Speech Transcript – Lisa Brummel, Silicon Valley Speaker Series – Products to Enhance and Simplify Consumers’ Lives

Silicon Valley Speaker Series
Products to Enhance and Simplify Consumers’ Lives
Lisa Brummel, Corporate Vice President, Microsoft Home and Retail Division
Dec. 11, 2002

ROZ HO: My name is Roz Ho and I’m with Microsoft’s Macintosh business unit. Thanks for joining us today for Microsoft’s December Valley Speaker Series. Today, Lisa Brummel, Vice President of the Home and Retail Division, is going to discuss the company’s vision and strategy for Microsoft’s consumer division, including the next steps in developing broadband networking, intuitive software and totally immersive gaming products and services.

Lisa is currently responsible for overseeing worldwide development and business strategy for Microsoft’s line of consumer hardware, software and Macintosh products, so she’s my boss, as well as worldwide sales and marketing for all of Microsoft’s retail products.

Lisa has been working at Microsoft since 1989 and has held a number of management positions, including heading up the product marketing team for the interactive media division, the Visual FoxPro database product and Microsoft’s line of Macintosh applications.

In addition, she has been product unit manager for the desktop and decision reference product unit, responsible for the shipment of Microsoft Bookshelf, Microsoft CarPoint, as well as Microsoft’s line of kid’s products.

She holds a Master’s degree in business administration from the University of California Los Angeles and a Bachelor of Arts degree in sociology from Yale.

Lisa also serves on board of directors for the Washington Academy of Performing Arts and is active in charitable ventures associated in Hopelink Community Services Programs and the University of Washington Medical Center.

And, with great pleasure today, I introduce Lisa Brummel.


LISA BRUMMEL: Thank you very much, Roz. I always worry when the introduction might outdo the presentation, so thanks very much. I do appreciate it. And I’m really happy to be here. I do some down here periodically, because, as Roz says, I have a group of developers down here on the Mac team, so I do enjoy coming down here. But this is a little bit different experience for me, speaking to a group down here sort of on behalf of Microsoft so we’ll see how it goes.

I’d be interested, because it’s my first time here, to understand who’s actually attending. So if you’ll bear with me for a second, how many Microsoft people are here? OK. How many folks from other companies are here? OK. How many folks who just sort of read about this, were walking by the building and — none, OK, good. Is there anyone else who wants to identify themselves who I haven’t asked about? Well, in the Q & A you can do that part.

Let me give you a little bit about what we’re going to talk about today. I run what’s called the Home and Retail Division and the easiest way to think about what I do is consumer software and hardware for the PC. And there are little offshoots that don’t quite follow that route and, when I say PC, I’ll extend that term to include Macintosh as well, so I won’t keep going through each one. It’s a division that I think people really don’t see in total, so we’re going to spend a little time talking about it in total today, talking a little bit about how it got to be what it is and then really looking at the future challenges.

And this is a little bit different I think maybe for this series and for some of the presentations that I give. I don’t have the answers about what the future will be. I think I have a lot of questions and I’d be very eager to get input on that, but I want to give a sense of how we’re thinking about what we want to invest in in the future and what we think needs to happen in the industry for us to be able to continue businesses like that. And the
there really means everybody in this room who’s involved in the PC. We can be a part of it. We benefit from being a wealthy company and one that’s interested in investing, but we can’t do this by ourselves.

So maybe the interesting part at the end is to think about it more cooperatively than me laying out the exact strategy of all the steps, but let’s go through it and we’ll see how far we get.

So the Home and Retail Division, where does it sit? This is the organization. I think if you’ve kept up with the way things go at Microsoft we’re now in seven business units. I happen to be part of the Home and Entertainment Division. That’s made up of the Xbox group and my group; that’s the easiest way to think about it. So when it comes to the Q & A I sit next to the Xbox group; I am not in the Xbox group.

This is probably the slide that surprises people the most. This is actually a billion dollar division. We pull in a billion dollars in revenue. There are about 1,200 people worldwide in this business. We do over 600 products and we have many, many, many locations.

So oftentimes when you hear about things in my division, you hear about specific products, the hardware team, a piece of software. Actually when you roll it up it’s quite a large business. It’s a portfolio business. If you took this outside of Microsoft this would rival a company like Revlon in size. So it’s quite a large entity and quite an interesting entity.

And if you think about this business, that’s a billion dollars, and 20 years ago it was zero, so how do we go from here to there.

Let’s talk a little bit about what’s really encompassing this division. This is the circle of things that either we develop or provide. So as I said, it’s a portfolio business. We do the traditional home products that you see up here, the Picture It, the Works, the Encarta, the Money. We do mass products and services. We also deliver components to MSN for services that they put out. For those of you who are familiar with the new MSN 8, there are a set of services that my teams provide to that delivery mechanism. We also do PC games and hardware.

So we really think about all the products that get shipped to home users and to a certain extent beyond that, and the key point of most of it is they are shipped at retail.

So the orange circles are really our retail business and the blue circles are really our online business. So you can see there’s a separate part of our success that’s not just developing the products but understanding and creating and supporting a channel for getting those products to customers.

So let’s go back a little bit in the history. I think all of you have your timelines. I have to say we’ve used this timeline a couple of times in presentations and people are just fascinated because if you’ve been around Microsoft or Microsoft products at all there’s something on that timeline you remember and it usually either results in a smile or sometimes a laugh, occasionally a guffaw if you’ve run across Bob or ActiMates or something like that.

But it all really started back in 1982 when we put out Flight Simulator. We worked with the Bruce Artwick company and we did the very first version of Flight Simulator for DOS. That was followed in 1983 by the mouse. So the mouse you see right in the middle of that semicircle of mice was the very first mouse we put out.

And it’s interesting to note that when we did that product we didn’t do it because we thought there was going to be a big hardware business. We did the product because we thought it would help people use Microsoft Word more effectively. And it’s an interesting theme that I’ll kind of take through to the end. There are times when we’ll make investments in a business or make investments in an industry because we hope to stimulate growth or we hope to allow people to use products more effectively or in a deeper way. The mouse is actually a great example of that. It turned out to be a terrific business, a business we’re very, very happy with, but the intention initially was really just to get people to use the software more effectively.

So these early years ’82 to ’92 were really about sort of the beginning of experimentation with applications and hardware devices in the DOS world and probably the latter portion of that was beginning to prepare for the graphical environment.

And that’s really the point where I think we made a lot of bets and they may not seem like if you look at a billion dollars today it may seem like a great bet, but the fact is I remember having started in ’89, which was pre-Win 3.0, it was certainly pre what we think of as a major consumer division, it was a big risk to A) go into a market that was not typical of what Microsoft was involved in at the time, which was productivity software and operating systems, to have any understanding of what consumers would want. Because, if you remember, this was a DOS-based role. The notion of multimedia, except certainly a little bit on the Macintosh, but even there was very much in its infancy.

So you’ve got people working in homes, people in homes; what is the value of the PC to those people, what unique things can we bring to them on a machine they don’t even understand they need with tasks that they could never imagine could be computerized?

So I remember sitting around a lot and trying to think about what it is that we could do, what will the graphical environment present us with, what will hardware manufacturers be doing from a configuration standpoint and what should we be doing from an application standpoint.

I remember two funny things about the person that I was working for at the time. One, he was obsessed that people would be taking piano lessons on the computer, and I just wasn’t there. I couldn’t figure out how all of a sudden we were going to be learning the piano on the computer and not on a piano. The second thing he said is here’s this games company, they are really amazing, we should go buy them and no one in the company wanted to do it. It was EA. (Laughter.) So it goes to show you.

But I mean that’s really where we were. We were just sort of throwing this big net out there and trying to convince ourselves that things made sense and kind of taking some risks.

That led us to what I’ll call the multimedia era. So between that first point and what you see on this slide a couple things happened. We shipped Windows 3.0, and over time that was adopted. But probably more importantly, PC manufacturers enabled multimedia and prices came down to a point where a consumer actually considered buying a PC for their home. The big stimulus early on, and I think it’s the same today, although I haven’t looked at the statistics, was really around education. That was the compelling thing. Let’s assume you weren’t bringing work home, if you were truly just a home consumer, the education piece of it was the reason why people were starting to buy PCs in the home for their kids so they could be prepared for the future.

Well, as we saw the configurations coming forward and we looked, and Bill kept saying we’ve got to be in this business, we’ve got to be in this business, if you remember back then we were a computer on every desktop and in every home, we were the
“in every home”
piece of that. And he just said,
“Look, we don’t know what people want. We know what they do, we know what the PC is capable of. Go out and start investing. Put products out there. Get the right content, get the right developers, take advantage of the technology in a way that’s unique and compelling and start getting products on the market.”

So we went into this. ’93 to ’97 was an incredible development investment mode for us. And if I look at the business strategy piece of it, that was one of the most important parts of how this business came together. We had someone who had foresight or tenacity or interest or all three to say just go do this, it will happen, people will want this. Go make some mistakes if you have to, but really go broad with the type of products you do.

So you can see we have a wide variety of products here, and the fact that most of these products you don’t really see on the shelf today means a lot of the investments we made and a lot of the thoughts we had weren’t commercially right. I’d say we learned a lot, we learned a lot about partnerships, we learned a lot about what people want to do, we learned a lot about the need to have sort of a recurring experience on the PC and I think if I looked back, making that big investment allowed us to take that learning.

Probably the most pivotal product during this entire period was the Encarta product, for a couple of reasons. One, it was the first time you could be at home and say,
“I understand what an encyclopedia is. It’s the set of books and it’s the yearly update that they send me. Even though I don’t know how to cancel it; I know I’m going to get it next year. And they sit on my shelf and my kids use them when they need to do a report. And when I open them up there’s some words in there or some pictures and that’s an encyclopedia. And it’s very useful and it’s essential for my kids to get their work done, but that’s an encyclopedia.”

And all of a sudden when you start to add multimedia and you start to link information together and you allow kids and parents and anyone using a reference tool to really explore in greater detail, people say,
“Wow, now I understand why the PC adds value to my life, now I understand why it’s different.”
Because you took something that they understood, you took advantage of the technology and you made something that was compelling and better.

The other part about this product that I think is interesting from a business perspective, until this point we’ve put out apps which were quite good. Take Microsoft Works, for example. We’ve been doing it for many, many years. And we ship it in probably 20 different languages. Typically when you do a localization for Microsoft Works, it involves a translation. It involves a translation of the words, it involves a little bit of adjusting in the menus but it’s pretty straightforward.

When you look at Encarta and you say, OK, reference material is worldwide, everybody wants it and needs it and uses it, in fact, in Europe you might even make the argument that reference is even more interesting and more value than it is here in the U.S. Certainly there are key publishers whose information has been around for many, many years. And we have this encyclopedia that’s built off of a base of U.S.-based information. I can’t ship that in French. I can’t ship that in Germany. They don’t want our view of the world; they want their view of the world.

But when you look at it and you decide you’re not just going to translate the words, but you have to effectively rewrite all the content, not just rewrite it, add new and have it done by an authoritative group within that country. It’s quite daunting to say this is what a typical localization costs us. Multiply that by 15 per product and then tell me whether you want to invest in that business.

The good news is we decided to make the investment and I think it’s an important way of extending what we do. There was a notion that it’s not just about what we do, but if you really want to make consumer products around the world you have to be sensitive to the issues associated with the content in those products. So it was an incredible learning for us as we though about consumers outside the U.S. and we had a much better understanding of the cultural nature of a lot of what we do.

So Encarta was really a pivotal commercial success for us but also a pivotal learning in terms of lessons that we take forward. So this period we put out lots of products and sort of see what the world looks like.

The 1998 to 2000 period was when we actually started to pull back on development. So we had gone through five years or so of just continuing to pump products out into the marketplace. We began to get market data back and it was a very broad and very thing portfolio of products. We were kind of all over the place.

And we stepped back and said, OK, we’ve now built a base of users who we can actually get feedback from. Had we tried this five years ago there really wasn’t anybody there to talk to. They didn’t have the PCs yet, we didn’t have the products yet. We have enough people out there who have actually used the products and can give us feedback.

So we shifted our development money from actually writing code to doing user research. It was now time to say what should we be doing really going forward. We spent a good amount of time looking at that.

The other thing that happened was actually a market factor, which we certainly never anticipated or had ever participated in, because we were not a consumer company. We didn’t understand that oftentimes the price can outweigh the value. We didn’t understand it. If there were two products and one was at 49 and the other was at 29 but the 49 was like way, way, way better, people would still buy the 29. Hey, that’s a hard learning, I’ll tell you, because your development models aren’t set up for 29; they’re set up for 49.

So I think we were scrambling, and that would be polite to say. We were scrambling because this was a very different learning than we had experienced before and we had a set of folks doing development who had a great methodology, had a ton of talent, were putting out what they believed was just amazing quality work. And I have no disagreement with it. The problem was the consumer market doesn’t always value that. And when people get very aggressive in pricing, sometimes the value just gets wiped out in the consumer’s mind.

So I’d say this was a period where we learned a lot about our business as well as learning a lot about our customers. What it resulted in was allowing us to settle on what I think are the core strengths of what we do today. We figured out pretty quickly how to run a business at $29 products. Thank goodness, because now they’re at $19.

So you can say, well, Microsoft has a lot of money and it just all gets absorbed. No, uh-uh. I can tell you, running this business, every business unit has a P & L. We run everything individually as a profit, so it doesn’t get absorbed someplace else. If you pulled us outside, you would look at these businesses on P & Ls that would clearly show what we do in every business.

So we learned some incredible business lessons in how to run a business lean, how to turn products every nine months, how to speak to customers in a different way, how to develop products where the key things you need pop to the front, because guess what, consumers don’t have three hours to sit down and play with their spreadsheet. It all seems like, yeah, well that makes total sense but it didn’t at the time. To us it was like people will want to spend hours with the products and we should make them work that way. So it was a fantastic learning period for us.

And what’s happened is it’s resulted in a set of products, which I think are core areas of focus going forward. We may expand these for new opportunities, we may contract a little bit, but I think the core that we settled on around education and reference around productivity, around digital imaging, around personal finance, around the mice and keyboard and extensions of the hardware products, that’s really what consumers told us that they wanted us to do.

We tried some other things. Probably the most glaring example of something we tried — I’m not going to talk about Bob — we talk about it all the time — is ActiMates, which also usually evokes a laugh or two. We didn’t do one; we did Barney and then we did Arthur and then we did Teletubbies and I’m not sure why we’re doing a product doll that didn’t talk in multimedia, but that said — (Laughter.)

What consumers came back and said really quickly was, you are not a toy company, you’re a technology company. We like your technology; that’s a good thing. The retail channel, the toy channel looked at us like you guys don’t know what you’re talking about. Consumers said, why would I buy a toy or a doll from Microsoft; I want to buy a toy or a doll from Fisher-Price, I want to buy a toy or a doll from Hasbro. So it was very clear from the feedback that some things that we had invested in that we thought were actually terrific extensions of the technology didn’t fit with what consumers expected Microsoft to be doing.

We had the benefit of over time now taking that technology and working with Fisher-Price and having them incorporate it in the Intelli-Tables. So we did actually find a way to bring the technology to customers, not through Microsoft, through a company that people would accept as being a toy company that was enhanced with some technologies, so sort of an after-the-fact partnership.

Well, what you see here is really where we settled our business and the place that over the past two or three, probably in the next many years will be the core of the investments we make in the consumer space. I think we’re very happy with the products. Generally they’re well accepted in the marketplace. We have our ups and downs every year with different products but generally I think we have a solid portfolio that we’ll continue to invest in going forward.

So if I look at that as the past 20 years and you sort of think through the first ten being figuring out, there’s a middle five where we just did this blanket investment, kind of the last five where we refined it and figured out how to make it successful, what do the next 20 years look like and how should I think about that?

So if I look at this business and I’m responsible for going to the executive management of the company and saying here’s the strategy for this business going forward, I’m in the process of formulating it. The areas that I’m thinking about today, and I think it’s interesting to pose these for folks who don’t work at Microsoft, for folks who work in the consumer space here, be they in competitive companies or not, these are questions that I think we all have to tackle because no one company is going to make this industry go for the next 20 years. We’re going to have to find a couple of things that make business sense and that make technology sense for the entire community and then I think we’re each going to have to put our best foot forward to battle it out, to help that growth continue.

But if you look at the areas, I’ve sort of gone through them in the following ways, and I’m going to look at them individually.

So what are the technology investments I should make or I should take advantage of in the next five to 10 years? The first focus for me is on the operating system. On the Windows side, what are the innovations that will be happening in the operating system that are interesting for me? So in XP the easiest one was sort of the ease of broadband networking, and that gave us the opportunity to think about doing some hardware that might make it easier for people to adopt broadband networking.

On the Mac side certainly with System 10 release and the ones that will come beyond, what will Apple be pushing us to do? We’ve had great discussions with the folks over there. I will look for Apple to push us to take advantage of certain things that they’d like to see help their customers move forward and we’ll have good discussions with them about that just like we’ll have with the Windows operating system team.

But that’s really the two things: first are what do the operating systems offer us from a technology perspective, and how does that cross with what consumers will want? When we go back we sort of said, you know, hey, there are these multimedia extensions and, hey, there’s this multimedia PC and, hey, we can do applications that come together, and consumers will see that as interesting. What is that next thing here?

The second is broadband connectivity. I brought up the specific example of a product but I think about this concept much, much more broadly. There has been a lot of investment in the market overall around broadband connectivity, around hotspots, around connecting people in a high-speed and wireless way.

I think that’s one of the key areas that will allow us to innovate in the future. If we thought multimedia was the thing that took us through the last ten years, I think broadband from a consumer perspective is the thing that takes us through the next 10 years. And it’s not that it isn’t fraught with many, many problems, but if you think about consumers in the home, think about the technologies that have happened. When broadband technology came out, people changed their behavior and their reason for buying the PC. All of a sudden everybody wanted to download music. OK, like I said, it’s fraught with issues; there are content-rights issues.

So the point to me was people changed, it changed the way people wanted to work with their PC. I should think that’s interesting. So if it really makes people change, how broadly can we make that happen in the future and what other ways can we offer people solutions with that as a center point.

So one of the things we think about in they very short term is multiplayer gaming. Multiplayer gaming is miserable until you get that high-speed connection. Once you have it you’re playing a different kind of game. And as a developer I have to develop a different kind of game for you. It’s that kind of thing where I say, OK, now I can start to think about consumers acting differently, and me developing for them differently.

So broadband is something we can really use going forward. I use kind of a personal example here. I was…I’ll admit to being very late in getting broadband into my home because when I’m not wearing my Microsoft hat,, I’m a true consumer and I’m not only a consumer I’m a cheapskate. So I was trying to figure out why I needed to do my e-mail over broadband when I could just dialup. And then my daughter suggested about this music thing and I pushed her off for a while and then just the tidal wave was too big.

But what I did was I said,
“OK, if we’re going to get this broadband thing then I’m going to try something.”
I put a Web cam at home and I have a Web cam in my office. And my daughter is not very technically savvy. She knows how to download music and do Messenger and things like that.

I just thought I’d see what would happen. Well, what happened was the first thing was she would figure out how to go into Messenger and start the videoconferencing and so she’d come home from school and I’d get the
“I’m home from school; let me make faces at you and I can see you in your office.”

And so that wore off after about three weeks, and then she realized that there was a share application thing and that was sort of the pivotal point for me where I said, OK, there is something here.

Typically what happens is she comes home, she’s 17-years old, 18 now. She does her homework because she has a lot of stuff to do at night. And the problem was if she had something that I needed to look at, it usually had to wait till I got home, she got home and at 10:00 she’s revising a paper. What she figured out was that if she came home from school and wanted to share that with me at 4:00 sometimes shortly thereafter we could sort of have this sharing thing and I could get it back to her and life would go on.

Now, there are lots of different ways. She could e-mail it to me. The point was it changed behavior. The point was we had a very rudimentary interaction that solved the problem that we had.

What if that interaction could be enhanced in some way? What if communication was different? What if I could really create an application that took advantage of the fact that I knew she was there and I was here and we were going to share things?

And we really took base level functionality, but I look at it and say could I make that experience better, could I do an application or a set of features that makes that experience better and that’s kind of how we think about broadband networking and I think it’s one of the critical things we do going forward.

Then the last one is really personal devices, and personal devices run the gamut and we really think very broadly. I have to say being a pragmatist I’m not quite as far as some folks are when I think about how to spend my development money, but I do understand that mobility, I do understand that at a very base level the vast majority of people have a cell phone; that’s also a new phenomenon. My grandmother has a cell phone. I say that, but my grandmother does not have a DVD player. My grandmother does not have a VHS. She’s 88 years old.

So you start and look at those things and say personal devices — in this case a cell phone — that can be carried with you and are interesting to you because they either carry information or allow you to share information are interesting for our future and we should be thinking about them as delivery platforms, creation platforms, I don’t quite know, but I do see a trend there that leads me to say that’s another area where we need to really focus on.

There are many subtopics to this. There’s a lot of technology exploration. There’s a lot at a lower level than this. But if I just sort of bring it up to the biggest business level these are the kinds of areas that we think about.

This is probably the thing that is the most difficult, the distribution piece of it. So today we’re in a retail environment that for our businesses is contracting. So I think I can probably find really smart people. I think I can probably develop great applications and I can develop great technology, but when I decide I’m going to bring that to market there is somebody in between. I don’t think that’s a bad thing; I actually think it’s a good thing. I think for us the retail distribution channel is a fantastic way to communicate to our customers.

But the issue is I need that channel to think as hard about its development as I think about the product development. So if I think about the channel as a product it’s not acting in a way that makes me feel great about my future business. How am I going to incent innovation in the distribution channel so that the products we all bring out in the future have a place to sit, be displayed and bought? It’s just that simple. Is it the true traditional retail channel we know today? There has been a ton of talk and a fair amount of action around Web services. Isn’t it just the Web that will deliver everything to you? Isn’t it pre-embedded? I don’t know.

I happen to do more of my business through the retail channel so for me that’s the one I know the most about and the one I feel I can have the greatest impact on, but I wouldn’t rule out that consumers may not think the way I think. Consumers may want to buy things in a different way and I’ll have to be cognizant of that.

So as I look at distribution and I think about how I’m going to spend my time this is one where I’ve got to get with my distribution partners very, very quickly and we have to step up from what are you going to put on the shelf next week to what happens a year or two from now, how are we going to stimulate growth, what do I give you and what do you give me. And in truth I need every one of my competitors to be doing the very same thing, because we need to expand the pie. No one company can do it. But it’s really, really critical to the success of this whole PC business going forward. But I don’t think any of the other channels in the short-term, the next five years, are going to overtake the equity that’s built in retail already.

Marketing is another one. If I look at just the PC software and hardware businesses the marketing spend by companies, including our own, in terms of demand generation, how much ad dollars are you spending in magazines, has gone down considerably. We had an interesting meeting about maybe four months ago with Bill Gates. One of the things he asked is,
“What are the publications that consumers are reading for PC information these days?”
So we gave him the top-five list and it wasn’t the top-five list from even three years ago.

So how should we invest in getting those demand-generation marketing messages out to people? And then what are the messages? How do we make our products relevant in the future? Is it just about saving you time, is it about price, is it about some new cool thing that you have to have? It will be very interesting to figure out what that is. And are there new methods? Should we be investing in thinking about new methods to communicate with people? Should I work with Dell or Apple to figure out a deal where I can embed something on that hard drive that continues to give you a message about my products? I don’t know. That’s an example. Are there other ways that we don’t even know about today? I think it’s very critical because if we’re going to develop those channels we have to start spending now.

Investments in partnerships: This is actually a very quick slide in a way to probably the most definitive point I’ll make today. We will continue to invest in this market. We will continue to invest in the channel, in product development, in the marketing. I think there is the same level of support there was when we did this whole multimedia push from my executive team telling me to keep moving forward. And I want to say that in the hopes that there are other folks out there who say,
“Well, if they’re going to do it maybe we should do it too.”
So I think it’s really, really important. Consumers are out thereneeding new things. The problem is we’ve kind of constrained the opportunity or the interest that people have in continuing to invest and we want to stimulate the market enough to encourage more investment going forward.

So a couple of summary points: It’s been really a great 20 years. I started in this division in ’89. Roz said I did a couple of other things; it’s true, I did. Between ’92 and ’94 I wasn’t related to the Mac or the consumer division, so two years out of my 13 I wasn’t in this business, but really for 13 years and certainly since 1994 I’ve been in this business.

This has been a fantastic business. I mean, I do love giving this presentation because it’s just very different than other presentations I give at Microsoft. It’s a terrific business. I am looking forward to the next 20 years. I am looking forward to those hard bets and the big bets that we’ll make, and looking forward to seeing whether they actually make it in the marketplace or not. I think there is a big future for what we do. I think there’s a very big future for what we do and I’m responsible for helping a part of that move forward.

We will do everything we can to support this industry. There is no doubt about that. There are a lot of messages around Microsoft that float out in the marketplace. I’ll tell you just from my division we are very committed to this business, we’re very committed to continuing to invest, we’re very committed to innovation across the line in products, in channels, in marketing, whatever way we can, and we hope you will join us in that.

So I am looking forward to the next 20 years and hopefully they’ll be even better than the last 20.

I’ll stop and take questions, and I’ll also mention that you’ll notice we have a set of products here that we brought down as representative of this division. We are going to have a raffle for all of you who put your business cards in. So don’t think we won’t save time for that at the end.

QUESTION: You mentioned upgrade, for instance, when you had an encyclopedia that you got the update each year, but I haven’t seen much in the way of upgrade pricing or coupons for the home products. And the other part of that question is how effective are coupons for rebates?

LISA BRUMMEL: So we haven’t done much incentives to upgrade because there’s not much price left. If people are buying products at $19 to $29, there’s not a lot of room in there to offer an upgrade price for $9 or $15. It’s very different than Office, which is $499 and upgrades for $299. So there is definitely incentive and a reason to create another product in the marketplace. In the consumer space the prices are so low it’s typically easier and more economical for everybody to just pay that going forward.

Are rebates and coupons effective? From a customer perspective, definitely. From a business perspective it’s yes and hard to manage. The most effective coupons, as would make sense to anybody here, are the ones that come closest to getting you to free. So if you have a $99 product and you get $10 off the redemption rate is going to be a lot less than $99 and $50 off. I think that’s pretty logical to folks.

But yes, they do work. They do tend to really not allow — once couponing starts in a particular business, it’s very difficult for prices to ever go back to the point at which they started. So if you decide to use that tactic in the marketplace you understand the ongoing ramifications of it.

QUESTION: On the content-generation side I believe that on the Encarta product, wasn’t that licensed in from Colliers encyclopedia, and today what is your policy on generating your own intellectual property content versus licensing in, and how do you make that risk investment decision?

LISA BRUMMEL: Actually, the original Encarta was started with content from Funk & Wagnall. That was our first basic content, and then we purchased Colliers and added to it later on. Over time we generated our own content, so we own, I’ll say we own all the intellectual property associated with Encarta. That’s not completely true; we site some of it out, but mostly we ended up creating the editorial staff ourselves and having that group go forward based on content that we started with the Funk & Wagnall and Colliers.

How do we make that decision? You know, it’s a little bit like the toy decision in a way. We were fortunate to have started early in the multimedia market and early in the content market, and we were able to establish I’ll say a new genre of content called multimedia encyclopedias. And in that case I think owning that body of content and using a reference content now across many products within Microsoft makes a lot of sense. I mean, a dictionary can be used in multiple different places, so authoring that dictionary you get much greater spend for your investment. That’s a rare thing. I think we thought it was going to be a more common thing.

I think Microsoft’s success comes from its technology, its business acumen and the software we develop, the technology we develop. While we appreciate content, we use a lot of content, we understand in the consumer business we must have content, I’m not sure we’re the best to always write that content.

So area to area, depending on the breadth of the content and the legacy of the content, there are some cases where we might choose to write it, but more often than not I think we’re looking to partner with people who do content and have that reputation built already. It seems to be a better match for what we do and what they do.

QUESTION: Do you see Microsoft much like Apple and Gateway initiating their own retail store initiative?

LISA BRUMMEL: I don’t see us establishing our own retail stores. We’ve done a number of different experimentations around store within a store. We did a store here in the Bay Area actually for, I don’t know, two or three years probably, and we had some learning from that and I’m going to go kind of along the same vein. Our strength isn’t running a retail shop. Our strength is certainly participating in the retail environment run by people who understand retail, no doubt about that; I’m just not sure it makes sense for Microsoft to build retail expertise because I’m not sure we do anything that’s unique enough. We are a mass vendor.

So the Nikes, the Sonys, the Apples, who really know how to characterize sort of I’ll call them boutiques, but I certainly think of Nike as a very broad-reach manufacturer, but who really need that design view use their retail channels very much for that, almost in a marketing way. I don’t think you’ll see us really getting into that business because running a retail shop is not our strength.

QUESTION: I’m curious, does Microsoft still have any programs to support independent application developers beyond the MSDN thing, but maybe with special hardware and research facilities as sort of an incubator or grant program or anything? And where would I go to find information about that?

LISA BRUMMEL: That’s a very good question to which I don’t know an answer beyond the MSDN piece. But if you will leave your name and however you want us to contact you with anybody here, let me just make sure we get his name, I will get you that information because I don’t actually know the answer at all I’m sorry to say.

QUESTION: How did the Internet boom, particularly since it pushed down prices to almost free, particularly on content and other things, how did that affect the retail business and how do you see that affecting your retail going forward?

LISA BRUMMEL: It actually didn’t affect our retail business other than in perception, I would say. The dynamics that were happening in the retail business were very separate from the Web. The only case where I might argue a little differently is actually Encarta. That’s a place where there is the Web, there’s the encyclopedia where you could probably make a pretty good argument that the Internet changed a lot about people’s interest in buying an encyclopedia. It’s hard to say though because at the very same time the Internet sort of boom was happening all the net to zero pricing was happening and it all happened in that category.

So I don’t know whether people saw the writing on the wall and said, I just want to get as many people out there with this product in our hand as I can so I’m just going to go net to zero, or whether it was simply an independent strategy chosen by a couple of vendors and we followed as well to go into that.

So I personally have not seen, aside from the Encarta case, the impact on our retail business as it relates to the Web in particular. There was this whole thing about people will buy only on the Web and you won’t need to deliver in CD anymore and, in fact, because broadband is not ubiquitous, it’s a very difficult download and it’s a very different experience.

And I think we’re now going to much more of a services play on the Internet, so while we will sell products, they’re different types of products and the customers will have different expectations for a 24/7 service that you buy, versus a CD-ROM product that you buy, and that’s kind of how we differentiate the two. But we haven’t really seen a big impact in terms of our bottom line. More of it has to do with just the retail economy itself.

QUESTION: I have a question about Works and whether its relevance is really shifting to the consumer, because what I see with my kids in particular is that their teachers have PowerPoint in particular and they’re doing assignments with PowerPoint, and Works doesn’t have it, and so I need Microsoft Office on my PC at home.

LISA BRUMMEL: We’ve had this discussion now for two years internally, I can tell you that. And what you said is something we heard a couple of years ago. We’re trying to figure out how to make that happen in the right way. We absolutely understand that PowerPoint has become a very important tool in education, a very important tool in schools and that’s being required, and we’re trying to figure out what the right way is, whether it’s an education SKU that includes PowerPoint.

A little bit of the problem with Works is it’s a fully integrated product, so to insert something into something that’s fully integrated already presents a separate problem. So there’s sort of a business problem and a technology problem that come together here.

I’m hopeful that by back-to-school season we’ll have an answer for you.

QUESTION: How important is the online retail channel for Microsoft compared to the bricks and mortar? And do you see marketing more as a demand generation tool or as a sales support tool or both and why?

LISA BRUMMEL: Online has grown in importance. The online retail channel has grown in importance for us at Microsoft. It’s certainly added to — well, I wouldn’t say it’s taken away from but it’s added to the retail stream of revenue that comes into the company, so we view it as very important and we’ll continue to work with the Amazons of the world who will distribute the online going forward.

So it’s very important and it’s growing. I wouldn’t say it’s grown to the point where we’re trading off between bricks and mortar and online. It’s a complement to, it’s another way of buying, we just add it.

In terms of marketing as demand generation or sales support, it is both. Right now we’ve used it much more as sales support because I’m not sure we have the right sort of big vehicles to go reach a broad range of consumers today based on the amount. If you look at the economics of how much it would cost you to put an ad in Time Magazine and the number of products that someone would buy at $29 after that, sort of look and say,
“not worth the investment generally.”

PC games is different. There are some cases where it does make sense for us to do very broad demand generation and that starts a little bit differently. There is sort of a buzz around the PC world where marketing is a little bit different than it is in our traditional consumer software area, but for us it’s lately been a sales support tool. I think going forward it will be both.

QUESTION: Would you please comment on your experience and thoughts on subscription pricing alongside or even in lieu of a single purchase price?

LISA BRUMMEL: So if you can clarify your question a little bit.

QUESTION: I’m interested in your experience and your thoughts on subscription-based pricing.

LISA BRUMMEL: Subscription-based pricing for a CD ROM product or an online service?

QUESTION: For products, yes.

LISA BRUMMEL: Yeah, we have one product where we’ve gone through sort of a subscription trial and that is the product that we bring up every time, which is Encarta. We had the first subscription trial where because we thought it fit within the encyclopedia business it would be a good place to try it.

I can tell you that either we haven’t generated enough need or consumers aren’t ready to have subscriptions it has not been a successful way for us to sell CD ROM products. Subscriptions in the Internet world where you’re buying services comparatively have been more successful.

So it’s a CD ROM product is something you will buy through a more traditional channel. A service, an Internet service, which doesn’t exist in another place, I think we’ve had a lot more success and had a lot more learning around subscription pricing.

QUESTION: Given the social trends around home schooling, which is skyrocketing, given that your own example was based on education, given that the lady in front talked about education, I’m both surprised and somewhat disappointed that education or some core element of education didn’t emerge as one of the areas of strategic focus for the future.

LISA BRUMMEL: It is. It is. I mean, I consider that an application area. Education, we have our pluses and minuses in education. We have the Encarta product, which is a great education tool. We have an education marketing group, which spends a lot of time out in the schools channel working on our products, everything from back-end servers to applications like Encarta and Office and that sort of thing that go into schools. So education itself is absolutely high on the list.

My personal team’s foray into education happened in a couple of different ways, and the first time we tried education was around the Magic School Bus products, which turned out to be just fantastic. It was a great partnership with Scholastic. We did 16 products over eight years with the company. People are still buying them today. I mean, that was a great experience but it was a very vertical experience. It was science content based on a television show that is sort of out of all of its content, and we’re sort of finished with that.

The other foray we had was into a product called My Personal Tutor. I don’t know if folks remember that. I loved that product, I have to tell you. I thought that was a place where we really did something smart with technology, where we could assess, if kids were going through an exercise we could do some assessment and actually bring the Little Professor up, have the professor talk to the kids, help them through the exercise and then go away. So what better way to have sort of a teaching vehicle.

The problem was the market — this goes back to the very first thing I said — we put a great product out on the market, but it wasn’t $9; it was $29. And the Knowledge Adventure products, and I give that company incredible credit for building that category, the Jump Start stuff was really ruling the day, probably followed by Reader Rabbit and Math Blaster. And those products were enough for the market. There wasn’t another way for us to differentiate ourselves enough to get customers’ attention. We were just late. We missed it. We started to invest in kids when we thought kids wanted a word processor and an art program, so we made Creative Writer and Fine Artist. Had we decided to spend our time at that point investing in education and curriculum, we might be having a different discussion today. We made one bet; the market was in another place.

Will we come back to try to support that? Absolutely. Education from an application perspective has been on the radar screen for years. We’re just trying to figure out again where can we add value that doesn’t exist today and we would very much like to do that.

So if anybody took away that education wasn’t important, I misspoke. It’s very, very important both from a Microsoft channel perspective and from a product perspective.

QUESTION: Do you see the broadband hardware that Microsoft offers as primarily a revenue channel for Microsoft or is it maybe a catalyst for more home networking type of applications?

LISA BRUMMEL: That’s an interesting question. We’ve only really been in the broadband networking business since September. I’m actually happy either way. I don’t know what it will turn out to be but in many ways I think it might look like the mouse. It might look like that thing that we put out in the marketplace where we tried to sort of address two things, which are security and ease of setup, because we thought those were two problems that people were having and so they weren’t getting into broadband networking. If it turns out that we’ve helped solve those two problems and more people get into broadband, I’m happy for all the other reasons that I talked about broadening the market. If it turns out to be a great business I’m happy because then we’ve hit on something where we’ve really met a user need and we can go forward with it.

So ask me a year from now because it’s a very interesting question. I’m sure I will be asked the question by my executives very soon so I’m trying to formulate a good answer.

I actually don’t know but I can tell you that if our entry is any indication the market has been stimulated significantly. Prices have become much more competitive and low, but there certainly was a market response. So if that’s any indication we’re in the right space; I’m just not sure how it will end up.

QUESTION: I have a question concerning home entertainment, like games. Do you think that Microsoft will move more toward sort of a studio model for games similar to Warner Brothers where they produce all the movies, or is it going to go more to like a book publishing where you’re looking for a bunch of independent authors working on different creativity segments and Microsoft acts more as a distributor and a promoter or similar to the music industry?

LISA BRUMMEL: Today we’ve kept the studio model and I think we’re pretty happy with the studio model. We sort of look on and off at the third-party distribution model, but I think we’re almost back to that same are we going to have a retail store. I think we’re very happy running or participating at the studio level because it’s more of what we understand. Third-party distribution, while we’re good at it, I’m not sure that’s our greatest strength. It’s probably to stick with the studio model, which we’ve already been involved with.

QUESTION: Most of the product lines that you described as being part of the home and retail division are standalone product lines, so they don’t feed into sort of higher level Microsoft products. The one sort of clear exception could be Money, which could potentially feed into Microsoft’s Business Solutions division products. So what do you do in terms of making sure your product strategy for Money is in sync with that of the Business Solutions division?

LISA BRUMMEL: Like Great Plains and things like that? Yeah, we actually spend a lot of time talking with them to figure out where the connection should be, and in truth there’s another piece of Microsoft, which is Wallet, the team that runs Wallet is another area, which sort of spans Microsoft but it’s something really important for us.

And the only systematic way I can say is we know who those people are, we have regular meetings with them. I wouldn’t say it’s a development goal but I would say it’s something we make sure we cover in every new version of the product to understand what the opportunities are, how much we should invest in it, what the end result would be. We wouldn’t want them to be incompatible but I’m not sure we’re developing them assuming every customer will go that path.

ROZ HO: I think we only have time for one more question.

QUESTION: I’m not sure if the Media Center and the air panel, the smart monitor technology is in your area, but if it is could you talk about it, if it’s not could you speculate?

LISA BRUMMEL: I would never speculate with a microphone on. (Laughter.)

QUESTION: Is Microsoft going to have any hardware around the air panel, the smart monitor as well?

LISA BRUMMEL: That I actually can’t comment on because I don’t know. It’s not in my area except for the fact that my retail teams do some work to ensure it gets stocked and supported and that sort of thing. But I haven’t been involved or spent a lot of time with those teams to really understand what their future strategy is.

So we can take one more. I couldn’t answer the question.

QUESTION: What is your revenue split between hardware and software and how do you see the evolution?

LISA BRUMMEL: The revenue split between hardware and software is actually almost 50/50 so they’re equal businesses in that way.

Do I see it the same going forward? Probably. I don’t see a big change, I don’t see a big shift really either way. Both of them have a very stable foundation and if they didn’t then I probably would say that. They each have investments and we’ll have future investments going forward that may swing them a little up or a little down, but there’s nothing I know today that would make me think the proportion would change significantly.

Thanks very much for coming.