Due to the varying sound quality and subject matter of tapes, the information in this transcript may contain inaccuracies.

MR. BALLMER:Well, let me say thanks to Claude and to all of you.It’s my great pleasure to have a chance to be here today and to speak with you.I feel a little funny.It’s been seven years since I last spoke at a Seybold Conference.Last time I was here, I know I didn’t have a suit on, but I have to go give a speech to a bunch of 6th graders next, and they’re expecting an adult to show up. I figured the best way to look
“adultly”
was to wear a suit, and there was just no time to change.So, I apologize.

Let me do just one thing before I get started.I’m trying to assess the change in climate over the years.Just a small show of hands, how many people in the audience use Windows machines as their primary machines today?

(Show of hands.)

MR. BALLMER:I hope the front rows are – better yet.Okay, great.How many use Mac? Hands up.

(Show of hands.)

MR. BALLMER:And how many use UNIX as the primary machine

(Show of hands.)

MR. BALLMER:Something else?

(Show of hands.)

MR. BALLMER:Who’s going to see the rest of those guys after class? Well, I’ve got to say, it’s a whole lot different than seven years ago.A good mix, Windows and Mac users in the audience.When I spoke in 1991, I think my sister and I and maybe two other people were all the Windows users in the audience.So, it’s certainly gratifying to see a lot of people moving to the Windows platform.

I want to do a few things today.I want to talk a little bit about some of the top-level opportunities that we see for computers in general inside companies, and in society as a whole.I want to relate those to what’s going on in the publishing world, and what some people are doing with our platforms in the publishing world.I want to talk a little bit about some of our standards efforts, and interoperability work.And then I want to show you some cool new stuff that I think is very relevant for the publishing space.

A year ago, Bill Gates was here to keynote the Seybold Conference, and he talked a lot about what we call
”
Web
lifestyle.”
We think there are really two drivers and motivators for a lot of what’s going on in terms of PC uptake around the world.One is the notion of what we refer to as Web lifestyle.That is that individuals, consumers, people in their home, are increasingly turning to the PC or other intelligent information devices as their fundamental source of information and entertainment and learning.And there really is a fairly dramatic shift going on.

Everybody has seen the surge in the Internet and Internet usage.Today, in this country alone, in the United States, there’s an installed base of roughly 120-130 million PCs, and if you look at the U.S. household base, about half of U.S. households now own a PC, which is really quite amazing if you go back several years.People are getting connected to the Internet, and there’s a surge of interest in consumers to find things out on the Internet, and of course there’s a surge of interest in businesses to start rethinking the way they communicate, relate to, sell to, their customers using the Internet.And that’s a very powerful thing.

I’ll come back to it again and again, but it has really changed the shape of the communication that I think the computer people and the computer industry have with people in all other industries.When we talk these days to groups of CEOs and business managers, they’re all paranoid about what the Internet could mean for the change in their businesses.It doesn’t matter if somebody is a catalogue retailer, a financial services institution, a printer, paper companies–not surprisingly, Weyerhaeuser, who is in our own backyard, Kimberley-Clark, the CEO I spent quite a bit of time with him recently–everybody is trying to think, what does the move to the Internet, to this Web lifestyle, to paperless offices, what might that mean for them, and in what kind of time frame will that be important.

The heart and soul and core of this concept of the Web lifestyle is the way in which people will use digital communications, and digital information to communicate, to express themselves.It’s a publishing problem at its heart and soul, and it’s got to make sense and live within the context of the existing ways in which people communicate with their customers and business partners quite broadly.So, we see a lot of opportunity.We also see, certainly, a set of challenges that relate to the move to this electronic method of interrelating.

The second opportunity we see, and one that I think is very, very important in terms of ongoing acceptance of computer technology, we refer to under the name
“digital nervous system.”
This refers to a concept that we believe in that says, if you think of a company or an organization much the way we think of the human body today, every company has a nervous system.It has some way of communicating, listening, learning, analyzing, planning.If you ask many people in business how that happens in their companies, they’ll tell you it’s meetings, it’s ad hoc, it’s paper, it’s this, it’s electronic forms, it’s a variety of other things.

We certainly see a move to what we call digital nervous systems in a corporation, where the information that comes in from sales representatives, and customer support representatives can speed its way back and be thought about and analyzed and processed.The sales data and customer feedback data is available online for easy analysis.That when people make a decision and decide they need to change a business process, the computing infrastructure becomes a fundamental part of the way they inform their employees, they educate their employees, they train their employees.And so whether it’s in the operations of the business, whether it’s in the commerce of the business, or whether it’s simply in the way the businesses choose to manage knowledge, we see the computer becoming fundamental in all aspects of that.

Mainframes and minicomputers grew up in business operations primarily, processing payrolls and manufacturing, being used to create the backbone of the editing systems in newspapers and magazines and catalogue operations, et cetera.The PC grew up through personal knowledge management, and now it’s graduating.And these two worlds are really coming together to the point where PC servers are becoming the fundamental elements of computing, not only for traditional knowledge management functions, but for what’s emerging in terms of electronic commerce, the Web lifestyle, and more and more the operations of the business.

In the publishing sphere, we think there’s a lot of good work that’s gone on by the broad set of independent software vendors who have chosen to leverage Windows, and Microsoft Office, NT Server, our SQL Server, and some of other platform technologies.There’s been a lot of great work automating the core business processes of the publishing business, design and layout, the editorial processes, management and workflow, and here’s just a list of some of the independent software vendors who’ve really put a lot of their best energy and ideas, and creativity and effort into the Windows platform.

Now, if we looked at this list a year ago, or two years ago, or four years ago, it expands, frankly, more rapidly than the equivalent list expands in any other industry.Windows, as everybody in this room knows, is coming from behind in many ways in the publishing sphere.But I think we at least are very excited with the momentum that Windows now has, not only at the client, but also at the server.And we’re gratified when we see products like K2 being announced simultaneously for Macintosh and for Windows.We’re excited to see that over 41 percent of the publishers today are using Windows NT Server, and have a high interest in installing NT servers tomorrow.That talks a lot to the range of applications, the heterogeneous support for Windows and Macintosh clients, and the kinds of exciting applications that are really being done across the board.

And we’ll keep focusing on this.We have a team of dedicated evangelists whose job it is to really work with the core independent software vendors to try to help them understand Windows and to try to help us continue to understand the sets of things that we need to do in Windows to better support the publishing industry.We talk a lot about Windows NT 5.Yes, we’re still a little bit away, a little longer than we’d like from Windows NT 5 shipment.It’s got a lot of things for a lot of people, but we’ve put a lot of new capabilities into Windows NT 5 specifically targeted at the publishing industry, whether that’s in the area of color or imaging, or a number of other areas, that come from the kind of feedback that we get from ISVs like Adobe, like Quark, like Imation, and many, many others that are sitting on this list.

So, NT 5, I won’t say it’s a radical breakthrough, but I think, again, that people will see it as a set of very important and nice improvements that are directly targeted at needs that have been expressed by the publishing community.

I wanted to take an example in the area of what we call knowledge management, managing the intellectual assets of a company and talk a little bit about a case study in which Windows technologies have been used to dramatically change and improve the company’s business.This company is Great Lakes Company, they’re headquartered in the Ohio area, about 100 employees, $16 million in sales, and they are a production house.But they were having a whole set of issues with their customers, who were having a hard time tracking the many images and documents, and PDF files that they were working with in the publishing process.

This is a service bureau, a service house in Ohio.They turned to Imation, they picked up the Media Manager product from Imation to really help them manage and track the intellectual assets of their customers.The Imation product at the server level is built around NT and SQL server.It integrates very well with the Imation color central product for OPI server capability.They had the required scalability.This system works well for managing images either in the print environment or in the Web environment, which Great Lakes thought was very important, because they see customers who want to be able to flexibly target both media types.

And so, Great Lakes went forward.They did a bunch of work with Imation, very successful, very happy with that.We have just a feel here from both perspectives.From the perspective of Great Lakes, trying to serve their clients, it just saves them time and money.They’ve really made a major strive forward to a set of improvements.From the standpoint of Imation, which is very important because they’re really the independent software vendor that brought this solution to the fore, the scalability, the features, the performance on Windows NT were very competitive for what they needed to do versus the UNIX systems which would have been the alternative for tracking and managing these very large image databases that their customers work with.

And it’s this kind of progress and improvement in the way Windows is accepted, not only at the client, but also at the server.That’s very exciting.

The notion of Web lifestyle meets digital nervous system? The heart of that is electronic commerce, and what’s going on in the electronic commerce space.I actually like to talk not only about electronic commerce, but electronic relationships because there are many, many more companies that are contemplating having an electronic relationship with their customers than there are people who are thinking about doing commerce.Some people can sell things.You can sell books.Maybe you can sell flowers.Maybe you can sell financial services.Maybe you can even sell some telecommunications services. But when it’s cars or stereos or some other equipment, really the heart and soul of what people want to do is communicate, to know their customers, to educate their customers, to relate to their customers.Much of the standard functionality of direct marketing, direct mail and advertising was brought to life and made a richer experience by virtue of the nature that the Web can know me, can track me, et cetera.And I think some of the most interesting things that have been done on the Web have been done by people who are very focused in on the relationship with the customer, not just on selling them something.

Will the Web be just a place where people sell things at low prices?I actually think over time we will think of the Web as a place where people deliver even better service than they deliver in a face-to-face interaction, because the computer can remember so many things about you and can personalize the information you see in so many ways.Why do I highlight this?I highlight it because I think the heart and soul of having an electronic relationship is a publishing problem, it’s a communication problem.And I see a reasonably dramatic shift in the way people, businesses, think about investing their marketing energy to the Web.

It happens more so in some industries than in others.You know, if you go talk to the people at Proctor and Gamble about the ways in which they expect to be selling soap tomorrow, they’ll tell you just an itsy-bitsy little piece of their budget will be going into the Web.And print, and TV, video, those will remain the primary forms of communication for Proctor and Gamble.But, if you really look at the kinds of things that are happening, say, in financial services at Merrill Lynch, who is a good customer and partner of ours, at Citibank, in those cases they see a much more dramatic shift, because they have a product type that lends itself very well to an electronic relationship.

And people are starving, these companies are starving.They don’t know exactly how to communicate.They don’t know exactly what to do.They don’t know how to make an impact.They’re not sure what the most effective advertising is.They’re not sure exactly how to communicate in the richest way with their customers.But, I’ll tell you, it’s been listed as a mission critical activity of these companies, to really get in there, to spend money and to figure it out.It’s not something which is being done in the bowels of the advertising department.It’s the kind of problem that has really risen up to the board level.

I had an amazing experience in this area the other day.We went and had a meeting with the president of Ford Motor Company.And I figured he would know very little about what they’re doing on the Web.He knew exactly how many used cars they had sold, in a test selling used cars direct on the Web, in Dallas, Texas.And I just couldn’t understand.I mean, it was like 10 cars.I don’t think you can pay many salaries at Ford Motor Company on 10 used cars.

But, even at his level, the importance of having an electronic relationship.Will they track the car for the customer?Do they have compelling reasons to bring the customer back?Do they have rich ways to demonstrate and present their cars online?Those are real mission critical issues from a sales and marketing perspective, even in a company as large as Ford.And I think for everybody then, it puts an even greater emphasis on being able to juggle the investment in online media, versus to the Proctor and Gamble case, also being able to do traditional print and video media.

I think a customer that chose very well how to bridge between the two is Eddie Bauer.As I’m sure everybody in the room knows, Eddie Bauer grew up as a traditional catalogue merchandiser.They see great opportunity and great threat, and great issues working on the Internet.But, it’s certainly clear that for the near term their stores and their direct mail catalogue will be the bulk of their business.But, they’ve got to have a rich way to think about how to create communication vehicles that use the same core knowledge, but yet well represented, and at the same time in both print and online media.

They put out 46 catalogues per year.You can see the number of pages they print, the number of pages they circulate.They’ve got a huge retail store network.And they’ve been on the Web since 1996.Their problem was absolutely to keep their retail presentation, their direct mail presentation, and their online presentation in sync.

And what I’d like to do now is invite up Jeff Ward.Jeff is senior systems business analyst at Eddie Bauer.I want him to talk a little bit about how they do this, what they manage, and what their processes look like.

Jeff.

MR. WARD:We wanted shopping at Eddie Bauer to be a singular experience.And that way, when the customers were in the store, or ordering from the catalogue, or if they were shopping on eddiebauer.com, they’d have the same shopping experience and customer relationships.For us it’s really important.The Web interface was designed with this in mind, guiding the customer through eddiebauer.com, as an associate would in the store.The key challenges, primarily, were how to effectively move our catalogue content over to the Web, keeping things cost effective, but also creating that synergy between our product presentations.Internally, we also wanted something that was easily created, and easy to maintain.

What we discovered was that an automated solution wasn’t going to work right for us.By manually editing and converting the content simultaneously, we’re able to adjust the content to fit the design needs at that time.

MR. BALLMER:I mean, literally bouncing back and forth, Web, catalogue, local advertising, whatever the case might be?

MR. WARD:Right.Right, there’s a total synergy between all three channels of distribution, and we get to use the same content throughout.The way we start off is just by going to our Quark Express page that we have created our catalogue in, and selecting our copy.

MR. BALLMER:So you create your catalogue entirely in Quark, that’s your production system?

MR. WARD:Yes, we use Quark Express for Windows, and then our images are low resolution FPO.The copy is then pasted into a Microsoft Access database.This database has been pre-populated with information from our merchant database, paste the copy.The copy is generally edited for content, because a lot of times it doesn’t refer to things like catalogue pages

— it means nothing on this.By going in, and typing in the rest of the information, we’re able to prepare the copy and move onto the images.The images that we use are the color correct images that R. R. Donnelley & Sons Co. uses in the catalogue.We use them not for color accuracy, but for a consistency.Our FPO images aren’t quite right there.But, by using the color consistency within it, our customers are able to see the product they’re buying.

MR. BALLMER:You’d like a little bit more accurate color out of the PC industry for this

— for representation on the Web?

(Applause.)

MR. WARD:Sure.That would certainly help.

MR. BALLMER:So would a few others, I guess.

MR. WARD:Our returns online, however, very interestingly are for fit and not color.And actually returns online are lower than catalogue.So we

—

MR. BALLMER:Just think, even with the extra accuracy of the color in print, you actually have lower return rates for color for online?

MR. WARD:Yes.So we’ll select the image.And just create a new document.Size down to our predetermined size.These images will be placed on an Active Server Page, so that everything fits into the pre-formatted area that we have.The Access database, along with the images, are then merged with our master SQL Server.That’s then moved to Site Server, and the whole thing goes online same day as the catalogue is shipped in the home.We’re looking at about a week to move all of the catalogue content that we need to onto the Web.

MR. BALLMER:And how many people do you have that do that sort of work to keep the online and the print stuff in synchronization?

MR. WARD:We have six people doing this.

MR. BALLMER:Six people.

MR. WARD:One production associate primarily working on the front end with the copy and the images, and content managers and merchants that deal directly with the interactive media.So we’ve been very successful with eddiebauer.com.We’ve been

forecasting way below what we’re actually seeing.We were able to do triple digits last year above what our planned forecast was.And right now this year we’re way ahead of plan.So it’s been very successful for us.

MR. BALLMER:And how does eddiebauer.com compare?Is it one of the bigger stores, if you compare it to other stores in the system?

MR. WARD:Yes, it is definitely the big store for Eddie Bauer.It’s drawing in a lot of customers, a lot of new customers and a lot of repeat customers, which is important as part of that customer relationship.

MR. BALLMER:So you take this whole thing, and then it populates a Microsoft

— you use our Site Server commerce product.And then the site gets rendered back this way in Site Server?

MR. WARD:Right.So using our interface, we’re able to just do a quick search for the product.Being a systems person, my typing ability is less than admirable.It’ll pull up all the different jackets that we’re looking for.We have several different product lines, the one that I had been working on was on EB tech jacket.No, wrong one.Did I do it again?

MR. BALLMER:Let me help you.I’m not a systems person.

(Applause.)

MR. WARD:Where’s the voice recognition?

MR. BALLMER:We’re going to get this, between us, yet.

MR. WARD:There you go.

MR. BALLMER:Spell checker, how did I do?

MR. WARD:There you go.Okay.The other nice thing about eddiebauer.com is we’re able to add services that are unique to the online environment.We have a wish list area.We’ve got an EB reminder, which is an email reminder service.And my favorite is

—

MR. BALLMER:So like I can remember my wife’s birthday, that sort of thing?

MR. WARD:Oh, yes, very important, very important.

MR. BALLMER:None of the clerks in your store have ever reminded me about my wife’s birthday.

MR. WARD:No, they don’t.But, they are good at this other thing that we’ve incorporated online, and it’s called EB gift finder, which allows you to select the product category, a price range, and it gives you product suggestions.I hate to shop.Work for a retail company, but I hate to shop, and this is a great service to those customers.

MR. BALLMER:So basically, for six people and a little IT money, you’ve got a store that’s bigger than the biggest store in the system, and you’re able to leverage the content both places?

MR. WARD:Right.Going bonkers.

MR. BALLMER:That’s great.Thanks very much.

MR. WARD:Thanks a lot, Steve.

MR. BALLMER:The technology that Jeff and the folks at Eddie Bauer use on the back end is a product we call the Microsoft Site Server Commerce Edition.It’s a product that has a range of capabilities, not only for selling things, but also for really managing the publication and personalization of information.We have tools built into site server that let you submit information, to tag it, to approve it, and to deploy it.So it’s really helping manage the media throughout the entire Web site creation process.Along with a set of tools that let you easily personalize.So when Steve Ballmer comes to visit the Web site, or Jeff Ward comes to visit the Web site, the content can be rearranged and personalized through this technology we call
“Active Server Pages,”
and deliver a targeted message, that’s right for that user, when that user comes to visit.

Of course, there are tools in the Site Server product that help you manage the order flow, order processing, the transaction approval, booking, et cetera, et cetera.But, I think a core capability in all of these commerce products will be the tools that help you manage the publishing and personalization of content, because that’s at the heart and soul of what makes the Web interesting, as Jeff had a chance to talk about with the gift finder, with the reminder service, et cetera.

We’ve got a variety of other customers who are also building off these technologies.I’ll mention maybe just a little bit.Some of you have encountered it the work that Compaq is doing with Site Server to actually provide online information that helps people get answers to the kinds of technical questions that they have in working with Compaq products.They’ve built a system they call
“Active Answers,”
entirely built around Microsoft Site Server.

If you take a look at the top 25 sites on the Web for electronic commerce, 15 of them have actually been built using the Site Server sets of technology that Eddie Bauer used.And then you can see five of them have been built on Netscape, five have been built basic to the metal in UNIX, and IBM is still picking up steam in the area of electronic commerce.

It’s such an important area.And there is so much I think we still need to do to make Site Server not only a better publishing system, in addition to a better commerce system. But there’s also a lot of work we need to do to really open it up and help integrate it in a far better way with the core publishing tools that you’re using today.I was joking with Jeff earlier, that not only do we need to do a better job of color management on the PC, we also need to make it easier to take those image databases that they get from R. R. Donnelley & Sons Co., to move those, to capture those and sort of manage them in the SQL Server, Site Server environment, to personalize those.There’s a lot of work we still need to do for integration into the overall publishing infrastructure.

I want to turn now to the way we see the Windows environment, where I think we’ve had a lot of success in publishing a client and server.That the way we see needing to interoperate with and cooperate with both Apple and the Macintosh, and the work going on in important standards bodies.

And I want to start with our commitment to the Macintosh.I get asked about this all the time when I talk to people who are in the publishing space, because Mac is still very popular. We are 100 percent committed, as we were at the time that Steve Jobs and Bill Gates first started talking about this over a year ago.We’ve brought new releases of our products out for the Mac, IE and Office.We now have over nine million Mac customers worldwide, and our Office 98 product is actually the best selling version of Microsoft Office that we’ve ever done for the Macintosh.So, it’s good not only to be committed, it’s good to see the enthusiasm and commitment back from the user community for a product that we think is a very fine product.

At the server level, we put a lot of energy into support for the Macintosh.Windows NT Server comes built in with services that support Mac clients.We think we have the product that is the leader today in AFP performance over AppleTalk.We’ve integrated AppleTalk routing in as a basic feature of the Windows NT Server product, because we know it’s very important.If we’re going to work with ISVs to promote Windows NT-based server-based solutions to you, we must support Macintosh clients in a very rich fashion, in addition to the Windows clients.

Steve Jobs has said that Internet Explorer 4 is the best browser in the marketplace for the Macintosh.So, we’re very committed in every way to doing what it takes to honor the commitments that we’ve made, and let the Macintosh environment really plug in and integrate in a very rich way with what’s going on in Windows today.

We’re also very committed to working with the standards bodies that have grown up particularly around the Internet.We’re a founding member of the W3C.We’ve got a group of people working full-time.We have over 25 people working on HTTP services.As you take a look at the next version of Microsoft Office, which will be out early next year, we’ve moved so that Microsoft Office can natively save things over the HTTP protocol and in an HTML format.We’ve got three people full-time just on coordinating all of these standards efforts.

Our security efforts have moved to support IP stack, and in other important Internet security protocols.In the data and UI space, we’re super-enthusiastic about what’s possible with XML.Bill Gates had a chance to share some of that enthusiasm with you last year.We’re going to show you some of the kinds of work that we’re doing, innovative work that we’re doing with XML here in a minute.We’re very active in the IETF.We’re very committed to supporting LDAP as a set of directory service protocols, because we know the only way for future services to work will not be just for us to be committed to the Mac, and have some level of interoperability with UNIX, but to really latch on and support the important and emerging Internet standards.

We think we need to not only take the tradition of Windows and push it forward and listen to what you say, we think it’s important for us not only to watch and monitor and be involved in the standards groups; it’s also important for us to do some innovative work across the family of products that I think are relevant for the publishing community.

I showed you a couple of examples, Windows NT Server at work in the publishing industry.I talked about the Macintosh services.We had a chance to hear from Jeff about their use of Site Server and SQL server.We have a number of vendors who have built workflow automation systems, particularly for the editorial process that use Microsoft Exchange mail capability.Internet Explorer is obviously very important.Many people use Front Page as the leading tool for creating Web sites.The next version of Microsoft Office makes it totally transparent to create content in Word and PowerPoint and Excel for the Internet.So, there’s a range of things that we’re trying to do.

One of the most exciting is something that we call Chrome

Effects.Chrome Effects was just released to our hardware manufacturer partners.They are integrating it with the Windows that they are now shipping on new machines.Chrome Effects is a set of technologies that we’ve built using XML that live inside the browser, and let you do very exciting 2D and 3D publishing and animation work inside our browser.Chrome Effects requires a machine that’s 300 megahertz.Chrome Effects requires a machine with a 4 meg 3D video card in it.You can buy a machine that runs Chrome Effects today for $1,100-1,200.And we have hardware vendors who say they’ll have Chrome

Effects machines in the market by Christmas that sell for $900 with the monitor included.It’s a very, very mainstream technology for the future, but of course as you look at it, you’ll say to yourself, it’s not mainstream in the install base today.But I think when you see the kinds of things that you’ll be able to do from an online publishing perspective, you could get very excited about the potential.And it will be a mainstream technology as OEMs start offering it standard on their machines over the next several months.

I’d now like to invite Ryan Watkins–one of the development engineers on Chrome Effects for Microsoft–to come on stage and join me and have a chance to show you a little bit of this new technology which we just released, and for which the developer tools are now available.

Ryan.

(Applause.)

MR. WATKINS:Thank you, Steve.

So, here we have Microsoft Chrome Effects.It’s an interactive media technology.It’s an add-on for Windows 98.It uses the advantage of the multimedia services in Windows as well as the advantages of the latest PC hardware.

So, here I have a customized desktop that I have built.

MR. BALLMER:So, this is just an active desktop, that’s a technology people have seen before.You can get that with IE 4.But what you’re doing now is, you’re jazzing it up with the Chrome Effects effects.

MR. WATKINS:Right.We’re using those media technologies to bring 2D and 3D and integrating them in here.

MR. BALLMER:Okay.

MR. WATKINS:So, I actually can link to my normal applications, like I have Microsoft Word.

MR. BALLMER:So, this is just a Web page on the desktop that has been enhanced with Chrome Effects.You chose to make it kind of jazzy and fun, but it’s just an active desktop.

MR. WATKINS:Right.It’s just an active desktop that we’ve jazzed up for my service.So, I have a copy of Notepad down here.And then, we’re personalizing a newspaper for you, Steve, and so I’ve got the last story on my desktop here that I need to make a few more edits to.So, let’s bring that up.

So, you can see it launch, and you see the title flies in.It actually says Financial Weekly, but we know you need the news daily.So we’re going to edit that.

MR. BALLMER:What we have here, this is just a browser page in which you have enhanced a page using Chrome Effects?

MR. WATKINS:Correct.You see this is normal HTML here.I can select text in the page.It’s not just a bitmap or anything.So, if I click restore, you’ll see that the tags to build this are very similar to HTML, and down here I have a text tag, and one of the attributes of that says
“Financial Weekly.”
We’re going to edit that to say
“Financial Daily.”

MR. BALLMER:And this is just a set of XML tags, XML codes then?

MR. WATKINS:Yes.They’re are just XML tags.So, we’ll save those changes out, finish that edit.We also noticed that one of the stocks on the chart here is heading down.We like all the stocks to be going up, so we’re going to go

—

MR. BALLMER:It’s a bad week for you, pal.

MR. WATKINS:Yes, definitely.

MR. BALLMER:But I’m okay with it.Let’s leave those stocks alone.I like those.

MR. WATKINS:In a couple of months, we’re going to be coming out with a Chrome Effects integrated authoring tool, so I can simply right click on the page, and add Chrome Effects, and you can see a new tool bar at the top.The tool bar allows me to add objects, lights and behaviors.It’s a simple drag and drop interface.

MR. BALLMER:But this is the kind of tools that the people would use to author content, change content, very simply?

MR. WATKINS:Right.You saw me edit it before with normal text, but I can also use a tool here to do it.

MR. BALLMER:Well, let’s look at how the editor works there.

MR. WATKINS:So, I’ll select an object.We’ll select the line back here in the scene, and I can just rotate it, so the stock is now going up.

(Applause.)

MR. BALLMER:I wish the stock market were that easy to manipulate.

MR. WATKINS:Yes.So, let’s save those changes.So, we’ve got our changes here.Let’s go back to the finished version of the newspaper now that we’ve got.So, I’ll leave my desktop, and we’ll head over to your desktop.

MR. BALLMER:So that’s my desktop, the bald-headed one?

MR. WATKINS:Yes.And we’ve personalized this for you.We understand you’re a big basketball fan, so we’ve got an appropriate desktop for you, and we’ve got your applications.So, up here we have Microsoft Excel.And then, in the center you see a finished version of the newspaper.So let’s launch that newspaper.

Here’s the front page of the paper.You see we’ve got some special effects going on here, it’s a series of transitions between 3D images of San Francisco.So, Chrome Effects ships with a standard library of objects and behaviors and filters, but it’s also extensible, so you can write your own things to manipulate 2D and 3D things, or you can use those being developed by third parties.

So, let’s move on to the next page.The next page is the weather page of the paper.Here we’re using some of the 2D effects from within Chrome Effects.

MR. BALLMER:I will say, we’ve had incredible enthusiasm for Chrome Effects coming out of the hardware vendor community.People, whether it’s Compaq or Dell or whomever, they see great opportunities to give a richer out of the box experience using some of these technologies.

MR. WATKINS:So, let’s launch the forecast, and that pulls up a new page with NASA weather information.Here we have a Chrome Effects scene with four sheets.I can interact with the scene so when I mouse over they become opaque, but you see that they’re partially transparent by default, so you can see the ones in the background through the pages in the foreground.I select them and they slide on into focus.So, I can navigate with multiple pages at the same time without having to go back and forth and back and forth.And then the contents of the surfaces are real live HTML.I can select text here on the surface, being that it’s on this page.We have the mouse over effects that exist within the HTML normally, the same mouse over effects exist on the surface of the 3D object in a Chrome Effects scene.

Let’s close out the weather page and move on to the financial page.You’ll see you’ve got the changes we’ve made, and now it says Financial Daily as it slides on in.A simple lightweight description of the title, and so we just edited the text and then changed that.We didn’t have to go back through the production process of building an animated GIF with a whole series of frames that gets downloaded.We’re using the power of the hardware to make the experience to the end user much faster.And then, of course, all of our stocks are now going up.

So, let’s move on to the final page of the paper.With Chrome Effects, we’re trying to extend communication from one in the past that’s been mainly textual to one that’s based on interactive media, and interactive media is going to allow you to learn more quickly, publish faster, and just simply communicate much more effectively.In this case, we found that Chrome Effects has been particularly effective in online advertising, so there are new ways of doing advertising.This one was done by Razor Fish, a local Web production company, and they’ve used Chrome Effects here.So, you can mouse over the button, a zipper appears, and when I click on it, it actually syncs the sound as the pages zips open, and I can interact with an interactive Chrome Effects add for doctors.

MR. BALLMER:So, the doctors think you need to pull down the zipper to look at their advertising.

(Laughter.)

MR. BALLMER:Just thought I’d try to get the analogy correct.

MR. WATKINS:That’s good.And so we have a series of 3D objects here, and on all of these objects, we have live HTML pages.And on this particular cube, using the Windows Media Player to play video on the surface of the 3D object.So, on this particular one, the video clip can be streaming over the Net.We have an animation sequence playing and drawing out the first frame of the video clip.And then when it’s finished downloading, it then renders this video on the surface of the 3D object.

So, when I’m finished with the video, I can move to other faces of the cube, and close in and rotate the back, it presents me a new HTML page.When I’m finished interacting with the ad, you notice that the page is still there.I’m not totally gone from the site that I was at before.So, I can select the surface, and it zips on back up again, and I’m back at the story where I was before.So I can continue reading my page, but still having viewed the advertising content.So, this is really just one example of what kinds of things are possible with Chrome Effects.

MR. BALLMER:That’s super.I hope people get something of the sense of the kind of tools that we’re trying to make available so you can do very rich, very exciting interactive pages without a huge amount of work.

Thanks very much to Ryan.

MR. WATKINS:Thanks, Steve.

(Applause.)

MR. BALLMER:I’d like to show you just a brief video that we’ve done with a number of Web site developers and independent software vendors, where they get a chance to talk about some of their views and enthusiasm for Chrome Effects.So if we’d roll the video please.

(Video shown.)

MR. BALLMER:We’re certainly very excited about the Chrome Effects technology.We hope you get a chance to check it out.It’s will be part of Windows systems, shipping starting this fall from a variety of major manufacturers.

What I’ve tried to do today is to talk a little bit about where Windows is in publishing today, and our commitment to improve it, talk a little bit about Internet standards, and support for the Macintosh.I’ll show you a little bit of how we hope we’re not only learning and listening, but innovating through technologies, like Chrome Effects and others.It’s been my pleasure to have a chance to speak with you today.And I’d be glad to have Craig Kline from Seybold join me for some questions.

Thank you very much.

MR. KLINE:I hope to get to a couple of audience questions, and we do have microphones in the aisle.

MR. BALLMER:Craig, what’s with the button?

MR. KLINE:Well, you may be aware of the small squabble between Quark and Adobe.

MR. BALLMER:I’m aware of the small squabble, shall we say.

MR. KLINE:Yes, so anyway, we’re having a therapy session for users and developers at 1:00 today in room 103.Seybold has to be impartial.So that’s the reason I’m wearing both buttons.But, as I understand it, you’ll have your choice of button as you enter the room.

So I had one question about Chrome Effects, having watched the demo.It’s my understanding that the actual traffic over the net is quite small, because you’re using XML and so forth.But, you do need a very industrial strength machine to actually render it, because all the rendering is going on on the client side.Is that correct?

MR. BALLMER:You need a $1,200 machine today.A machine that OEMs think they’ll sell by Christmas for $800 without a monitor, $950, maybe $1,000 with a monitor.So, yes, you need a $1,000 machine.Now, we can call that very industrial strength and powerful, you need $1,000 machine.But, I’ve got to admit there aren’t a lot of these $1,000 machines installed today.But, you do need a $1,000 machine.

MR. KLINE:Okay. But, you’ve still got to go buy one.

MR. BALLMER:Oh, yes.I’m not going to tell you we’ve got 300 million instant converts out there.But, it’s still $1,000 machine.

MR. KLINE:Okay.All right.What about Macs, will this thing render on the IE 4 client on a Macintosh?

MR. BALLMER:We’ll need to do that add in on the Mac, and we’ll look at that based upon the kind of demand we see from developers.Just a small show of hands, how many of you had either seen or heard about Chrome Effects before my discussion this morning?Take a look at what we have up on the Web site.The SDKs are available, give some feedback.I think that’s how we’ll best gauge what the demand would be on the Mac.

MR. BALLMER:Changing gears a little bit.It’s clear that NT is making great inroads in the enterprise, and certainly in publishing shops, particularly displacing traditional UNIX vendors, such as Sun or SGI and so forth in many cases.But, in the last year we’ve seen a resurgence

— I shouldn’t say resurgence, but an increase in interest in freeware, like Linux, and Apache, and SendMail, and Perl and so forth.A lot of the standards on which the Internet has been built are increasingly making it into the glass houses at enterprises.

MR KLINE:There was a news item the other day at an Informix user meeting, when they tried to talk about their financial results, all people wanted to hear about was Linux.So what is Microsoft doing?

Are you worried at all about Linux and Apache? Or given that it is a free software movement, and you don’t have any one competitor to target against, how are you dealing with this movement?

MR. BALLMER:Well, sure we’re worried.Anybody who doesn’t worry about somebody who’s got something that people like just means you’re not really focusing in on what your customers really want.I think at the end of the day, when we talk to people who do have some enthusiasm, it’s not the fact that the software is free that’s attracting them to it.In almost any IT project, the cost of the software is actually fairly small, relative to the total cost of any project.

So it’s not the free nature of those things that excites people.When they get excited it’s typically more because there is some flexibility they have, whether it’s source code, or ability to modify.There’s some flexibility they have with Linux or Apache that they’re afraid they can’t have with NT.And all that does is it keeps putting pressure on us to say,
“Are there more ways to open up NT?Is there more source code we can publish for NT? Are there more customization capabilities we need to provide in NT? Are there some features that we’re still not as good at, in terms of the way you host multiple virtual web sites on the same machine?”
So we work those issues.

The free nature of it, itself, actually I don’t think that’s a customer plus in many cases, because they understand what that implies about support, et cetera, et cetera, et cetera.But, there are some other non-price issues that I think we feel the constant pressure to do better and to respond to.

MR. KLINE:Would Microsoft consider making any aspects of its software, like IE, an open source offering, which would allow other people to add enhancements and so forth?

MR. BALLMER:There actually are many pieces of Windows for which the source code is available.That is a true statement today.The device drivers,

the libraries, the run time libraries, the DLLs.Of course, the source is not available for the whole system.But, you know, every day we wake up smarter, and we’ll consider what it means.People aren’t really sitting here begging and demanding source for the browser.But, when you take a look at why people are interested in Apache and Linux, there are perhaps other features of the system where we need to open things up.

MR. KLINE:Okay.PDF is becoming increasingly important on the print side of our business.People are looking at it for work flow.And Apple recently announced that it’s going to replace Quick Draw with PDF as the native imaging model for the Macintosh.What is Microsoft doing to provide better support for PDF, for its publishing customers?

MR. BALLMER:Well, we have a fairly active discussion.I can’t say we have a clear plan that we both love.But we have a fairly active discussion with Adobe about what the nature of the relationship between the things that go on in Windows should be with PDF.You shouldn’t expect to see us abandon our so-called GDI system in any way, shape or form.It’s our mainstream graphics package.It will be this year and next year, and the year after.On the other hand, making sure that you can faithfully represent a PDF file on a Windows machine, that that’s not a hard thing to do, that’s the kind of discussion that could bear a lot of fruit between us and Adobe, for example.

MR. KLINE:I would like to take some questions from the audience, so if you can bring up the house lights.While you’re doing that, I want to ask another question, though.

In your talk you mentioned early on about how the Web is making it much easier to provide better customer service by remembering a lot of things about the user, as he’s conducting a transaction or going for information.But, a lot of people are concerned about the dark side of that same thing, in terms of privacy, and particularly the breech of privacy, the ability to spoof somebody and therefore have people lose their identities, and maybe being fleeced and so forth.What is Microsoft doing to protect people’s privacy online?

MR. BALLMER:I think there’s really two key things.One is, what technology initiatives do we have to help people

— help both users and Web site developers on the privacy issue.We recently bought this company Firefly.The reason for buying Firefly, which had a combination of personalization, privacy and filtering technologies, was to make sure we could have a rich infrastructure in the platform for allowing Web site developers to honor the privacy concerns of their users.I mean, every Web site developer has got to decide on their own.

Second, for us as a content provider–which we are through microsoft.com and our interactive media properties–we do have a fairly strong code of respect for the privacy of the end user.We’re very involved in Trustee, and some of the other organizations that have focused in on this concern.So we’re trying to set a leadership example in terms of the way we would want to be treated as customers, treating our customers that way.

MR. KLINE:Though, I notice on Windows 98, for example, when you register it asks for quite a bit of information about your computer, though it does give you the option of saying no.

MR. BALLMER:It gives you the option.I think it is wrong for us to not let the customer give information that we could use productively to support them.But, it’s up to the customer.At every step of the process, the customer gets to decide what he wants registered and what he doesn’t want registered.

MR. KLINE:Do we have any questions from the audience?Are there microphones here that people can come up to or not?We have roving mikes.

QUESTION:Hello, I have a question about Chrome Effects.Do you guys require a plug in for the use of it, or is it just a free thing just with Internet Explorer?

MR. BALLMER: Well, it’s integrated with Windows.That’s probably a controversial thing to say.It’s an integrated part of the Windows system, which hardware makers are delivering this fall.So it comes completely integrated.There’s no extra install.It’s just there.It will operate in the browser in the way that you saw in the demonstration.It operates as part of the Active Desktop, if you want to do that kind of customization.So there’s no process for an end user to have to put it on their system.It just comes as an integral part of Windows on new computers.Because it requires a computer that’s 300 megahertz, and it requires a 4 meg, 3D video card, we don’t think there’s a huge installed base upgrade opportunity.It will mostly be on new machines for the next couple of years.

MR. KLINE:Will somebody be able to get it, presuming they’ve rolled their own 300 megahertz, high graphic bandwidth machine, could they get it somehow?

MR. BALLMER:We don’t have a distribution strategy today that allows that to happen.I was kind of giving the team a hard time about that before the show.So maybe we need to reconsider that.

MR. KLINE:Where there’s a will there’s a way.So you should make it available.

MR. BALLMER:Yes, where there’s a will there’s a way, but it depends on how complicated everything is for the user.

MR. KLINE:Another question?

QUESTION:What about the support for the Macintosh users?Do you

— would Chrome Effects be supported in that, or is there going to be a plug in for that?

MR. BALLMER:Right now we’re supporting it on PC.We’re not

— we don’t have a Mac committed plan.But, as I said earlier, we love feedback.I’m [email protected], if you’ve got a strong opinion, please email.

MR. KLINE:Okay.Next question?

QUESTION:Yes, Mr. Ballmer, a couple of years back Microsoft tried to get

— to turn the Internet into a proprietary format, with Active X, and Web developers didn’t buy it, because they wanted Web pages to be viewable on any platform.Now, essentially you’re trying to do the same again with Chrome Effects, which is a way to make Web pages which will only be viewed correctly on Windows 98.What makes you think Web developers will buy it this time?

MR. BALLMER:Well, I don’t think our strategy has changed, ever.So let me explain what it was, and what I still think it is.I don’t think anybody can turn the Internet into a proprietary system.I don’t think we ever fooled ourselves about that.What we tried to do then, and what we’re trying to now, is to say: Look, there are exciting, innovative things, which we can let people do on the Windows platform, some of them may go beyond and require some code on the client, other than just a basic HTML renderer.Some people will choose to use that capability.Some people will choose not to.It really is up to the Web-site developer.Some Web-site developers will have ways to take advantage of a technology like Chrome Effects if it’s there and to not take advantage of it if it’s not there.

We certainly haven’t seen every Web developer move to use every capability that is unique to Windows or IE.On the other hand, we have seen a number of Web developers enhance their sites in ways that they consider very productive by taking advantage of some of the advanced client side capabilities.

You can’t turn the Web into something proprietary, we don’t presume to do that.But, I think it would be a shame to think all innovation should stop at this stage in the game, and not give developers the option to take advantage of advanced capabilities that might be very meaningful for the sites and applications they’re building.

QUESTION:So you’ve got a little
“chicken and the egg thing.”
If it’s only on machines that are going to ship this fall, people building sites with Chrome Effects are also going to have to factor in that you’re going to have to have Chrome Effects enabled, Chrome Effects disabled, Navigator enabled, et cetera, et cetera.So it does completely increase the complexity for the Web site developer.

MR. BALLMER:Yes, I don’t think we’re going to see sort of a mad rush tomorrow, everybody in all pages must use Chrome Effects.On the other hand, I think pages like that represent the wave of the future.And the question is,
“How do you get there?”
It may take a while.But, we think it’s important for us to give the option and to give tools that make it easy enough that a Web site developer can think about that as a set of nice enhancements for people who do have Chrome Effects.

I do know some Web developers who are going to make heavy use of those.There are Web sites which are run by hardware manufacturers who will ship machines.I know those Web sites will highlight the capabilities of their machines.And, you know, so at least some

ISPs, so to speak, will definitely take advantage of these capabilities.

MR. KLINE: So it looks like Intel and the hardware manufacturers will love this product.Next question?

MR. BALLMER:That’s true.

QUESTION:(inaudible) …in Chrome Effects?

MR. BALLMER:Yes, we will support both streaming audio and streaming video in Chrome Effects.

QUESTION:(Inaudible.)

MR. KLINE:I think he’s heard this message loud and clear.Okay.Next question?

I think we have time for two more questions, so Steve can get onto his first graders.

QUESTION:(Inaudible.)

MR. BALLMER:The gentleman asked,
“Will that be Windows 98 SR1?”
It’s Windows 98 as shipped by OEMs this fall and I’ll bet we do have a version number for it, and I’ll bet I don’t know it.I’m sorry.

QUESTION:There’s also the Windows Active Update, which some manufacturers are complaining about, because it could conceivably break their enhancements in their particular models.I know, for example, Dell has warned people about using Active Update to update their Windows 98, because it might break some things that Dell has provided for support of their machines.

MR. BALLMER:Well, I think Dell had some specific concerns about some things that they didn’t think we’d executed.I’ve had a lot of talks with Michael and others at Dell.And I think they are very supportive of the general concepts.We need to make sure we get all of the

rough edges off the execution so it can really work well for the Dell customer.But, I know that at this stage they’re enthusiastic about the concept.

MR. KLINE:Last question, and make it a good one, please.

QUESTION:(Inaudible.)

MR. BALLMER:Yes, the color stuff we did prioritize.I think we’ve made some efforts in color.We didn’t get them as right as we would have wanted to on our first pass.We’ve got a clear view of how to do the color stuff.We did make a decision that the color stuff should be integrated with NT 5.Two years ago when we were here, we had just shipped NT 4, and we had an expectation. I don’t remember the specifics, but I’m sure our expectation would have been that there would be an NT 5 by now.Hence, I wouldn’t be apologizing, still.

There will be an NT 5, not tomorrow or the next day.But, there will be an NT 5, in the not too distant future.We’ve just released our second beta.We have a third beta.We’re making some good progress.I think we’re in good track for

— I would hope — the top half of next year.But, that really is where we get after the color issue.

MR. KLINE:Okay.Thank you, Steve.

MR. BALLMER:Thanks all, very much.

(Applause and end of keynote.)