MR. Mundie: Good morning.What I’d like to do in the next better part of two hours is share with you Microsoft’s vision for the evolution of the broadcast media from the Web to digital television.In the course of this presentation, we expect to show you our technology, as we know it today, and our vision for how that technology will evolve for both better PCs and better TVs in the future.And in the course of this presentation, we actually hope to make a couple of interesting announcements that people are not currently aware of.

We believe that we’re entering a new era in broadcasting and computing, and this era has many implications for both the computer industry broadly defined as well as the entire broadcasting industry.What we intend to do is show in our mind how these things converge and move us toward an era of digital television.

When we lookat this from the computer side, we find that we’re really in a situation where we’ve had a goal, certainly Bill Gates has had a goal of Information at Your Fingertips, and he has set that forth for the people at Microsoft for many years as an objective for us to achieve.The computer is certainly a key part of achieving that objective, and it’s gone in several decades through the three entire generations, the mainframe generation, the personal computer generation, and essentially now toward one that we call the network personal computer, where these things begin to operate more and more as a set of connected appliances as opposed to stand-alone devices.

At the same time that we saw this evolution, we were frustrated because although we could make the computers better, we still couldn’t quite find a way to give them access to all of the information that people find interesting.And so, in the last few years, the Internet revolution has come along.And for the first time, it has become clear that we have both a model for user interface as well as ubiquitous communication mechanism in terms of Internet-based communication technologies that, coupled with the computer revolution, give us the basis to have this information at your fingertips.

Similarly, we’ve seen in this time period a great many changes in television.Television started as a black and white medium, and over the years became color and added stereo sound.Even with all those changes, that evolution took place over a much longer period of time than the personal computer evolution.And today we contemplate an era, perhaps exemplified by the top right diagram here, where our view of the future of television comes to include not only the traditional forms of television viewing, but new forms of television programming that we’ll explain to you this morning where we combine the best of the Web with the best of traditional TV production value.

When we look at this from the Internet side, we see — and we can even see in the popular business and community press, like Business Week and Wired Magazine — people are beginning to recognize that there is a new broadcast medium.The Web represents a huge amount of information, daunting to many people.One of the benefits of the traditional broadcast media and publishing media is that people turn to it for editorial value.They recognize that even today there’s more information than they can possibly consume.And they look for things that implicitly create affinity groups or editorial value added that provide a simplified way to examine all the state of information that’s available.

In the Internet environment, the amount of information available to everybody is actually even greater.And, as a result, some of these new push technologies as they’re called, which is essentially the broadcast media on the Web, are becoming an important part of a dual mode operation that we expect consumers to have, both with their personal computers, and in the future with their other appliances, television, smart telephone, et cetera, where they can either request information or, if your profile is designed to identify your interests, have information pushed to you.

We find today that the computer industry and we believe the broadcast industry are really two major industries, each of which is at a major crossroads in their evolution.If you look at this very simplified graph, you can think of the vertical axis as sort of the traditional PBX that has been dominated by video production value, no real computing or software involved in that process, and as far as the consumer is concerned, it’s the model of simplicity.You turn on the television, you channel up and channel down, and essentially are entertained.On the other hand, the computer has evolved.Technologically, it’s much more sophisticated than television today.It incorporates computing, very sophisticated computing, hardware and software, and more recently has become connected to the World Wide Web as a ubiquitous communication mechanism.

Today, television penetrates in excess of 98 percent of all U.S. households, and the personal computer over the last decade has reached a penetration level this year of probably approximating 40 percent of U.S. households.Clearly, the computer industry’s goal is to see intelligent appliances and computers penetrate U.S. households to a much greater degree, and similarly around the world.And we recognize that, in effect, we have to fix some of the sins of the past that come from the rapid evolution of this kind of complex technology and make a much, much simpler experience for the consumer.And so we’re busily at work trying to improve the simplicity and ease of use associated with all classes of computing devices, large and small.

However, at the same time, the TV industry finds itself contemplating a required change now from the traditional analog broadcasting medium to that of the digital era.And, at the same time, the recognition that, in fact, that era could intersect the kind of technologies that are prevalent in the personal computer.But these two technologies have evolved strategies for this in quite different ways.And my purpose for being at NAB today and this week, and the presentation that I’ll make here and with colleagues from Intel and Compaq tomorrow night at the Treasure Island Hotel, is to share with you our vision of how these two industries can, in fact collaborate as opposed to compete in providing this future experience for consumers.

What is it that we think consumers actually want?Well, certainly, they do want better pictures.And a lot of the work, perhaps you could say the vast majority of the work, was done in the development of the ATSC proposal really focused almost exclusively on better pictures.But we know from the work that we’ve done with personal computers and other appliances that all of the work from the rapidly evolving experience of having this year 56 million people using the Internet on a regular basis, that they are interested in other things, too.They’re interested in the enhanced Web, the ability to get access, to get easily to more information.And they’re interested in a great many forms of video programming.

The broadcast television industry has done an unbelievably good job conditioning the consumer to expect high production values in video, and to believe that it is, perhaps, the most powerful and effective form of communication.And so they desire to see this used both in the work place and at home in other ways.They demand instant, on demand, access to the important daily information, and being able to get this perhaps in ways that are more personalized, and even more timely than the traditional broadcast news mechanism is also valuable.During the election in November, the Microsoft MSNBC activity saw a peak of six times the normal rate of usage that we see on a given day because many people realized that they could come to the Web, go to that site, and get personalized information about their interests as to what was happening in real time with the election results.This information was basically not available to them through the broadcast medium, or only if they were willing to wait a very long time for the information to come around.

They’re also interested in the choice of manufacturers and a variety of price points.This has certainly always held true in the consumer electronics industry and in the computer industry, and we expect that that needs to continue going forward.And we’ve also learned that our rapid growth and our ability to operate with efficiency on a worldwide basis has come from having compatibility and standards, either de jure or de facto that allow many, many manufacturers to work together.And, of course, they want to growth path.Many of these people have already come to expect personal computers.They understand their rapid rate of technological innovation.And their children, even in things as like video games, recognize that this world evolves at a very rapid rate, and people are willing to pay money for more advanced goods and services and programming.

So what we think this is all about isn’t really a war to decide whether everybody should watch television on their PC exclusively, or whether they should see television on TVs to the exclusion of personal computers, it’s really about a parallel set of evolutions to produce better PCs and better TVs.And here you can see, as we annotate these charts, that many of the steps that we think we would naturally take in evolving the personal computer are identical to those that we, at least, think should be taken in moving toward a true digital television system.

What I’d like to do now is show you a video that gives some ideas about what’s already happening with people in Hollywood in the production of television of a form that goes beyond what we’ve known for the last 40 or 50 years.

[Video presentation.]

MR. MUNDIE:And look at the work product that we’ve got, even in the experimental development of several of these television shows.One of the things that we have done in the last half a year or so is really try to find out experimentally, is it possible to engage the creative community in a way where they can blend everything that they’ve perfected in the art of video-based entertainment, and combine it with the new technologies of the Internet to provide not only passive entertainment in an enhanced form, but the opportunity, even in a purely broadcast environment, for some forms of interactive operations.

But I do think that the comments, like some of those on the video, that say, hey, my kids, they are multimedia capable.They watch television, do their homework, listen to the headphones, play video games, all at the same time.They’re really capable of enjoying the kind of presentations that are going to be possible when we move beyond the tradition forms of production.

So if you look at this graph and move from the left to right, you can understand how we see all of these things coming together.It not only is going to be about video and audio production at the state of the art, but the ability to take Web technology and IP communications and data and essentially move it into this new environment.

The technologies that we’ve developed work equally well across any of the broadcast medium, terrestrial broadcast, satellite, cable and other wire-line forms of communication as well as the traditional Internet mechanisms.And our view is that we want to provide the consumer, ultimately, with a very comfortable and compatible experience whether they choose to consume that on their televisions of the future or their personal computer.

So Microsoft has a number of broadcasting initiatives, and the goal is better PCs and better TVs.We want common content.The producers essentially want to do one form of development, put it in the can, and be able to get multiple uses of it, and we think that these new technologies allow that to happen and we’ll show you some of that.

We want to have common tools that work, not only in the production of traditional video and film, but which also are common tools that allow people to work to produce these things much as they’ve done traditional video development in the past.And soone of the major initiatives we have is a partnership, a working partnership with Intel and Compaq where the three companies, as leaders in the personal computer industry, have gotten together and tried to both listen to what’s happening with respect to the broadcasters and their requirements as they move toward digital television, and intersect that with our vision that we’re sharing with you today of how this stuff comes together with personal computing.And so we’re driving all of these things forward.

So first what I would like to do is talk a bit in more depth about better PCs, at least for Microsoft and these others companies.We come at it first from that side because, in fact, we know it best and, in fact, because through the Internet we begin to think that many of the key technologies that will be part and parcel of enhancing television in the future are going to be available first in the very sophisticated computing environment of the personal computer.

So the first step in this is essentially enabling the personal computer for broadcast.We thought quite openly, actually since about May of 1995, about a project at Microsoft we call the Broadcast PC.And that this was an effort we had undertaken initially in concert with Direct TV, who had the first digital transport that certainly had a nationwide footprint, in order to begin to understand the problems associated with creating a personal computer that could simultaneously accept the video programming from that satellite and, at the same time, add an entire new range of digital data services, both through the enhanced programming that we’ve shown a few minutes ago, as well as altogether new types of digital data services.

And so the Broadcast PC, which we now call the broadcast architecture for Windows, is a system that allows personal computers to connect to the Internet and to receive satellite, terrestrial broadcast, and cable delivered video programming, and to composite that into a new TV experience.

As we move toward this class of products that have a great deal of computing capability, we want to use that computing to make the experience better for the consumer.An important part of our consumer research has shown that what people want is essentially personal content delivery.And certainly in the personal computer, beginning with the Internet, we have the ability to provide that kind of personal customized information.We’ve also taken advantage of the fact that people have, through television and radio broadcasting, come to understand what it means to have a channel.

Channels are a concept where they know they can go to a particular place and get a particular type of programming.And radio broadcast people go to certain stations, and they know that they either get Top 40 or Country/Western.They may go to certain television broadcast channels, or particular networks on cable systems expecting that they’re going to get a particular class and quality of programming delivered to them.So we want to borrow on some of these concepts and their familiarity with consumers in order to allow the Internet progression to work up and be a complement for the traditional TV.

So we have technology now that allows the Web to get delivered to you in the form of subscriptions and, in the case of personal computers and hand-held personal computers, to take the Web with you off-line so that it becomes a personal and persistent mechanism for providing information access.

There are a number of technologies that are key to doing that.One of them is what we call NetShow, which is a new platform from Microsoft.It’s essentially apara-technology, some at the head end for initiating the broadcast, and some at the client end for receiving and tuning the broadcast, which allow computers, then in the future digital television, we hope, to get network multimedia delivered through an Intranet in a corporation, or over the Internet broadly.It allows viewing and listening to both live and recorded events without delay.And, in fact, some of our friends in the back from AudioNet are actually putting this actual presentation live in low bit rate video and audio on the Internet.And we’ll actually show you that in a few minutes.

Part of what I want to do in this presentation is make the broadcast community understand that there are many new forms of broadcast that are emerging, and these represent both complements to the traditional businesses that you have and, for many companies, completely new opportunities.

Second, I’d like to show you a video of a well-known organization who’s using the NetShow technologies and the Internet to extend the reach of their very well known business.That company is NPR, National Public Radio.

[Video presentation.]

MR. MUNDIE: So how will companies use this kind of technology and what are the key components.Well, as I said before, there are really two parts to this.To understand how the kind of product that NPR showed in this video can be produced, it’s important to understand both ends of this process.If you look at this screen, what we have here is actually an actor from a training video that we’ve developed as an example for a hypothetical coffee company.When you come from Seattle, you have to focus on coffee companies.

In the frame of a browser that people would know as the normal navigational environment for the Internet, we have the ability to put three different classes of information.Here, although it isn’t moving, the top left corner of this picture would actually be come full motion video, which could be delivered at any bit rate from 28.8, which allows this to happen over a dial-up connection, all the way up to multiple megabits a second.And, as a result, the producer can decide how he wants to make the presentation as a function of the deliveries system.

We have active controls, which are essentially a technology for programming many of the features of traditional Windows personal computers.And, as a result, the ability to drop these things on the Web page.One of the things that you saw in the NPR video was really a comment from the people who are actually the radio producers, who realize that this is to their form of publishing what desktop publishing did for word processing.It wasn’t until we got word-processing moved up to desktop publishing that virtually everybody in every organization had the ability to at least the printed word and put it on the page.Now, we want to move beyond the printed word, we want to go to audio and illustrated audio, as NPR has done, and as we’re doing here today, and we’ll be doing going forward, we want to go to full motion video in these environments.

And we also, again, want to have the ability for these things to be scripted such that it can either be an interactive experience where you can drive your way around, or it can be a passive experience.So another key idea is the ability to have scripting in this.In some of the enhanced TV demos you saw, for example the Moesha demo, it was an interesting thing to recognize that that entire presentation could be viewed completely passively.All of the stuff surrounding the video, and which essentially is synched to the time line and story line, allows it to be just entertainment.But it turns out those Web pages are scripted to be active.At each moment in the show, if you pick up your remote control and actually push on it, the page will begin to interact with you, and using the local computational environment of that receiver.And, as a result, we have the ability to give people, in one presentation, either traditional television, enhanced passive, you know, entertainment, or the ability to get more involved.

The other end of this process is essentially the NetShow server, which as you heard we’ve integrated directly into the Windows NT server product line.We also paid a great deal of attention to the problems associated with operating these systems in a mission critical real-time production environment.Microsoft has spent about seven or eight years developing Windows NT and the server products of that as our offering for mission critical computing applications, and a great many companies are deploying that in many applications.And we believe that it will now find its way into mission critical broadcasting applications.

We also have created an environment where using Web-based tools, you can administer essentially an arbitrarily large set of these servers such that, as again was mentioned in the video, you have scalability.You have the ability to ramp this thing up as your appetite for content increases or the bandwidth of the pipe that you have to deliver it increases.

We’ve also come up with new paradigms of programs and channels that allow people who are in the business of video and audio production to have familiar paradigms on the production side, and also to have familiar paradigms on the consumer side for finding and enjoying and consuming this entertainment.

[Demonstration.]

MR. MUNDIE:In this environment of NAB, with all the discussions surrounding high definition television, why am I showing you all this low bit rate video?In part it’s because we believe that the future digital television has to be more than about just pretty pictures, that it has to be enhanced forms of broadcast and that, in fact, it has to be an environment where people are going to be able to use these digital transport mediums to get many different types of information and, in fact, to create new business opportunities for the broadcast community.

So when you look at these things, whichwe have shown you in the context, today, of a Web page, that’s even accessible over a dial-up phone line, and we contemplate a movement toward an environment where this gets better quickly, it’s, to me, very important to understand why the computer industry has such confidence that we can take advantage of the effects of Moore’s law and clever programmers to move very, very rapidly to have many new types of services.

We don’t believe that the world should define television as essentially a static medium.Certainly not static at the level that NTSB was static for about 50 years, with very, very few real technological innovations.And so in moving forward to put these technologies into Windows,one of the announcements I’m making here this morning is that Microsoft has made the decision that the broadcast architecture for Windows, which includes the NetShow technology and some other things that we’ll show you next, are going to be a standard part of the Memphis release of Windows, which will actually be going into beta test at the end of this second calendar quarter.Also, Windows NT 5.0 will also include these things.

So the program guides, which you’ll see shortly, remote control,integration, true integration with the Web, to do all the things we’ve seen here, as well as traditional television, the NetShow broadcasting capability, DVD, the 1394 interface, all these things will be standard parts of personal computers delivered in calendar 1997.These codecs, for example, the eight megabits a second, some very high quality video, and that’s essentially equivalent of a 640 progressive delivery.And all of that decoding and all that encoding is done in real-time on a standard 133 megahertz, or even slower, personal computer.So those of you that have a laptop or something in your possession in the audience, you could do this without any hardware assist.

So many of the arguments that have been made, as wecontemplate how broadcasting should be done, about, you know, MPEG 2, and how we, you know, might go to particular resolutions, in our minds, needs to be opened up a lot, such that the MPEG board technologies and many of these other codices can be used to simultaneously put many different forms of entertainment and information services on that wire or over that antenna.

So what we’re about is trying to deliver the TV experience in Windows.At the desktop level, if you will, what Tim just showed you, we call that the small screen experience.But, we’ve been busy at work, to develop the broadcasting technology and this broadcast architecture to be incorporated in Windows.And we’ve been working with a number of people in the OEM community to do that.These companies will actually begin to deliver new large screen personal computers that will be sold and used primarily as televisions, but which do retain their capability to do all existing traditional PC functions.It could do Word and Excel and PowerPoint.Perhaps more likely your kids will play very contemporary, high-performance video games on them.And at the same time it will become your interface for integrating many different types of entertainment.

We are moving ahead to build this into personal computers that will ship this year, even in advance of the time when true digital broadcasting technologies are available.But, here we have the ability at least to use digital transport and progressive digital display, to make the most out of the traditional video medium that is sourcing this.By virtue of these actions, and other things that I’ll explain in a few minutes that we’re going to do this week in San Francisco at the Windows hardware engineering conference.We believe we’re on a track to have the personal computer industry deliver about 40 million personal computers that are broadcast enabled by the year 2000.And we’ll do that in a variety of ways.We’ll do it as small screen and big screen.We’ll do it in pure software techniques and we’ll do it in hardware-assisted mechanisms.And we do believe that this is the route from the entertainment PC to full-fledged digital television in the future, in the very near future.

[Video presentation.]

MR. MUNDIE:So as you begin to look at this, you begin to understand the power that comes from assuming that you have some type of software and computing capability embedded in both personal computers and digital television.You begin to realize that you can unleash a lot of power in the creative community around the world when you give them access to these new kinds of tools.And understanding how this works, a very simplified diagram, basically you have a broadcaster, he wants to put traditional video bits into this big pipe that he’s got.But, we not recognize he has these new opportunities, both for new forms of entertainment and new businesses.And we want to put these into that pipe too.So we’ve basically taken the architecture of the Internet and essentiallyadapted to a broadcast medium, such that people who develop a single form of programming can deliver it, whether it’s over the VBI transport, as we showed you in an analog environment, or whether it’s over a digital transport — intrinsically digital transport, like the direct media satellite.

Direct TV has made a huge commitment, and we’re very pleased that they have, I believe it’s their attempt already to dedicate at least one entire transponder on their satellite to doing nothing except IP multicasting, as these services come on the air.What we showed you is actually a live engineering test on the digital TV — Direct TV satellite today.So this technology is not something that’s speculative or far in the future.These things are essentially going across that air space right now.

If you contemplate a day where the personal computer or perhaps an intelligent set-top box, or digital television, also has other forms of communication, then you essentially can close the loop.And while you wouldn’t want to use the broadcast medium on a personal delivery basis, just because of the sharing inefficiencies, it does allow you to do many other interesting things.For example, to do shopping, looking at a video catalogue that would get delivered to you and stored in your computer or television.And being able to place orders, using interactive Web type operations, where the order is then placed, using the more traditional dial up Internet environment.Because these things are all architecturally the same, the user sees a seamless blend of these things.

Also, you saw here today, perhaps for the first time for many of you, an electronic programming guide, the likes of which we don’t think anyone has ever built before.First, the component technology that allows us to build it makes it portable.So essentially any environment that Microsoft makes its Internet Explorer technology and Windows operating systems available.And we expect through our Windows CE efforts, to see that move into a wide range of appliances, including digital television.As a result, it also has created the ability for us to have a guide, that for the first time is both agnostic, as to the sources of the guide information.

And is an important part of breaking what I call the six remote controls problem.Where today every time you get a new piece of consumer electronics, you get a new remote control and it likely doesn’t have anything to do with any other remote control that you have.And consumers hate that.Now, what we hope to do is to take this kind of guide technology, which we think is intuitive and which allows us to integrate all of the different forms of entertainment that a consumer might choose to have in his home, or subscribe to.

We didn’t show it today, but there is actually no reason that thesesame types of controls couldn’t control a multidisk DVD changer that sat next to your television as part of your entertainment center, such that when you search for the movies, it might just as likely show you a movie you already own, as a movie that you might get off the satellite or off of the cable that evening.And the ability to integrate all these things into one uniform presentation for the consumer, we think represents a radical step forward in terms of simplification for the consumer.

I’d like to talk briefly about media production issues.What we’re really talking about here is the need to merge the traditional form of live action or film-based production with these new synthetic media.Here all the bits that you’re seeing on the screen aren’t being sent as video.In the example of these enhanced television productions, the graphics that you’re seeing are created on the fly, locally, in the receiving device, whether it’s a PC or a TV.So one of the reasons that we’re very, very assiduous in our request that the broadcasters think hard about how they apportion the use of bandwidth in the channel is because we do believe that these kind of locally generated graphics, composited with the video production, really is of much more — a much richer pallet for creativity, going forward, than just the traditional forms of video.

But, people want to repurpose the media assets they have.They want to author once, play it anywhere.So the ability to have many different codices that allow the delivery of the same content in an automated way, across many delivery platforms is very important.We haveto target mobile resolution systems, from the Web, where we want to just see these things, for example, as a video ticker, you might want to monitor as a postage-stamp-sized thing on your screen, you know, all the way up to very, very high definition display systems in the future.

We showed you examples of low bit rate video, where people are using it for access to a specific video information stream.I think exactly these same techniques could be used by a broadcaster, for example, to offer, either for free or maybe as a special benefit or subscription based service, alternate camera angles in a sporting event, sent as low bit rate video, not full high quality video.So that the consumer has his choice of looking at some other things.It’s, essentially, the ability to have an arbitrary number of pictures in picture kind of presentations, which are controlled in a collaborative way between the producer and the consumer.And we expect ultimately interoperability to be a requirement between these authoring systems.

So Microsoft has been cognizant of this for quite some time and one of the things that we’ve done in the last couple of years is work hard to make Windows NT workstations a great production platform.Three or four years ago, the video production and audio production businesseswere dominated by products that ran in the MacIntosh or Silicon Graphics workstation environment.And even then we believed that the personal computer and its progeny were going to become important playback environments for all forms of media.And so we went to work and, in fact, including the acquisition of SoftImage a few years ago, and have essentially worked to build an entire new generation of tools that will aid and abet the process of creating these new things.

Also, here at NAB, SoftImage, which is also part of my division, is demonstrating a product we’ve worked on for over four years, which is called Digital Studio.Here we have the ability in a single personal-computer class workstation product to do integrated video creation and finishing, in a resolution-independent way, all the way up to cinema quality film.It’s platform independent.It runs in many different environments.It’s a scalable architecture, which allows people to come along and plug in different types of video storage mechanisms and video coding and input mechanisms.And it allows people to work in either a stand-alone or a group collaborative environment.

So in a single feed product, Digital Studio, which we will ship in a production form later this year, allows the integration of full nonlinear editing, full audio editing in real time, including scripting, 3D paint, and titling, and later the direct ability to do 3D modeling and animation, all in a single workstation environment.So if you’re a small company and you want to actually use these technologies to use multimedia and enhance your business, you can buy this, probably for maybe $60,000 or $70,000.

It probably provides, at a professional level, roughly the equivalent of somewhere between a half a million and a million dollars worth of collective audio, video and editing suites.And so this shows what happens when we begin to apply software techniques and let Moore’s law continue to improve the platform, in terms of being able to lower the cost and essentially be another key part of solving this problem of how do you get essentially desktop video publishing.

So we talked a bit about better PCs and how they’re coming even this year to become a vehicle for us to learn and deliver some of these new techniques for better television.Let’s talk a little bit about what we’re specifically doing to mirror that in our work in appliances.What we have is the development, over quite a period of time now, of a new special version of the Windows operating system family.We call it Windows CE.We launched this product last November here in Las Vegas, at COMDEX, with a device category called the hand-held PC.It’s a small device, weighed under a pound.Basically, it had the compute power of about a 486-66, in a device that runs for about three weeks on two AA batteries.

It borrows many of the design elements of the Windows user interface, because we felt that there were many, many people who use Windows who wanted to take a lot of their information with them.And we worked hard to create a synergy between the traditional computer desktop and its ability to host this device that you would want to carry around in your pocket.Having developed that, we’ve taken all the work we’ve done in the last four years about developing interactive television and set top boxes and multimedia technology for the PC.

And we’re well along in the process of developing a versionof the Windows CE that not only will go down and support new applications, like smart, Internet-based telephones and wallet-based devices, besides the pagers, and mobile devices like automotive PCs, but this, in fact, will become our operating system product that we offer to the world’s manufacturers of consumer electronics for an entire range of families in the TV display category.So in our mind this includes DVD players, Web browsing systems for the television, televisions and set top boxes and game machines.

At this point, I want to stop and highlight that I’m incredibly excited to announce at this moment that, earlier this morning, Microsoft has completed a tentative agreement to acquire WebTV networks of Palo Alto, California.Through their efforts, combined with the Windows CE program, we hope to dramatically accelerate the merger of the Internet and television.And I have with me, here in the audience today, a couple of the founders of WebTV Networks, Steve Perlman and Phil Goldman.Their colleague, Bruce Leak, their founder has been in Redmond through the night finishing the Ts and Cs (terms and conditions) with our lawyers.And I’d like to have them join me on the stage today and tell you a little bit about WebTV and what we hope to do together.

[Demonstration.]

MR. MUNDIE:Before I go on, just a few key parameters, because I’m sure people will be curious.WebTV Networks will operate as a subsidiary of Microsoft.It will remain in Palo Alto, California, where they were founded.The company will continue to be managed by Steve Perleman and his executive group.Steve will report to me and the subsidiary will be part of the consumer platforms division at Microsoft Corporation.WebTV Networks is not a public company.It’s a privately held company at this point.But, we are disclosing that the valuation of this deal was $425 million.So Microsoft is deadly serious about combining the technology of brilliant people, like the ones who were just on the stage with me and these other brilliant people who have been here all through this presentation, to really drive forward and create remarkable new ways to deliver programming to people, both on television and personal computers.

Through this marriage we expect to create great opportunities for a great many constituencies.Broadcasters, we think, could have new forms of programming, they can deliver new services, perhaps not all advertiser supported.They should be able to target new audiences, like NPR is doing through the Internet.Bottom line, they should be able to get new revenue.Perhaps one of the things you might notice, as this presentation has worn on, even completely independent activities, like those of WebTV, have shown that the use of software and contemporary microprocessor technology produces surprising results.

If you look at their video flash technology, you might say, gee, it looks kind of similar to some of the other things we showed you.These are very, very — there’s a pattern here.The pattern is, we should not get ourselves bound up in a very statically defined system for the future of video-based communications and entertainment, because in doing so, many of these new opportunities that I’m talking about, in our mind, are likely to be foreclosed, either permanently or for a very long period of time.

So we think there’s opportunities for equipment manufacturers.We think there’s a clear upgrade path for the consumer.One of the reasons that we acquired WebTV , is that we think they’ve done a brilliant job creating a server network that these devices know how to call home to.And because of that sort of bookends relationship between the client architecture and the server architecture, over any IP transport, the things that you see today, which are limited by the performance of that dial-up modem, can be radically improved as these boxes come to talk through other transports.

Interestingly enough, the IP transport over the satellites, VBI transports, these are all IP transport mechanisms, the lingua franca of the Internet.As a result, it shouldn’t surpriseyou to believe that there will be a rapid and easy marriage between the technology of WebTV, both in their network operations and in the architecture they’ve developed for their client’s set top boxes, with the work that we’ve already been doing for several years in Windows CE, the Internet Explorer technologies and the entire raft of tools necessary to produce these new, enhanced forms of programming.And we’re not talking about a distant future. These IP transports, whether it’s dial up, cable modem, VBI, terrestrial broadcast and satellites, essentially are all possible today.

We think through this there will be a resurgence in the interest in consumer electronics, not only for the television and personal computers, but for all of the things that can then plug and play in this environment of intelligent appliances.For the production community we have new ways to deliver creative programming.We have an explosion in demand for new forms of creative programming, because we’ve been breeding in our children an interest in these kind of multimedia experiences.They grew up with video games.They see personal computers at school and at home.This stuff doesn’t frighten them.They relish interaction with it.They are your future customers.Bottom line, production companies should have better revenues.

Little V and big D, which is a little bit of videoand a hell of a lot of data.At the same time, we have the enhanced PD broadcast environment.We’re putting this into the Windows PC, where we have big V.We can do any class of video you want, at any bit rate you want, integrate in any Web page you want.And so we’ve got the ability to have a tremendous amount of data in this environment, and we’ve built this in as a standard product of both of the Windows operating systems.As a result, we think this is the underlying technology base for digital television.Big V, big D, taken together to create the future of video based communications, whether you call it a better PC or a better TV.We think you’re going to need both.

So basically we’ve formed a DTV or digital television team initiative.Initially, this has resulted in efforts by Microsoft, Compaq, and Intel.We have worked behind the scenes with a number of other companies who, I think, will rapidly come public with their support for the basic tenets of this proposition.And we intend to detail our recommendations, not only for the encoding, transmission,receiving and display technologies as they would be optimized, to deliver this vision that we’ve shown you this morning, but we believe that we can also identify how we can work within the constraints that the broadcast community has, as they rush headlong toward the deployment of at least terrestrial broadcast video.And hopefully find, following close in their footsteps, the satellite broadcasting community and the cable broadcasting community.

One of the ways that we intend to achieve this, is we will publish this specification for what we think can economically be built as the basis of the first level of high definition television delivery systems.And we’ll publish it openly at a venue called WinHEC, starting Tuesday in San Francisco.WinHEC is the Windows Hardware Engineering Conference.It happens every year.This year they’ll probably be thumping close to maybe 4,000 people, who are the engineering management and business management of virtually all of the world’s personal computer manufacturing companies, at every level from chips to boards to whole computer systems.

Every year this community convenes and talks through a recommendation made by some of the leading companies, like Compaq, Intel and Microsoft, for what will become the baseline specification for the various forms of personal computers in the year to come.So MSPC-98 spec, we intend to provide guidance as to our collective recommendations.And, while it certainly is always a voluntary basis as to whether the companies elect to do this or not, certainly our experience has been that the bulk of the computer industry move aggressively to implement these recommendations.And so we’re going to be recommending that every personal computer developed and sold next year, for what we call consumer configurations, which are small screen multimedia PCs in the home, and large screen, what we call entertainment PCs, which are really being launched this year with this broadcast architecture for Windows and the Direct TV services, every one of those we hope to see build conforming to this specification.

As a result, we think we have a clear path to exploit new compression technologies, lower cost components, and new software algorithms, to even in the terrestrial broadcast channel, in the nest few years, go to high definition formats to extend the progressive 1080 line formats and even beyond that.And certainly in the context of satellite and cable systems, to be able to go to those levels and beyond quite quickly.We will provide these in both large and small screen versions and also in intelligent television.Compaq Corporation has already announced publicly that they intend to provide a line of digital televisions that conform to the specifications and allow a seamless user experience between the full PC products that they’ll ship this year and the digital TV and digital PC products that Compaq will introduce for consumers next year.

We believe we can start with a very rapid introduction, phasing in new technology on a rapid basis, as we are want to do in this industry.But, in all of these products we’ll be able to have an integrated program guide, providing a uniform consumer experience across all these appliances, much like the one that we showed you in the broadcast PC architecture today.We believe that this architecture and proposal for implementation husbands that incredibly scarce resource called bandwidth, particularly the bandwidth that’s in the air.And provides flexibility in its applications that goes well beyond that, that was really contemplated actively in the production of the APSE proposal.And it allows the immediate leveraging of Internet systems and tools to allow the creative community, many of whom you’ve seen in the videos here today — they are embracing this technology.They want to differentiate their products and we want to give them that technology.

To close today, I’d like to give you a demonstration of the base level of technology that we intend to put into personal computers next year and into digital televisions next year, in order to build a base, a base perhaps greater than 10 million devices that will be sold to consumers just in the United States in calendar 1998.And to give you some personal visceral sense as to whether or not these proposals are really adequate to launch the world into digital high definition television.

In the last year and a half, as I’ve worked with many in the broadcast industry, negotiated the changes to what became the FCC rule and order for digital television, and helped to try to share our vision with many of the executives in the broadcast community, I found one interesting fact.The vast majority of business decision makers, in the broadcast industry, have never actually personally seen any demonstration of most of the high definition technologies that they’re being asked to deploy.And, as a result, they actually don’t have a personal opinion, other than what they hear from engineers and read in white papers, about whether or not any of these proposals are truly something they can be proud to stand up and deliver to their consuming public.

So just to give you at least a little flavor, and recognizing even here we have, you know, the limitation of a very large viewing environment, we’re going to show you a couple of demonstration clips now of the basic video and film formats that we intend to support in these digital TVs and PCs next year.

[Video presentations.]

MR. MUNDIE:In summary, we face a question.We have the PC industry and the TV industry.Are we moving toward a common vision or a separate one?Clearly, in our mind, standards are emerging in many of the key technologies necessary to implement an incredibly rich environment for the future of video communication.We believe we have a deep understanding of the computer architecture, software, video, graphics, and other key elements necessary to unleash this kind of innovation, both for equipment manufacturers, TV set manufacturers, personal computer manufacturers, producers and broadcasters.The question is, will we elect to go forward together?

Many people in the last year have chosen to focus on the discussions, we’ll call them, between the computer industry views and the broadcast and television set equipment industry views as a war over interlace versus progressive.Clearly, there are elements that are important in how we approach this, but hopefully today you understand that in our mind, this isn’t an issue strictly of interlace versus progressive, or even a specific particular video format or resolution, or a particular compression methodology.In our mind, it’s about flexibility and making good business decisions.What we hope to do is show the broadcast and equipment industry that there is an opportunity to move forward together with the computer industry and, in doing so, not only get the world there faster, but get the world there in a more uniform way.

The computer industry has enjoyed the benefits of having worldwide de facto standards in virtually every element of the computer system and its communication system.And we want to see that same level of standardization brought to the rest of the world as we move to combine the mediums of digital television and personal computing.We think that that’s possible.We think that it’s low risk.We think that it’s lower cost, in fact, than the strategy that people are currently embarking on.And perhaps for all of us that have to make a business out of this, we think it actually is a better business.

So, with that, thank you very much for your time.