco.

Huge figures and they continue in 1997. This industry is just bubbling with innovation and lower costs and the winner here is the end-user.

Now, in terms of basic trends, the technologies do us a lot of favors. Look at PC prices in and of themselves. Back in 1990 you could buy a machine that had 60 megabytes of hard drive, a 386 chip, 33 megahertz and you could pay $3,000 for that. Today you can buy a Pentium MMX and it would retail for less than $1,000 and, in fact, you would get 2 gigs of hard drive and that would be about 133 megahertz.

On the right I list the unit shipments of PCs in and of themselves. Now this is a controversial subject always, in that we’re all betting on the growth rate of PCs. Every week in the Wall Street Journal you’ll see a new twist as to how people are feeling about this. This week the twist has to do with inventories, inventories of chips, inventories of machines, and the like, and we saw some hiccups on the part of Intel as well as Compaq. It’s had an impact on the whole industry. We’ve seen that kind of thing before, there are ups and there are downs in this industry. If you’re going to be an investor, you have to fasten your seat belt. But over the long haul, these curves, these trends that we cite here look reasonable. We’ll see the kind of growth that, in most cases, is being predicted pretty accurately by the experts. More for less is really a phenomenon in this industry. It’s very seldom you see the kind of price declines on a unit basis that you see in this industry. If you go back to 1990 and you bought that PC that we just saw for about $3,000 and you wanted to equip it with a spreadsheet, a word processing tool, a presentation tool and the like, you would pay a little over $1,000 for that software. What you see now is that the price on this, in terms of new items, would come to about $499. That kind of basic trend, in terms of lower and lower and lower costs over the long haul is prevalent in most all of the areas of the software industry. Why? Well, we’re just seeing more and more users come in, people are taking their investment and spreading it over a bigger period of time.

It’s just a very, very healthy industry. Once again, why? Because of the great applications you can use to streamline your organization and run things better.

This is the Microsoft revenue and profit picture. A steady growth. The important thing here that we always talk about the products and appropriately so. But I want to point out the fact that we’ve had good profit growth compared to revenue growth. Why? Because we pay a lot of attention within the company as to how we run the place. It’s an organization that watches their costs extremely carefully. It watches their work processes very carefully. We really try to constantly prepare ourselves for the future. This is an industry where the future is always upon you, you must anticipate it. Be it manufacturing or the way you take orders or the way you license product with customers, you’re always in change mode because things are always evolving with respect to the products.

As far as the stock price, you’re all familiar with this and I won’t belabor it. It’s amazing what has occurred.

There are two main stories out there from Microsoft that I want to talk about. First of all you’ll see some advertising in the popular publications for a term called the Digital Nervous System. What is it? It’s the basic infrastructure of an organization. It’s the network they have coupled with the PCs that they have for their people. That leads to, basically, a nervous system for that organization. Now what does that enable people to do? That enables people to execute plans faster because the communications systems are in place. That enables people to have better basic operations because you can implement systems that can help you a lot as far as streamlining information, getting the facts and figures to your suppliers in an easier way, etc. So this Digital Nervous System is very important when you anticipate the kind of applications that are really hot today. So when you think about using an intranet within your organization to provide all of your employees the information when they need it, you get back to the basic issue of ‘Is my infrastructure really where it ought to be?. Is the basic network in place? Are the PCs in place the people will need in order to take advantage of this basic capability?’ It truly can be a competitive advantage in the context of faster decision making and better information to people on an ongoing basis.

Another thing that you will hear us talk about is the Web Lifestyle. Now what do we mean by that? We talk about people, during the course of the day, going about getting information in a far different way than they have in the past. They don’t need to rely on written reports. They can learn facts and figures right off of their PC tapping into that Digital Nervous System. It helps them organize their information and helps them organize that in the context of teams they might be working on. There might be GroupWare files that a particular body of people needs access to as they tackle a particular project. The ability to connect up and to get information immediately and to get information from a team that you’re working with and constantly be up-to-date and know that that information is sitting out there is up-to-date and you can get at it easily is really something. The old Web lifestyle is alive and well. As people work through the day more and more you’re going to see them reach for devices to get information, where in the past they may have waited for the six o’clock news, they may have made a telephone call and left a message on a recorder, or they may have picked up a newspaper at the end of the day. You don’t have to wait for information in this kind of a world. The context of the Digital Nervous System, this is really what it’s enabling people to do from the standpoint of organizations but also in terms of their personal life. A lot of PCs now are being connected up. The Internet is hot.

We’re to the point where about 22% of households are getting on the Internet over the past 30 days. This thing is very real.

Let’s talk a bit about Microsoft’s focus. There are four fundamental product areas.

Obviously operating systems are important to us, it’s the oldest part of our business. Windows 95 is our first 32 bit operating system. Windows NT Workstation is also a 32 bit operating system for a client device. We just passed the point where we have 100 million 32 bit operating systems being used. Microsoft BackOffice, in terms of Microsoft Windows NT and other Microsoft BackOffice products such as Microsoft SQL Server and the like, we’re the new-kid-on-the-block you might say but things are going well in that we’re winning the product reviews and market share points are coming our way because of it. Microsoft Office is a very popular product, we’ll touch on a few facts and figures in a moment in regard to Microsoft Office. Desktop applications have clearly been a cornerstone to this company for a long time. The new part of our business–interactive media–we’ll talk about this also in a moment. Actually, from the standpoint of a fundamental area of the business it would be inappropriate to call it that at this point in that there isn’t a given financial model that we think will hold true in the future. We’re sure getting a lot of very valuable experience as to what it’s going take to make these technologies really useful to people on a day-to-day, hour-to-hour basis.

Now if you look at the overall focus of the company as far as major initiatives across all of these product fronts there are three that I want to mention. We continue to tap into the capabilities of the Internet and make all of our products as Internet friendly as is possible. The conductivity that the Internet brings is awesome. This is not a fad. This is here to stay. The scalability of the Internet, everyone has been surprised by it, it truly does provide global conductivity. Our products need to take full advantage of that. Another incredible priority at Microsoft is simplicity. If we’re really going to get to the point where 60%-65% of households are regularly reaching for these technologies we have to make it a lot simpler to use and a lot more reliable. So you’d see a tremendous amount of focus on exactly that at Microsoft. We’ve made the same kind of organization changes within our product groups to focus on simplicity that we made two and a half years ago in regard to the Internet. So we’re serious about this subject.

Scalability, I’ll talk a little bit more about that also in a moment. The fact that these technologies are becoming more and more powerful, the fact that Intel and the chip makers can continue to double the capacity of those chips every 12 to 18 months means

that PC based technologies are truly competing with the big machines at this point. You’re going to hear a lot of dialogue in the future in terms of transaction processing on PCs as opposed to mainframes. The whole scalability issue in terms of just how much information, how much transaction processing we can do with these technologies, that’s going to be a very hot subject. From the standpoint of our four businesses, recounting them in the context of growth prospect as well as market share, obviously we have a high share in desktop operating systems and the growth prospects are good. Why? PC penetration continues to grow outside the United States in a steady way and also raw PC replacement are two factors leading to a continued healthy growth rate in the PC market as we discussed earlier.

In desktop applications, growth prospects are lower. There’s a heavy penetration of desktop applications at this point.

We have a high market share. What we have to do is be clever in terms of listening to what the users want and incorporate those new capabilities that they’re asking for in the latest versions of these products. As far as Microsoft BackOffice systems, Windows NT Server and Microsoft SQL Server and the like, the growth prospects are very high. Our market shares are not nearly as large. Those are big growth opportunities for us. We certainly believe interactive media has high growth prospects. There’s a lot of learning going on. Some of that is tough to take. What is so important in this industry is to face up to the facts and learn and learn and learn. Some of those experiences won’t be good, others will be very good, you simply have to acknowledge what’s going on quickly, make the appropriate changes, and get on with life. That’s what’s so important in this industry.

It’s constantly humbling, because you put ideas out there but many of them don’t work out. You just have to listen and listen and react quickly so that you’re trying to maximize the satisfaction level of those users.

Let me cite a few statistics in regards to the various product line ups. Microsoft Office is our largest business.

We have more than 65 million users of office right now on a worldwide basis if you look at the various versions. We have a high market share. As far as Microsoft Windows, you really need to think of Microsoft Windows these days as a family of products. This is the way our users want us to portray Microsoft Windows because they want to have applications within their organizations where in some cases people have a very high powered PC and they have to get at some aspect of that application. On the other hand, often times they’re on the road and they want to have access to that same kind of information from a very small device and in some cases a hand-held device that can be compatible with a network so that they can download facts and figures at the appropriate time and interact with their organization.

This full spectrum of Microsoft Windows has one thing in common and that is the Microsoft Windows operating system that can communicate up and down this particular spectrum. A lot of these devices are brand new that we’re just putting out into the marketplace. The Palm PC.

The mobile users with an Auto PC, the hand-held device that has a Microsoft Windows CE operating system which is a small kernel of the classic Microsoft Windows operating system that you see in the larger devices that are portrayed up this spectrum. Up at the top of this graphic are the big server clusters running things like Microsoft Windows NT operating system for servers which just continues to get more and more robust. As far as users, as I mentioned before, more than 100 million units are currently in use and you see the market share statistics here.

As far as Microsoft Internet Explorer, which is the name for our browsing capabilities, the thing that’s important about Internet Explorer is we are often asked ‘What are the basic principles by which this company runs?’ — there are two that I always cite. First of all, we are really good at recruiting in that we go after really strong people who are incredibly passionate about this business, who can hardly drag themselves away from work, they enjoy it so much. The second part though is the fact that we tell people — develop these products and read those trade publications and the reviews in those trade publications and our objective is to win those reviews, because life gets a lot better for everybody when we win those reviews. Market share points come our way. Those are the basics. In the case of this browser, starting with Internet Explorer version 3.0 but now with Internet Explorer 4.0, we are winning the reviews right and left. The world is claiming that this is currently the best browser. It’s got good communication and collaboration capabilities. True Web integration and the active channels and Web casting are very popular. It has broad usage at this point. The first day this product was available it was downloaded a million times in 24 hours. We knew it was popular. Our market share, with respect to browsing, is now at slightly over 40%. There’s several different panels that are used to measure market share in this particular product area and there might be variations of three or four or five percentage points in any one of them. The important thing is, because we’re winning the reviews, we’re going in the right direction.

I do want to talk about the legal issue related to browsers because it’s an interesting one that is hard to understand. In fact, there are two different approaches to browsing. Our approach is that of an operating system. Microsoft Windows has got to be viewed on an ongoing basis as an operating system, not an application. Our competitor has a browser which is a standalone application. In fact, if you read the press the intent is to make that application more and more robust and to incorporate operating system features into it so that in fact the other operating system, mainly Microsoft Windows, is no longer necessary. So this is flat out competition. May the best product win. That’s the way it should be in the marketplace. What we owe our shareholders is to do the best job, to constantly improve our products and have them made the most sense as an operating system.

I want to tell you how we handle this particular project called a browser because it’s far different than the competition. Microsoft Internet Explorer can be viewed as a big mass of code but it has various segments to it that I’ll explain in a moment. At the bottom of this slide, I portray the operating system which is a fairly large set of code. What we do with Microsoft Internet Explorer is we actually chop it up onto pieces, it’s not a browser at all. It was a browser at one point in time. We chopped it into pieces and we put each of the pieces into the operating system in the place that made the most sense. For example, there is a section of code in Microsoft Internet Explorer that is used to project HTML on a screen. What’s HTML? It’s a certain kind of data that is out there on the Web that needs, at times, to be brought to the PC and projected up on the screen. Where did we put this code that projects HTML on the screen? We put it in that section of the operating system that projects things on the screen. So when you need to project something on a screen you go to Microsoft Windows and say, ‘Hey, I have a Microsoft Word document, help me here, put it up on the screen’. It will say, ‘Ah, fine, I’ll go to the section of code that projects Microsoft Word documents on the screen and I’ll put it up there’. If you say to that section of code, ‘Hey, I’ve got something to project up on the screen, it happens to be HTML’, it says, ‘Fine, I know how to project HTML code on the screen.’

Why do you do that? You do that so that all the independent software vendors never have to worry about where the code is to project HTML on a screen. We have promised, as the Microsoft Windows operating system, that it will be there so that the thousands of independent software vendors say ‘Fine, you have promised that it will be there, I’m changing my application as I build my new versions for this fiscal year and it’s going to be there’. It had better be there. I’m going to put on the back of the box- This product can be used with Microsoft Windows 95 version such and such and it’s there.

There’s a section of the code that deals with URLs too. You give the operating system the URL and the operating system goes and finds it. We put that section of the code in the operating system that goes out and fetches things. If you go to the operating system and say, ‘I have an address for a file on a hard drive. You go to this section of code.’ And it says, ‘Fine, I go and fetch things, it’s on the hard drive, I’ll get it for you’. If you say to that section of the operating system, ‘Hey this is a URL, it’s out on the Web’, it says, ‘No problem, I’ll go out on the Web and I’ll get it for you. This is the section that fetches things no matter where they are, your hard drive, a CD ROM, a floppy, or now the Internet. All the independent software vendors, the thousands of them, once again, they want to have this in the operating system as opposed to them all carrying that kind of code. Or worse yet, having to hope that the user has downloaded something that in fact would carry out this function. As they develop their new versions, if you’re Intuit and you’ve got a new version of Quicken, you don’t want to have any question that this is going to be here. That’s called being an operating system. In other words, promising all those independent software vendors that code will be there. Well this story goes on and I won’t bore you with all the intricate little files that, in fact, go on.

Now what’s left? A very small little icon on your desktop that actually looks like the browser, but it’s not a browser. You click on that thing and what you’re doing is you’re bouncing from section to section within the operating system and you’re simulating being a browser. You’re really not a browser at all. You’re an operating system. The first phase of our discussions with the Department of Justice and Judge Jackson said, ‘Please take all the little i’s out of the operating system.’ We submitted a couple of different documents saying, ‘If you do that, this operating system is going to be a huge disappointment to all these independent software vendors. They said, ‘Fine take it out’. So we took it out but we also provided the basic 32 bit chassis of Microsoft Windows that you buy at retail that has no Internet capabilities. Upon realizing how this is not what the independent software vendors needed and, in fact, that it didn’t run some things, they then told us, ‘Okay, let’s go put them all back but hide the icon’. We did that as a second round.

This basic exercise that we just went through, I think, demonstrates the fact that this code really is integrated into the operating system. If you step way back, what’s really clear here is the fact that we really are an operating system, not a standalone application that sits on top of a particular operating system like Microsoft Windows. It was a tough set of discussions, a lot of confusion. We were ordered to do a few things that were frankly embarrassing but we’ve worked our way through it. The issue is now with the Appeals Court and we’ll see where we end up. It’s a tough thing to go through. We think we’ve been forthright throughout it, but it is a complicated subject that I wanted to take a few moments to try and give you as simple explanation as is possible.

Stepping back to our various products, continuing on that theme. Windows NT Server is a very hot product. Over 1.3 million units were sold in 1997. You see our market shares here, they’re increasing, steady as she goes. Once again, we’re winning the reviews in the trade press. That’s a good sign that this business will continue to move forward. The server market itself continues to gain momentum. You see the unit growth on the left and you see our unit shipments on the right. We’re making good progress versus our major competitors. When we say UNIX here we mean all the different flavors of UNIX combined. As far as the Microsoft BackOffice family of products, what you see is a robust set of tools to help you implement mission critical applications. Over in the lower left is Microsoft SQL Server, the enterprise class database tool that is getting stronger and stronger. The version that we are about to introduce called Microsoft SQL Server 7.0 is an incredible product that will really put us toe-to-toe with the best of them. We’ve been working toward that for several years now. As far as other capabilities, in terms of Internet site management, Internet commerce, there’s a lot of great tools here to enable people to implement the kind of applications that I referenced before.

As far as scalability, I cited it before. What’s really happening here is as the chip gets more and more powerful and you stack up layers of chips and call them servers, what’s happening is we are really turning these servers into transaction processing systems. The whole enterprise computing situation is going to be changing a lot in the next five years because the cost effectiveness of transaction processing on these kinds of devices versus the classic mainframes will be very much a point of discussion.

Let’s switch gears to a part of the business which is less mature, namely the interactive media group. What are we covering when we talk about this particular organization? Well, we’re talking about CD ROM products such as games, encyclopedias and the like, hardware such as mice and joysticks and yes, Barney. Also online products like MSNBC, CarPoint, Sidewalk, Microsoft Investor, and the various things that we have put on the marketplace and gotten experience with.

The Internet really is taking off. I cited the figure before but to see the chart of the growth of the use of the Internet by households is really something to behold. This is an independent organization, it’s a market research firm called NPD and every month we get a new set of figures that measure over the last 30 days what percent of households have gone out on the Internet. You see this growing at an 80% or so level, which you might say, ‘Well, it’s slowing down’.

Yeah it is. It used to be growing at 100%. It is phenomenal to see this level of penetration of conductivity.

What’s really driving this growth? The thing that is driving this growth, once again, are great applications. In this case, the fact that for a growing number of tasks, the Web really is a superior device for getting information. If you look at services like MSNBC, Expedia, Microsoft Investor, and the like, people like these services. They’re getting information when they want to get that information and in many cases, they can get more detailed information than ever before. An example of this that is particularly striking, is if you look at the month of January. We had a lot of big news events in January. What they do is when one of these events occur, people jump on these Internet news services because they want to get more detail, they want to get more information in a very timely manner. Every time we have one of these events, it’s like a sample device where people who’ve never used an Internet news service try it, they get some information about that incident. Many of them become regular users. I think you’ll see this in the figures that I’m about the show you. If you look at the beginning of January, we were rolling along at, let’s call it an index of 100, and Michael Kennedy has a skiing incident that people are very interested in. What happens? The usage of MSNBC on the Internet increases by over a factor of 2, this is a plus 140%. What’s important is that occurred for about two days and then after the event was over, business did not go back to usual. Business went back to a level that was about 30% higher than it had been prior to the event in and of itself. It really was playing the role of a trial device for Internet news.

Then what happened? Sonny Bono has the same problem. In this case, now we’re up at 180% versus that base level at the beginning of the month. After that event what occurred? Well it went back down, but it went to a level that was 50% higher than at the start of the month.

It gets better, it was an exciting month. Here we have depositions for Paula Jones. Okay. You know what’s coming…plus 220% versus the beginning of the month. There was phenomenal interest in this, people really wanted to see what was out there on the Internet as far as what they could read. When it went back down to normal, it was now more than double the beginning part of the month, which is incredible. Then, there it is … plus 280% versus the beginning of the month. We’re now talking over triple the volumes.

It’s phenomenal the amount of people that wanted detailed information about this incident. This incident was just perfect for Internet news.

You can look at this at so many different angles. You couldn’t imagine a better trial device for all of the news service, not just MSNBC. If you looked at the CNN figures and the like, the whole industry is…I don’t want to use the word benefiting because that’s kind of warped.. but the fact is, people want information and they’re going to try new ways to get it. This will surprise you as the one that really took the cake, it went back down to about 140% above the base. The incident that really blew everything away was Carla Fay Tucker. This was the execution in Texas. It was the first female execution in a long time. There was a lot of debate in regard to the appropriateness of that. A lot of arguments on both sides that people were interested in reading about. They used these services once they heard about the incident. It was an amazing trial device.

The important thing is what is happening here. People are finding out this is a terrific way to get information quickly and to get information in a more detailed manner and to get information with the slant that they want to take on that particular news. It’s a terrific device. If you step back and think about the Internet broadly, you’ll think about these kinds of services and the like and you contemplate the spectrum of devices that we say before, some of them hand-held, hopefully a lot easier to use. If you think about what the software can do to make these tools a heck of a lot easier in the future and more reliable, we hope all those things come true. We’re certainly trying to do our part. If they do come true, we are convinced, based on the kind of information that we saw relative to news, that these tools can become the next mass media.

Shifting gears for a moment, here’s what’s hot in the research area at Microsoft. Our research organization is one that continues to grow significantly. We’re doing a lot of basic investing in really top notch people. Natural language is important.

Speech recognition is important.

Graphical procedures that enable people to put things on the screen that are incredibly vivid, incredibly photographic-like, coupled with the improvement of the screens themselves is important.

You can get some startlingly good pictures with some of the technologies that we’re testing in the labs these days. There is just so much innovation waiting to be unleashed. What does it need? It needs work in terms of good software.

It needs the power of the chip, because something like speech recognition requires a lot of data processing behind the scenes to interpret what humans really are saying. All of this stuff is on track. It’s going to be phenomenal as far as the kinds of applications we can dream about in the future. It won’t be very long that you’re going to be talking to your spreadsheet instead of filling those numbers in by hand. I know a lot of you, including me, look forward to that day.

Another thing you should take away from this presentation is Microsoft really does invest for the long term. These are our R & D figures. We’re now well over two billion dollars in terms of R & D investment in the fiscal year. We have a lot of different partnerships with hardware companies and in some cases software companies.

Solution providers are what we call them. It’s just a lot of people that we work with in this industry in order to bring to the user the kind of applications that we’ve been talking about.

We also do some acquisitions, typically they’re small. WebTV is certainly a great acquisition. If you hear the story that we’ve been talking about it’s clear as a bell that WebTV fits right into our overall plans. It’s a very easy to use device. They needed a small operating system in order to coordinate the capabilities that they wanted to provide their users. The newer versions of WebTV will take advantage of Microsoft Windows CE and give their users new kinds of capabilities they never dreamed of before. Seventy-six percent of the people who buy a WebTV have never used a PC in their life. We like that. It’s that easy to use.

It’s that simple. It gives people not only the usual television alternatives but they get to get out on the Internet and send email in an incredibly convenient way. Companies like ComCast, you might say, ‘What are you doing with ComCast, that’s a cable company’. One of the things that’s important relative to the mass media that we all dream about in regard to these technologies is to have people have enough bandwidth that they can bring these great applications into their home or into their work. That means the cable companies as well as the telephone companies need to constantly be working on providing more bandwidth. We’re trying to make investments that encourage that bandwidth so that our software and our hardware partners can do a better job for individual users.

In terms of upcoming product news, naturally Microsoft Windows 98, a very exciting product, is right around the corner. Microsoft Windows NT 5.0, a version for the server, a version for the client. An incredibly powerful set of products that enable you to dramatically cut the costs of maintaining hardware and software in your organization while providing a lot of new capabilities. Microsoft Office 9X is the code that we use for our next version of Microsoft Office. Microsoft SQL Server 7.0 I’ve already mentioned. These are major thrusts for the company that will be coming to bear over the course of the next fiscal year.

As far as fundamental principles, I cited two of them. When you step back and you say, ‘How does Microsoft really run as a company?’ I already mentioned recruiting. It is a core competency at our company. It’s probably our most important core competency. We’re really good at recruiting smart folks who are really psyched in regard to this industry. So much so that they can hardly tear themselves away from their work. We like that.

We focus on winning technical reviews. I’ve mentioned this several times. I can’t underscore enough how important it is. This is important in any industry. Any company worth it’s salt, needs to focus on how do my products stand up versus competition. They need as a good a measure as is possible. When those measures are predictive of marketplace behavior then it’s easy to figure out what the company needs to do. We certainly have that in this industry. We know that when we get it right and those third party reviewers objectively assess all of the products and claim that ours is the best, things will work themselves out.

The third thing that we do well is speed and efficiency in our internal communications as a company. We’re really good at communicating quickly and frankly with one another to get to the basis of the facts and to get to a decision as quickly as possible. This is an

industry where you have to keep moving very fast. You have to listen intently as to what the users want and then make quick decisions to get on with things that aren’t working and really maximize the potential of things that are working.

Another thing that we do very well at Microsoft is focus on operational excellence. We look at our work processes and we fine tune them and fine tune them. We look at the way we’re managing our money and ask questions- how can be constantly have the increase in our operating expenses lower than the increases in our revenue? How can we do that in a context where we’re increasing R & D? How can we keep moving down the percentage of our net revenue that we’re putting into marketing?, etc. Those are good basics and we really pound them every day.

With that I will conclude and thank you for your attention.