STEVE BALLMER: It is my honor, privilege, excitement, to be here with you today. For all the things I do — and many of you have had a chance to hear this many times as I travel the world — but everything I get to do working for Microsoft, there’s one thing that’s most energizing for me — one thing, one thing — meeting with our partners. And you say, this guy gives this line to every audience he meets with. Nooo.

What’s special about this group? What gets me particularly pumped up? What is particularly exciting? Our partners are a unique blend, you are, of two elements. Number one, you’ve made a bet on us. You believe in us, you want us to win, you need us to win. You’re kind of like employees in that regard. But our employees are a little bit more captive. You have other options — every — our employees do, too — but you do — every minute of every day there’s somebody coming to you saying, Hey, we’ve got a better mousetrap; Hey, we’ve got a better idea. There’s a customer out there beating you out with somebody else’s technology. And so every day you’re in a position where you’re rooting for us, and every day you come to work you give us feedback, critical feedback, important feedback. What about this, Microsoft? What about this? What about this? You need to improve this? What about this? What about this? What about this? What about this?

I find our partner audience the most challenging audience I get to deal with. Our employees have had a little bit too much in the backwater, and our customers aren’t quite deeply enough bent on us the way our partners are. So meeting with our partners and getting a chance to hear what’s on your mind, what you’re thinking about, what your concerns are, your issues — for me is absolutely, positively energizing.

I am [email protected]. I will get 100 pieces of e-mail as a result of that statement. I love each and every one of them, and there will probably be 90 brilliant insights, five pieces of mail I don’t really understand — (laughter) — and five pieces of mail that just says, that was the worse piece I’ve ever heard. But, nonetheless, we want to hear from you and we want to hear you push us, push us, push us every day to improve — to improve, to improve, because with our improvement you improve; and, with your improvement, we improve.

So having this real healthy interaction between you and us is so critical — so, so critical.

Thank You, Partners

The second thing I want to say, since we’re in the process of finishing up our financial year — but I saw some early numbers — not that I could comment on them, because if I did you’d all be insiders. So I’m not going to tell you what things look like. But I’ll tell you they are not bad. (Applause, cheers.) Which means I want to say thank you, thank you, thank you, thank you, thank you.

We make 97, 98 percent of our revenue with partners, through partners — whether it’s reselling, partner service, partner training, partners ISV partners — partners, partners, partners. I’m not going to run through the whole partners program. So every year that’s a good year for us in a sense means it’s been a good year for you, and you’ve driven it to be a good year for us. So I do say thanks so much. You do have choices. Every day you can come to work and you make precious investments of your time and your people’s time and energy in our technologies and in our product line, and with our people and in our partner program. And the value of that to us is immeasurable.

You know, when this business got started, Microsoft got started, we made the decision then that we would be specializing somehow. This company wasn’t going to look like IBM — hardware, software, services — everything under the sun. We decided to specialize in certain fields. And we’re sitting here 30 years later, and some of you will say, well, geez, you’re in a lot more fields than you were a few years ago. And that’s certainly the case. But we still maintain a fairly straight-line focus. We are not in the customer services business. We are not in the reselling business. We respect our partnerships. We value our partnerships. We need our partnerships.

So I say again thank you, thank you, thank you, thank you, and maybe one more time, thank you. (Applause.)

The Next 10 Years

Okay, but this is a partner meeting. That was last year. Now the question is: How about next year? And the year after, and the year after that? Because in a sense your bet — you need to be forward looking. Whether it’s us or some other vendor or some other company, you’re asking yourself what’s coming in the next year, three years, five years, seven years. Is my investment, is my time with these guys still well placed? Are they going to drive technology forward? Are they going to bring good innovations to market? Are they going to work with me? Are they going to change the world? Perhaps most importantly: Are you guys going to win? You want to bet with people who are going to win. You win if we win; we win if you win. And so I know every one of you comes to a meeting like this, determined to assess that question: Is this a company that’s going to lead? Is this a company that’s going to win? And I can’t answer that for you. You answer those questions yourself. I answer it for myself every day. I come to work, and I’m excited and I’m enthusiastic. And I can’t believe what a fantastic job I have and opportunity that Microsoft has. And I can’t be more excited about what we’re doing. But you will make these judgments and assessments yourself.

I look out the next 10 years, and I see nothing but opportunity — opportunity everywhere we look — opportunity. Ask yourself this question: Do you believe the world technologically is going to look pretty much the same five or 10 years from now, or do you think it’s going to look quite different? If you think it’s going to look quite different, raise your hand. If you think it’s going to look the same, raise your hand. (Laughter.) I kind of made that impossible to put your hand up on, but nonetheless, I really was interested.

The world will change more in the next 10 years, I predict, than even the last 10 years. Ten years ago was kind of a momentous for us. Ten years ago was Windows 95. Ten years ago was Internet Explorer Version 1.0. Ten years ago, most people in the world did not have a PC. Ten years ago, most people in the world did not have a mobile phone. Ten years ago, most people didn’t know what the Internet was, let alone whether they needed to connect narrow band or broadband — and what the heck was a virus anyway? That was the world 10 years ago. And yet I predict 10 years from now the world will be more different than it is today versus 10 years ago. The advance of technology, the innovations that are coming to market, will really blow our minds. We’ve barely as an industry begun to exploit the power and potential on the Internet. We still have user interfaces that work like computers — they don’t work like us. I still can’t talk to my computer, have it recognize my voice, my meaning, my intent. All of that will happen in the next 10 years. Moore’s Law continues. It’s not being translated into additional processing power in quite as straightforward a way it was for the last 10 years, but Moore’s Law continues — communication, storage — everything continues to get less expensive.

And so the fundamental underpinnings of the hardware industry are ripe, and all it takes is the right software and the right services, and these next 10 years will be phenomenal. It is a phenomenal place to be, industry to be in, and we are phenomenally lucky and fortunate to be the leader of this industry. And we are investing in the technologies we think will enable us to continue to lead this industry five years, 10 years, 15 years from now. Sometimes we’re way ahead of competition. Sometimes, unfortunately, we get a bit behind competition. But we are a company that will relentlessly pursue the opportunities to innovate, to change the rules, and to break through. And we’ve been successful on that each and every time. We were successful in the original operating system business. We started behind actually in desktop applications — hard for a lot of people to remember that far back. We weren’t in the server business at the earliest possible moment. Those rules were rewritten. We innovated in the database business and the browser business, the e-mail and collaboration businesses. And in every case innovation has driven marketplace success.

And we continue to innovate. We’ll invest about (U.S.) $6 billion this year in R&D. That’s an imponderably big number — for me, let alone anybody who doesn’t have to do the accounting on it, the way we do. It is a lot of engineers with a lot of innovation that can build on each other — it’s tied together. You look at all of the products and all of the offers that we talked about, and really one of the most critical facts is that one plus one has to equal three — that you can use the same programming model and management model and user interface model in a business intelligence application, in a security solution, in a collaborative application or in a line-of-business process.

We look out the next year and, frankly, I think more than in any of the last few partner conferences, we really have the deck stacked to give you the new product flow and the innovations that could let you really push your customers to the next level and really allow your businesses to sign at the next level in terms of the important solutions that you can put in place for our mutual customers. This is small to think about. This year we’ll bring the beta of the “Longhorn” product to market — super important. “Office 12” — you’ve had a chance to have just a little glimpse of what’s in “Office 12,” which I think will be the most exciting release of Office in years, particularly for the folks in this room, because Office will be able to be really a part of the fabric of every business process and interaction around the globe. We just brought the live communication server in the Office Communicator to market, pushing us into the real-time communications business, opening up new opportunities for our infrastructure partners in communications and in collaboration. We have Exchange SP 3 coming to market this year with the new Windows mobile software. We are darn serious about driving Windows mobile devices to be the backbone of the way people from very small form factor devices get access to the information that is important to them. We’ve got the new version of SQL and Visual Studio and BizTalk coming to market this year. We have a new version of Axapta, of CRM. We’re launching our first small business accounting product this year in an important way coming to market. We’ve got Xbox 360 for some of you who want a little down time every now and then — (laughter) — coming to market this year. We’ve got new technologies for interactive television, which will be an important opportunity for some of you. And the list goes on and on and on and on and on.

We believe we’re committed not only to just getting you these important, exciting innovative products, but then in really working with you to make sure that our customers get value from them. We get enabling technologies. We talk about our mission as enabling people in businesses throughout the world to realize their full potential. But we get the enabling technologies, and it takes you and you and you, and all the folks in this room and many, many others, over 600,000 partners around the world, to galvanize those technologies and really let our mutual new customers realize the full value from them. We’re going to innovate. We’re going to innovate in the product, we’re going to innovate in the way we partner and work together. You’ve seen that in the evolution of the partner program over the last several years, because we know that we need that combined innovation so that together we can get the kinds of outcome that our customers, that you want and that we want.

At the end of the day, how do we measure how we do together? How do we measure? Simple. Revenue, revenue growth, profitability and market share. It’s a good old-fashioned measure, nothing all that complicated. We have a good year, our revenue grows, you have a good year, your revenue grows, you make money, we gain shares. That’s a very good year, in my estimation. I think we’re set up for many more good years — not just the next 12 months or 24 months. But we really are set up to go to the future. We have a solid base in our partner program. I think we’ve got partners more excited about it than any time I can remember in the last 13 years since we started our formal partner program. I think we’ve got the right innovations for the next 12 months and the right things in the labs for last three years behind. But there’s two more things we’re going to have to do if we’re going to seize the kind of ambitious growth and market penetration objectives that we both have.

Number one, we’re going to have to continue to face change, and face it together. If we talk about the world being substantially different in 10 years, and we agree on that, we also have to agree that things will evolve. The role of the Internet, the hosted services, will evolve. Our product line and the spaces in which we offer solutions like security and BI is going to continue to evolve. We need to evolve together. We are 100 percent absolutely, totally positively committed to our partnerships. But neither you nor we should be 100 percent committed to doing things exactly the way we do them today for the next 10 years. If you run your business exactly the way you do today 10 years from now, you’ll probably have a problem. If we don’t embrace the important things that are going to happen and be enabled by technology and drive our business, we will have a problem.

So what we need to commit to do is to continue to evolve, but evolve together, always having the dialogue, always making sure that we respect each other’s mutual skills and talents, and the mutual opportunities that are in front of us.

The last thing I want to highlight that I think we all need to do to succeed and to grow — and, frankly, a key thing if I’m sitting in your chair that I’m evaluating — is we need to execute. Execute, execute, execute, execute. It’s not all about programs and ideas and new products. It’s about everyday telling the story, helping customers understand where they can get business value. We’ve got to put the air cover out there. You’ve got to bring things alive for people so that they can really get the value out of them. Every day we have got to be executing very well together, delivering the key technologies, driving the overall demand, working together, and putting in place the solutions that really, really and truly bring value to our mutual customers, to where we can stand tall together and say our customers, ourselves, and Microsoft — we have all fully and truly realized our full potential. And that’s what brings us together. That’s what we’re going to talk about here over the next, or I don’t know, 45 minutes or so. We’ve got a panel of partners coming on stage. But if we do the kinds of things that I think we need to do, and that I know you think we need to do, there is nothing, nothing, nothing in front of all of us except the greatest of upsides. Thanks. (Applause.)

Partner Discussion

I want to invite on stage now with me three partners. We’re going to do a little bit of a roundtable Q-and-A session. We tried to pick partners from various walks of life. We have got one ISV, one large systems integrator, one smaller infrastructure partner. I’d like to have up on stage with me please Patrick Bertrand, who is the CEO of CEGID. CEGID is an ISV focusing in business process automation software, headquartered in France, about 2,000 people. They’re focused on fashion and in certain other industries. Please welcome Patrick. (Applause.) Next to Patrick is Tom White. Tom is the CEO of VL Systems from Irvine, California, great infrastructure partner for many, many years in Southern California. Please welcome Tom White. (Applause.) And lastly, but not least, of course, Brett Dawson, the CEO of Dimension Data. Dimension Data is a partner of about 9,000 folks headquartered in South Africa, but doing business globally, a systems integrator and outsourcer. Please welcome Brett Dawson. (Applause.)

OK, I guess I’m supposed to sit down. But if I wander around, please bear with me. I guess the first question goes to Patrick.

PATRICK BERTRAND: Thank you very much, Steve. What energy you have, you set a good example for us, and I’d like to thank you. You gave us the opportunity to write some questions, not only for Steve, but for the ISV community, because as you know, many and most of ISVs have made tremendous investments to develop new range of products, and CEGID made the same as well. We have a developed range of products based on the architecture, including most of Microsoft components, and much more dedication to vertical structures such as accounting firms, industry, industry manufacturing, fashion, and so on. Until now 80 percent of our clients and our customers are using CEGID software based on Microsoft architecture coming from 40 percent in three years. And so I’m sure that you might, why not 100, but I promise you to do the work and to work very closely with your Microsoft France team and the EMEA teams and I hope that we succeed to do that.

So my main issue and our main issue today is how could be the role of the ISV today as Microsoft is in managing the Microsoft Business Solutions, and what could be the role in the Microsoft business value chain? As you know, and we understand that probably we can have additional business and additional revenues coming from the services-oriented software, but basically we are R&D development, and we are sure that we can move further and go additional work and very good work together and very closely with Microsoft to develop new software applications.

So what do you see and how could be the role of the ISV in the future? And if you could go further and have some words about the strategy between .NET and MBS versus MBF, et cetera, as both are probably used in the future as business development platforms, that could be very interesting for us because we have to make some choice today. Thank you.

STEVE BALLMER: Let me talk in general about our evolving relationships with ISVs, and then let me talk specifically about MBS and MBF and what’s going on in that area.

We have a number of ISVs in the audience today who will say in some way, shape or form that some of the new capabilities that we’re bringing to together somehow overlap just something they do today. With Excel and SQL Server we’re adding some business intelligence capabilities. We’re adding security capabilities to our product line. We’re adding a little bit of document management and work flow in the next version of Office. Now, those are all good and important things for us to do to continue to extend the footprint of our very horizontal, very general purpose products. I think that’s a good thing for us to do. I think it creates great opportunity. And I think customers actually like this notion of being able to do many of their most important tasks directly from within applications that they understand.

We don’t think that that should be an issue for us and the partners in this room. It may be an issue between us and Oracle, it could be an issue between us and an SAP. I don’t think it’s an issue between us and the partners, most of the partners in the room here, who are simply relooking and finding new opportunities for both of us to add value.

I know we have some partners who have been around long enough that they’ll remember when there was a good business for partners who would take TCP/IP — who wrote TCP/IP protocol stuff, and integrated them in with the operating system. That is not a good service opportunity any more, but Tom’s business engaged in some of that probably 15, 17 years ago. But new opportunities have presented themselves as we’ve extended our horizontal footprint.

In the specific case of MBS, we have potentially made maybe a more quantum-leap, large decision, but it’s still more a decision. We see MBS as a horizontal application or platform on which we will need literally around the world thousands of partners who extend to bring vertical expertise, vertical solutions, vertical intellectual property that they integrate themselves. And we want those partners. We embrace those partners.

Some of those partners are people today who are building directly to Windows and .NET. Some of these partners will elect to build value on top of our MBS solutions. Some of these partners will say, no, I still see important needs for me to innovate — for whatever set of reasons — Microsoft’s underlying solution is not extensible — we want to continue to innovate in core ERP, CRM, et cetera. And so we want to have ways to work with our partners at let me say either level of integration. If CEGID wants to continue to write to our development platform, Windows .NET, our emerging MBS for Business Frameworks, which is kind of another set of building blocks at a higher level, we want CEGID to build at that level. If you want to add value on top of Axapta, we want you to add that value on top of Axapta. You have to tell us where our platform is extensible enough, where our business model works for you well enough, and we’ll respect the decisions that you make.

I think the degree to which we can give customers higher-level solutions through a simpler world for the customer, but at the end of the day, you make those decisions, and we want to partner with you, no matter how you choose to make that decision.

We do believe that the business application market will continue to — what shall I say? — get consolidated to some degree in the mid-market. That was a phenomenon we saw when we decided to enter the business with our app divisions of Great Plains and Navision.

If we compete well, we and our partners will help consolidate the market in a way that is of mutual benefit. If we don’t do our jobs well, SAP will consolidate that market, and SAP I think is far less interested in having ISV partners to write vertical solutions. I think SAP views that as really their proprietary input, at least from an application ISV development perspective.

So I think there’s great opportunity. We’ll respect whatever decisions you make, and I think for us it’s very important that we have you on our side. I think we, much like our infrastructure partners, if it’s us or IBM, we’re the right choice, because IBM does infrastructure solutions themselves. For our business application ISV partners, if it’s us or SAP, I think we’re the better guys to partner with in the long run.

PATRICK BERTRAND: Well, thank you. We can try to do both, that is to say to work for the future on the .NET and Microsoft Business Framework, and at the same time try to do some vertical applications on the Axapta business platform, and that could be a good way. But we have to be really supported by our partner, because we’re a partner.

STEVE BALLMER: That sounds great, and we love to help.

TOM WHITE: Steve, it’s a pleasure to be here. You spent the first 10 minutes thanking us, and I want to speak from experience of being a Microsoft partner for over 13 years and say thank you to you and to Microsoft for consistently having the best partner program in the industry. (Applause.)

Over the last three to four years, the growth of VL Systems has been fueled by us targeting the aging install base of NetWare and NT 4.0. Recently we started to see a rapid decline in these infrastructure opportunities. I’m concerned that there will be a substantial gap in this drop-off in the uptake for “Longhorn” slated for 2007. As an infrastructure partner, what customer business issues and scenarios do you think we could focus on to help bridge this gap?

STEVE BALLMER: Well, it’s a good question. I’m going to make just a few points, and I’m getting a little caged, so don’t mind if I move just a little bit off the chair. I feel really excited.

First of all, just in case anybody is confused, there’s still plenty of NetWare and NT 4.0 out there. I’m not going to tell you —

TOM WHITE: We’re moving it out —

STEVE BALLMER: But get every last customer over, every last NetWare customer, every last NT 4.0 customer. Let’s bring them over to the new technologies. I don’t want people to think there isn’t still some pretty good fields. You go into local and state government, some sectors — you can find a lot of that old stuff sitting out there. So just a small reminder before I really get into your question. (Laughter.)

In terms of other things from an infrastructure and information worker perspective, I see great opportunities. Let me give you just a factoid to think about. We kicked off Office 2003 two years ago — roughly. Office 2003 is still deployed on only about 10 to 15 percent of all installed PCs in the world — 10 to 15 percent. However, Office 2003 brought SharePoint. Office 2003 brought the new version of Outlook and Exchange and cache mode which is a superior experience for e-mail. With Office 2003, you can be looking at the new Exchange release and Windows Mobile and Mobile Solutions.

So if you ask me just in the straight infrastructure-inflation-worker-productivity business, you can take a look at NetWare and NT 4.0, you can take a look at the untapped opportunities with Office, with SharePoint and Exchange and Windows Mobile — all of that has incredible run weight before we get to “Longhorn” and “Office 12” roughly 12 to 18 months from now. So if you’re saying do we have opportunities — I’d say we have NetWare opportunities, we’ve got NT 4.0 opportunities, we’ve got Lotus Notes opportunities — just to remind everybody — coming out the yinyang. I’d never seen a customer base that’s more ripe to be plucked and moved than that Notes customer base — left and right, large account after large account that I meet with that’s a Notes customer — they’re just waiting for us and our partners to do the conversions.

But, putting that aside, you’ve got the NetWare install base, you’ve got the Notes install base, you’ve got the NT 4.0 install base, you’ve got the Office install base, you’ve got the Exchange install base. And despite all of the hullabaloo about BlackBerrys and blah, blah, blah, blah, blah — there’s only a few million of them installed worldwide. And I think we all know the demand for real mobile business solutions is going to be much bigger than that.

So just in this period of time, when you’ve got SharePoint, Exchange, Office 2003, install base migrations and Windows Mobile — and if that can’t keep you busy, I’ll come on down to Irvine and we’ll do a seminar something to help drive business together. (Laughter.)

TOM WHITE: Sounds great. You’re more than welcome any time. (Applause.)

STEVE BALLMER: Now I have to be careful! I’m only signed up for 6,500 seminars right there!

TOM WHITE: There you go. We’re kind of intrigued with the infrastructure maturity model from Gartner. I’m kind of curious: How can we get into those discussions with our customers to be a little more strategic?

STEVE BALLMER: The infrastructure is perhaps the hardest thing for most of our customers to assess the value of. At the end of the day, customers actually resonate that with the value that comes from the infrastructure. We do this annual CEO Summit. We bring about 100 CEOs from around the world together. And the thing that they resonate with are actually things like Office and SharePoint and Exchange and mobile devices — because that’s what business people use and touch. But the business space is never tangible for this stuff as it is tangible for a new ERP system or a new CRM system. And so I appreciate the difficulty. We’re working hard every day to come up with new ways to help make the return on investment models, to help folks like you, to help the folks at Gartner help folks like you. But I know we still have a ways to go.

TOM WHITE: OK, thank you.

BRETT DAWSON: Steve, our business, as you said, started out in South Africa, and we went very aggressively to networking sites, and then we expanded globally and really went out aggressively onto the Internet. We bought a lot of the infrastructure that the Internet runs on in terms of partners like Cisco really driving them up.

The last couple of years, though, we worked with Exchange, and we’ve been driving two fundamental transformations in our business. The first transformation is to extend our value proposition, taking us from networking, we’ve gone into office telephony, which has been great, security, the datacenter, the call center, sort of client great value proposition.

About 18 months back we made the call in this space to really select Microsoft —

STEVE BALLMER: Thank you.

BRETT DAWSON: — to select Microsoft as our go-to partner to extend that value proposition. We had to turn around to all our techies and shut the door on all the IBM stuff. So we went off to Microsoft, and it’s important to understand that. So we just backed Microsoft. (Applause.)

The second key theme is trying to transform. So the value proposition is the first, the second one is to move our business from a preponderance of product sales into lifecycle services. So we’ve been driving very hard in professional services and into managed services. And as we go into every one of those market segments we’re going to have a whole lifecycle of services. So if we’re selling IP telephony today, that’s a managed IT telephony service, with security wrapped around it, all that kind of good stuff.

So the key thing for us with Microsoft is about managed Microsoft services. That’s what we want to do. So when we look out and we see announcements about use products, we’ve managed some of the your clients’ infrastructure, projects like Energizer, we’re very interested to expand obviously from your agenda, from your mind, what exactly is your intent within that managed services space.

STEVE BALLMER: For many years actually now, we have had partners who have not only done infrastructure systems integration and have tried to run infrastructure particularly managed services on our technology. And we’ve tried to improve our products to facilitate your doing that. We’ve tried to work hard with you going to market. And I think we’ve all done a pretty good job — pretty good job.

I think though that if we stop and say, what is one thing that is almost sure to be different in the world 10 years from now, many of the things that [done] individually and uniquely customer by customer. The way infrastructure gets configured and installed and customized and personalized probably 10 years from now won’t be — we won’t have the same kind of reinvention of the wheel so often on customer after customer. That is, the world will be moved to not just managed services, but managed services that are somehow designed, if I could say it this way, more like a product or a standard offer and less like a set of customized outsourcing services. I believe that. And I told our team we’re not learning fast enough what it will take for us to engineer the technology that lets managed services evolve from a world of infinite customization to a world of much more standardization.

And we came up with the idea that said we ought to try to create a product that is a managed desktop server. Well, unfortunately, unlike all other product where you can just send engineers into labs and let them build them, a service you kind of need to operate for somebody. So I told our guys, let’s check a couple [or] three customers who are interested in engaging with us, and let’s work with these customers and build a managed service that looks like a product, that’s configurable like a product as opposed to having infinite configuration like the managed services do today.

So we’re working with Energizer, we’ll work with two or three other customers, and you can consider them essentially — I mean, from the customer’s perspective we’re going to make sure those things really work, and they really work well. But from our perspective you can really say those are product design and learning experiences.

Once we know what we learn from the experience, then we can figure out how to productize those services. Maybe some of it should come from us, with customization by you; maybe we’ll just turn all the learning over and tell you how to operationalize this product service. We don’t know exactly where it takes us, because we’re in the product design and development phase.

Unfortunately, if you take over a few thousand desktops for somebody, it’s not something that can be private and quiet, so it’s been in the press, which is fine, and I want to explain it to people so you understand it’s about us evolving our capability, and like I said in some of my remarks, then we need to look to make sure we have a model that works business-wise for you and for us to implement wherever this takes us.

BRETT DAWSON: Do you see yourselves executing those services over the long term or using the partner channel?

STEVE BALLMER: I see us trying to figure out what can be standardized, what can be standardized and implemented, what should be implemented in the cloud, one, maybe by us, and what should be implemented and delivered many times by our partners. And so we’re really trying to sort that through, and I suspect it will be some mixture of all of these things.

But we come into that looking for partner opportunities as well as our own. I said here and I meant it, we’re 100-percent committed to our partners, but part of our commitment has got to be to get smarter about what managed services look like so that we and you both succeed as we go forward this next 10 years.

PATRICK BERTRAND: Okay, Steve, thank you. Maybe a question which is not the day-to-day question for our business, but probably a very important point for our future, because it’s something like a part of the landscape of our industry, I’d like to speak about the intellectual property future. Maybe you know and you remember last week the European parliament restricted the software patent in a new directive, and so it’s difficult for us to understand what’s the right position. Why? Because some of them say that innovation equals patents equals protection, and some others say that innovation equals freedom and equals open source.

And I think that both doesn’t work for ISVs because what are our main concerns, the first one is to have protection for the development we’ve made, it’s necessary to have some protection and to secure our business with that. On the other hand, too much patents, too much protection in terms of intellectual property could raise some big problems for our R&D teams. It’s like a joke that I don’t want to have my R&D teams work very closely besides them with the lawyer to say, OK, you can use this and not this one because there is some question of intellectual property on that.

And so what’s your vision about that and what’s the position of Microsoft, and do you plan to work very closely with your partners on that point to try to implement probably a strong but the flexible protection to try to take care with the different positions, which are quite not good? I don’t think it’s possible to tackle this problem taking it one on one, they are too opposite.

STEVE BALLMER: Intellectual property law and intellectual property protection has been a foundation and cornerstone of innovative industries around the world for the last basically 100 years. Patents, copyrights, trade secrets, trademarks, they’re all actually important to encourage businesses to invest to do important things. We’re not going to invest in marketing, nobody is going to invest in marketing campaigns if their trademarks are not their trademarks. Nobody is going to invest in R&D if their ideas can be trivially copied the next day when they have a significant breakthrough in ideas.

Is today’s intellectual property law perfect around the world? The answer to that is no. Just as a way to think about it, there’s been no major updates to the patent laws anywhere in the world since software really became a business, I mean, just to put it in context. So the patent laws were written for the manufacturing industries, the pharma industries, the electronics industries and they probably do need to be updated to reflect the nature of this furious industry called software.

In fact, we’ve spoken out on this issue, there’s been new legislation introduced in the U.S. to reform the patent law in some ways that I think are important to encourage large inventors to do a good job, and also to provide protection for smaller companies and smaller innovators who want to take advantage of the intellectual property protection.

But the notion that says there should be no patents, there should be no intellectual property, which really comes primarily from the open-source community is wrong-minded, from my perspective.

If there is no patent protection, copyright protection, whatever, there will be no software vendors, there will be no hardware vendors. Cisco will not be able to exist as a business, since you mentioned Cisco, if somebody can trivially look at their stuff and copy it the next day. There will be no Cisco to invest in R&D, sales and marketing, customer support, service. The same thing with Microsoft. So having an intellectual property foundation is important for small inventors, large companies.

Now, you could say is it more difficult to have to kind of understand a world with intellectual property, the answer is yes. And the open-source guys don’t know what to do, they don’t know how to license patents that they violate. Rumor is Linux violates about 274 patents, about 35 of ours, according to the press reports. I don’t know these numbers off the top of my head, but this is what the press says. (Laughter.) And they too will have to innovate. They have to find a way to bring their inventions to market, appropriately packaged with licenses to patents from important inventors. We do that. When somebody says, you know, your browser isolates Eolas’s patents, we have to go license the patent rights. We licensed patent rights from Sun last year. That was a major thing.

So commercial companies have an obligation, and I think it’s important that everybody be inventive about how to protect intellectual property but also let it be licensed wherever it needs to be licensed so this industry can continue to grow, and that would be our philosophy.

PATRICK BERTRAND: Thank you, Steve.

TOM WHITE: We’ve invested fairly heavily to become licensing experts, so we’re a software advisor, we have several licensing champions on my staff. But as a small VAR, even within our own customer base, we quite often find that we have little or no chance at competing on licensing purchases due to the aggressive pricing packages of large VARs and the exclusive programs, namely EA and Select. Do you envision any changes in your licensing programs or do you recommend VARs such as myself stay focused on our business models on providing value on the consulting services side of the business?

STEVE BALLMER: I think everybody’s got to find the place where they can deliver the greatest value, and I certainly think services is a great opportunity. I’m not trying to talk you out of being interested in resell, but I think if you were to talk to most of our partners who sell Select and EA contracts today, they wouldn’t tell you that those businesses have extra profit in them, and so we’re also trying to be mindful of each opportunity that exists, and we want to make sure there’s enough opportunity that a partner who engages in it can make money.

This year we are introducing, I think, an important innovation for partners like you, which is the so-called Open Value License where we’re creating an EA-like license, so license and Software Assurance bundle, three years, spread it out, really targeted as much for mid-market and small enterprises down to small business, probably not targeting the biggest enterprises, but it will be open for everybody to sell, and I think it will give you the opportunity maybe not to create a totally new business but for the customers that you’re serving to be able to give them full service, if you will, from their licensing needs through their service needs, et cetera. So we’ve thought about that hard, and we’ll launch the Open Value license later this year.

TOM WHITE: Actually, you’ve had that out for a while, and we took advantage of it, and we’re doing about a half a million dollars a year in Open Value program licenses.

What I’d suggest is, if possible, you’ve got the software advisor fees on the MBS side of the business, I would think you might want to consider doing the same on the classic side. (Applause.)

STEVE BALLMER: I’ll write it down. I’ve got my note card and I forgot my pen. I will write that down later. It’s the first thing that got a lot of applause, so I’d better write it down and not forget it.

Great, thanks, Tom.

BRETT DAWSON: Steve, I want to change this, if we can, to change it a bit, and that is to look externally. To me the essence of the foundation of any good, strong, robust strategy is to look at the competition. I mean, that’s what strategy is all about, it’s about positioning our businesses to compete and to win in the future.

So when we look at that, and we look at a certain segment of our client base, which is a lot of the global kind of clients, the multinationals and the big enterprises, we come up against only one real global competitor, and that’s IBM. So from the perspective of a lot of clients is they’re able to provide the hardware, they can provide the software, and obviously they have a big services organization, so they can do all three of those things, and can be quite significant.

When I look at IBM, I see us being able to do alignment and collaboration, being able to come up with at least an often far better value proposition to go out there and win.

Now, we joined the Microsoft family, and made that clear I think upfront, and the key thing for us is we want to win. We’re an aggressive company, and I really wanted to explore your thoughts in saying how do we together, not only do together, but the sort of partner base really step up the competitive entry by collaborating, by aligning; what is it that we could do and should be doing together?

STEVE BALLMER: I think probably for many of you who compete in larger enterprises the number one competitor for us and for you is IBM. Sometimes it’s Oracle but really it’s IBM, IBM, IBM, IBM, IBM.

I want to start by maybe just sort of analyzing what Brett said. He says IBM will sell you hardware, they’ll sell you software, they’ll sell you service, they’ll sell you financing. Well, they won’t sell you all the hardware anymore, they’ll probably send you to Lenovo and look for Lenovo hardware. Lenovo is a fine company, so that whole it-all-comes-from-us story starts to break down.

Secondly, ask yourself this question: Does IBM have the best hardware at the best prices all the time, most of the time? Ask yourself the question, I’d say. (Laughter.)

Does IBM have the best software? They don’t even have — my personal opinion — the second-best software. (Laughter.)

Services: Ask yourself the question, do they have the best services?

BRETT DAWSON: No.

STEVE BALLMER: No, they don’t have the best services, let alone qualified on the right software.

That sounds like instead of all for one, one for all, it sounds like the three mouses instead of the Three Musketeers. It’s not the compelling value proposition that it was five, ten years ago. I’m not saying we don’t compete with it, we don’t see it, I know you do, we do every day, but it is important for all of us to disabuse the myth that comes in this it all comes from IBM shtick. They say it, the customers says it to us, the value of that is really significantly less today than at any time in my 25 years in the business.

In 1980 that was everything. Today, two things are true: IBM’s product line is the weakest it’s ever been, in my opinion, number one, and number two, quite frankly, the customer’s desire in getting best of breed is still high. We certainly face that as we bring new technology into our product line. If our technologies aren’t best of breed or close to it, customers don’t buy them, even if they’re integrated. So it’s important to remember the world has changed.

Next, we need to work differently together to beat IBM. People say IBM’s got the biggest services army in the world, and I’d say that is nonsense. Our partner base is the biggest services force in the world, by far, without question. (Applause.) Our ability to tell that story, to mobilize, we’ve got to continue to get better and better and better.

I know there’s always a lot of controversy around good old MCS. We say the same things, you ask the same questions, it goes on every year. But our 4,000 little MCS people is not what it’s going to take by themselves to compete with IBM.

Customers want to see us involved, they want to see us as the lead vendor to put skin in the game, but the real solutions, the real services, the real day-to-day differentiation on that dimension versus IBM has got to come from Data Dimensions and many other partners in the room here today.

So we’ve got to tell our story in a more integrated way. We’ve got to bid more seamlessly upfront, we’ve got to put that package together and look at one when the customer wants to see that on important bids. But we’ve got the stronger value proposition, we’ve got the better trained experts, we’ve got the better software products, we’ve got greater flexibility in hardware choice; there is no reason, in my opinion, in 2005 that we should lose any of those kinds of bids to IBM, not anymore. (Applause.)

Great. Well, I want to thank our three panelists. We’re going to take a few more questions that you guys wrote in and pre-submitted. We’re going to work off of questions that you sent us in advance and hopefully have a little bit of fun, and, Allison, you pitch and I’ll catch.

ALLISON WATSON: All right, let’s get going here.

Steve, last year we talked a little bit about Denmark when we were here. Are we Danish enough yet in the world?

STEVE BALLMER: For people who weren’t here last year, a little context. If Microsoft had the revenue market position in Business Solutions that we have in Denmark, we would be roughly a $6- to $7-billion a year business. And I wished last year at this conference that we could all be Danish so that our business could grow to be $6 or $7 billion.

So the question is, are we Danish enough yet, and the answer is no. (Laughter.) We’re not $6 or $7 billion in revenue yet, so we’re not Danish enough yet. (Laughter.) We’re getting there, though.

A lot of the focus on vertical solutions and selling vertically with MBS is modeled after the success that our Danish team has had with its great partners. We’re trying to pick that concept up and really move it and translate it worldwide. The partner recruiting that we’re doing, we have really studied and been well informed by the great work our partners and our Danish team have done, and so while we’re not all Danish yet, we’re getting ourselves on the road. And every year we can measure how much more Danish we are, not by what we eat for coffee rolls in the morning, but by revenue growth for us and our partners with MBS.

ALLISON WATSON: All right, with the recent enhancement in MSN.com search capabilities and the search-centric focus of the soon to be launched Windows “Longhorn” product, what is your view on the significance of index search and retrieval across the Microsoft family of products?

STEVE BALLMER: Thanks, Justin, for the question, and the answer is super, super important. Super important.

Now, if you ask one area where I really think you’ll see extra innovation and investment and drive, it really is in information organization, search and retrieval. That will be an area that we really push ourselves. We’ll push ourselves at the desktop, we’ll push ourselves at the corporate network level, we’ll push ourselves out in the Internet. We launched our first MSN Search product based on our own search technologies. In SharePoint Portal we’re pushing the search technologies. In “Longhorn” it’s not just about search, it’s about changing the way you manage and organize information that’s interesting to you. In our new portal technologies it’s about changing the way you manage and find information that is interesting to you.

And so this whole notion of how you make the world’s information more seamless to every end user, whether it lives on their desk in their company or on the Internet, is supremely important to us. We have some of our best minds, thinkers, IQ involved in pushing on this front.

I think if you really stop and ask, do most of us find what we’re looking for most of the time, the answer is it’s still a pretty rough experience. Where is that memo I wrote last week? Where is it? Who is the account manager — this is my favorite at Microsoft — who is the account manager for Ford? Well, the truth is I don’t know how to use our Siebel implementation. (Laughter.) I didn’t go learn the UI. (Laughter, applause.) Now you can tell who the Microsoft sales people are, they’re the ones chuckling that I haven’t learned our Siebel implementation.

But the key message there is search ought to be able to look inside Siebel and SAP and MBS and be able to get important information out of it in a search type query. That would be an improvement in the corporate world, it would be an improvement out in the Internet.

The accuracy of results that people get back when they do searches today is still not very good. Try doing a search on Bill Gates. Do it on MSN, do it on Google, do it on Yahoo!, do it wherever you like. The truth of the matter is not only do you get some things that are actually interesting about a guy I work with, you get everything that has to do with any gates, the gates at Buckingham Palace, the bill for the last party that Dennis Kozlowski had, you get all these links back when you type in Bill Gates into the average search engine.

Believe me, the world can and will do a lot better job in helping people find, navigate and organize the information of the world, and our company is dedicated to being the leader at that, if it takes us one year or two years or three years. We’re the leader today in the corporate environment, we’ve got the leading desktop search product out today. We’re not the leader out on the Internet today.

But just as we were serious about innovation with past competitors, we’re very serious about innovating with and in a way that puts us way in front of Yahoo! and of Google.

So thanks, Justin, for that question.

ALLISON WATSON: Microsoft recently announced our partnership with SAP for more integration between Microsoft Office and their ERP system. The project is called “Mendocino.” I wonder why Microsoft chooses to realize this with ERP competitor SAP first, instead of their own MBS solutions like Navision, Great Plains and Axapta. (Cheers, applause.)

STEVE BALLMER: Well, the answer is we are doing this stuff first with Great Plains, Axapta and Navision. We didn’t think we needed to actually go out and have a press conference, we just implement every day, every day.

The Office integration that’s built today for our products, for our MBS products and Office is pretty good. If you take a look at what we’re doing with the next round of releases, with the next Great Plains release, Axapta release, Navision release, if you look at what we’re doing with “Office 12” and integrating workflow, business process and business intelligence between Office and the MBS product line, that’s one we’re absolutely going to just nail, just absolutely nail.

Mendocino is a town half way between Palo Alto and Seattle, Palo Alto where SAP has their labs, Seattle where we have our labs. We didn’t need to have a product called Mendocino, we’ve got one called Redmond. It’s all getting done in Redmond, designed in Redmond, thought through in Redmond.

And have no fear, we are going to cooperate with SAP in the biggest organizations in the world, but we are going to compete every minute, every day, compete, compete, compete, compete, compete. Every place that MBS products are appropriate, if there’s a choice between an MBS product and the SAP product, let’s get out there and tell the story, let’s get out there and win that customer. And there are places where we have chosen not to compete, and we will partner with SAP.

I get people with two minds. Some people say to me, you don’t engage in enough coopetition, and then when we engage in coopetition, people say, boy, coopetition is confusing. Well, it is. (Laughter.) But we’ve got a lot of customers who want to put in SAP. We want to make sure when it goes in, it goes in well on Windows and on SQL Server and with Office, and we’ve got a lot of customers who we want to have pick the MBS product over the SAP product. And if I can live with it and Henning Kagerman at SAP can live with it, I hope all of you can live with it, but let’s get out there and make sure where we can win, we win. (Applause.)

ALLISON WATSON: This is our last question coming in from Roland. In what way will the business for Microsoft and her partners change as the baby boomers are replaced by the net geners? Sorry, Steve. (Laughter.)

STEVE BALLMER: No, sorry, Allison. (Laughter.)

ALLISON WATSON: I am the last year of the baby boomers. That means I’m getting kind of old.

STEVE BALLMER: I do think that there are some changes that we have to keep in mind. And in a sense it is always important that our R&D workforce represent the diversity of our customer base. We need to have baby boomers and net geners, we need to have American citizens and non-American citizens, we need to have people of all racial and ethnical backgrounds, because the more we have diversity in our R&D team, the more people will have not just market research but a visceral feel for what people want.

And it’s clear that the net gen generation is a much more real time and a much more multitasking generation in a sense than the baby boomers, or at least because net geners have grown up with technology, and the technologies that net geners embrace do look somewhat different. If you just take a look at instant messaging and real time communication versus e-mail, the role of mobility, the way people want to communicate, there are clear differences, and we’re making sure that we evolve our product line to make sense across the spectrum of folks at various age ranges that we absolutely need to target.

I think though in this question there’s another message that we should all probably have in mind. If I look out in the audience, we probably have a reasonable smattering of baby boomers — well, we have a lot of baby boomers probably, just looking out here — a lot of baby boomers actually, looking out in the audience, some net geners but a lot of baby boomers.

But I think every one of us for our own businesses has to ask the same question. It gets back to the last point I made in my opening remarks. Are we keeping fresh with the times? Are you doing what you need to do to reinvent yourself? Is the business of tomorrow managed services, whatever it’s going to be, how will it be different? If the customer of the future is a net gener, then we’d better understand the net geners. If the business model of the future is more Internet-based, we’d better all understand it.

And so it’s a good reminder not only to us to think about the future in the broadest possible way and remake ourselves, but it’s probably a good reminder to all of us to make sure that we’re keeping ourselves fresh and current with the full range of customers that we now all have to serve.

ALLISON WATSON: All right, Steve, I really want to thank you. Do you have any closing comments for this audience today? Because we’re all talking about velocity here.

STEVE BALLMER: I have a couple. I love this word velocity. I didn’t love it — it didn’t mean much other than sort of a fancy way of saying speed, it didn’t mean much to me until about 18 months, two years ago. Two years ago, Orlando Ayala, who all of you know from his presentation up here, but he’s a very passionate guy. And Orlando came to my office one time, and he said, “I figured it out.” I said, “What is it, Orlando?” And he says, “We need more velocity.” Immediately I said, “OK, well, yeah, we always need velocity; what do you mean?” He says, “No, no, no, velocity, velocity; we have to get everything moving faster, shorten cycles, change, change, change, move, move, move, move, move, fly — fly, fly, fly, fly, fly, fly, cut down the time everything takes, get products to market faster, make sure that the time it takes to close a deal gets closed, shortened, make sure our operational systems improve, velocity, speed, speed, speed, move.” Velocity took on a whole new meaning to me, a whole new meaning. (Laughter.)

And at the end of the day, he says, that was all the small potatoes. Now let me tell you what velocity really means. We’ve got to increase, increase the velocity of our sales. And I said, “Oh, I get it, this is about revenue.” (Laughter.) He said, “Absolutely. More revenue for us, more opportunities and more revenues, close faster for our partners.”

Velocity and speed, velocity and speed: They’re the keys to good execution.

We will win. Like I said earlier, we will win as a company, and we will win as a community, a set of partners, people working together — if we innovate, and if we execute with velocity, execute well with velocity.

We’re committed, absolutely committed to our partnership. We’re committed to driving velocity, high speed interactions in front of our customer. We’re committed to great execution together, and most of all we’re committed to winning with you, winning with you today, winning with you tomorrow, winning with you in five years, winning with you in 10 years.

I don’t know where the WWPC will be 10 years from now, but I’ll be up on stage, hopefully still able to move as well as I can today, talking about our partnership, the great results that it’s brought, the winning in the marketplace, and the exciting future that will still be in front of us.

We’ve got a great next year, I know we can all go execute well together. Go knock them dead, build your businesses, we’re there with you. Thanks. (Applause.)