Speech Transcript - Jon DeVaan, Silicon Valley Speaker Series
June 07, 2001
A transcript of remarks made by Jon DeVaan as part o f the Silicon Valley Speaker Series, held June 7, 2001 in Mountain View, CA.

Remarks by Jon DeVaan
Silicon Valley Speaker Series
June 7, 2001

JON DEVAAN: Thank you, Phil. Good afternoon, everyone. One of the things I like to do when I have a talk like this, and particularly I think we have a pretty diverse audience, is to ask people a bit where they're from. I know we've attracted a lot of people from different companies in the Valley. How many people are from companies around here in the Valley? A good number of hands.

How many people are from a university or school? Didn't get too many people, a couple.

How many people are here from Open TV or Liberate? (Laughter.) Well, no, I mean this very sincerely, welcome. You know, Microsoft is going to do a lot to compete for the business and all that stuff, but we don't want to lose sight of the fact, and it's the important reason why we have the Silicon Valley Speaker Series, is that we have a lot more in common than we don't. As people, members of the community and members of the industry, and there's a lot of stuff that we should work on together, and a lot of that relationship comes from getting to know each other. So when we set up the Silicon Valley Speaker Series, you know, Microsoft here is a neighbor in the community. You're all our neighbors. And every once in a while, you ought to have your neighbors over.

So really welcome, even from our competitive companies. Did I mention the use of recording equipment was not allowed? (Laughter.) But seriously very much welcome.

I'm going to cover what's happening in the TV Group here at Microsoft. We're going to concentrate on our Microsoft TV platform products. We have another exciting product called Ultimate TV. I'll place this in the taxonomy of things, but I won't be talking too much about that. I'll show you a few demos; we have some interesting things to highlight the kinds of services that we expect to come true on the television set. There are a lot of visions about what will happen in terms of what people will be able to view on their TV and we want to show you what our thoughts are there.

One thing you can be certain of is there will be a huge amount of experimentation because the usage of the TV is just too important for it not to join the digital technology world. With Moore's Law, every TV is going to be a computer and have a computer inside of it, and how are we going to put that technology to use for the benefit of the people that own them will be worked on probably forever from this point forward.

An interesting thing to ask yourself is just what is interactive TV anyhow? And we think that there has been a lot of early effort on interactive TV and we think that's a start and that you'll see Microsoft's view of interactive TV as very comprehensive. And there are a lot of different kinds of services that will get delivered to people through their television set.

In the upper left hand here you see "Enhanced TV," and this is the notion of applications that come down with the video programming and add to the experience of the video itself. You see things like "play along with game shows." You see things like "drill down on use highlights." I was just with the senior vice president of NBC yesterday and the interactive things they've done with CNBC is great. How many people get annoyed having to watch CNBC and wait for your stock to go by? Well, with their interactivity now your personalization from your Web site of CNBC will put just those stocks on the top stock ticker while you're watching CNBC. So it's a huge, cool personalization, and that comes from the enhanced broadcast of CNBC.

Other things with enhanced broadcast is advertising. The early experiments with advertising that's been enhanced so that whenever you see in the ad, "Call this 800 number, or send $24.95," you know, just being able to click once with the remote and take advantage of that offer generates better than 10 times the response rate on those ads, and that has some real significant value, and also a lot of convenience again to the consumer, which is very important.

In the upper right hand side you see "Personal TV" and this has been a wildly exciting new area in technology just recently. I bet everyone has read about it. How many people have an Ultimate TV or a Tivo or a Replay? Probably about 20 percent, 25 percent of the people. So I don't have to convince you about how amazing it is to be able to just be watching whatever it is you're watching, and, of course, if you're like my household, just as you're getting to the climax of the show, or the two-minute warning or whatever it is, the phone rings or your kid has some problem or something, and just being able to hit that pause button and not have to worry about it and go take care of whatever you have to do and come back and pick it up is an awesome feature. And then, you know, the ability to record and all that stuff, that's even better. And so personal TV is a very exciting part of interactive TV. And personal TV will grow in the way that it can help you get the most value out of the hundreds of channels that are available to you with your TV service today, and so there will be some exciting things, the way that personal TV will grow and change over time.

In the lower left we have really the pioneer, which is the "Internet on TV" service, and people have seen that. WebTV has over a million subscribers and really was the pioneer in this area. And Internet on TV is important. It probably won't be the way that most people use the Internet, like was predicted early on, where, you know, because everyone has a TV everyone will use the Internet on the TV. That's probably not true, but there is a very important segment of people, who are really technology averse; they don't want to spend the money for a PC, that will use the Internet on the TV, and we think that's probably about a 20 percent penetration, which is not the majority but it's still a very significant number and an important service that will get delivered over the TV.

And in the lower right is really the future of what kind of services people will get with their TV. My favorite example, I have a digital camera and I have a lot of fun with USB cables and reaching around the back of my PC and all that stuff, but digital photography is a great thing. But in the future what you'll be able to do is you'll be able to take your digital camera and just set it next to your set-top box and then you'll be able to use your TV to look through the pictures there. You'll be able to use the network that's connected to that set-top box to store the pictures from your digital camera up on a storage site on the Internet, so you won't have to mess with any cables. You won't have to mess with worrying about your hard disk crashing. From the photo service that you're a subscriber to you'll be able to order prints, be able to send them to your mom, your dad, your grandma, whomever, and another way that the set-top box and your TV will branch out and support new convenience services and just make it available to participate in the digital world even in what seems like a low tech way through your TV.

So that's the consumer promise of what can happen with interactive TV. How does the market work anyway? This is relative to my experience at Microsoft. It's one of the most complicated markets you could ever possibly imagine in terms of the number of companies that are involved. Anytime you're dealing with consumers, it also makes it really interesting.

I'm sure probably all of us have heard some industry guru or someone get up and say, "Consumers want X." And anytime someone does that, they say, "Consumers want X," they're always wrong, because consumers by definition are wildly diverse and different consumers want different things.

But they're a very important part of the marketplace, because ultimately they're the ones who are looking at the advertising. They're the ones that are going to play the subscription feeds. They're the ones that are going to participate in transactions. So the money starts there and so the industry has to do a great job of taking care of the needs and wants of the consumer.

Our belief is the consumer will consider themselves a customer of an interactive TV service. And virtually all the interactive TV services will be integrated with the company that provides their TV service. So I put some examples up on the slide here. Ultimate TV is the Microsoft interactive TV service that we offer direct to consumers. We have a variety of network operator partners, like TV Cabo. We'll talk some more about them later. UPC, Rogers, AT & T: These are major network operators around the world.

And consumers will think of the way that they get interactive TV services from the place where they get their TV service. They'll think of it as their TV service, and the interactive features are just great things that come along with their TV.

In turn, all these services are going to be combinations and integrations of a lot of other different kinds of services. For a long time in the industry these network operators thought that they would build all the services themselves. I think the last six to nine months to a year of the Internet experience has done a lot to convince them that they won't be able to build all these services themselves, and some people, who had been working on building those services, are starting to realize it's a lot harder. I'm sure a lot of people in the room work at companies that have dot-com businesses or online services and you realize that it's a lot of work. And so there is going to be a lot of partnering going on with these services, whether they're communication type of services, commerce type of services including wallet, other kinds of interactive services like a shopping area, those kinds of things, or the enhanced broadcast and advertisement I was talking about earlier. All these services are going to come from partners.

In turn, those services and the ability to integrate all these different services into one integrated offering for the consumer is going to be built on enabling technology. And the enabling technology for Microsoft in the TV space is called Microsoft TV. Now, a lot of people have probably heard about Microsoft .NET and Microsoft TV is an important part of Microsoft .NET. When you look at Microsoft's broad vision about .NET, you have the notion of there being a lot of digital services for consumers to use. And Microsoft will provide technology that will make it very, very easy to create those services; the notion being that if we can create technology that makes it easy to create world-class digital services, the notion of entrepreneurism, the value of that service will be what will make those people successful, not just their ability to manage technology and do all that stuff -- that's important -- but if we're going to do our job, we're trying to make with the Microsoft .NET software the most important part of being successful in an online business that value proposition and that entrepreneurial spirit that you bring.

All those digital services are going to get delivered to consumers where they want to use them -- any time, any place and on any device. And when you talk about devices, you look at the TV and it's the world's most popular device and it's the device that has the most usage of any other device on the planet. You have more people, more hours in front of it every day, so the TV is a very important part of this dream of digital services presented conveniently to the consumer whenever and wherever they want them.

Some of these constituent services that will make up the interactive TV services, Microsoft has some and we're willing to partner with the network operator community to deliver those. And a bunch of the services will come from Microsoft TV partners. We spend a lot of time evangelizing and developing the ability for people to create these services using .NET, of course, and also using Microsoft TV, that those services can be readily integrated into an offering from a network operator.

And lastly, I like to highlight and just sort of remind everybody that with the orange things, those are all ways that Microsoft can bring and offer either directly to the consumer with Ultimate TV or to our partners in the other areas.

So when we talk about our mission statement, given the taxonomy that I just put up, we really think of our mission statement really as in two pieces. One is to make sure that we're always serving the consumer, and that makes TV more useful, fun and engaging. So we can't lose sight of that consumer. So the consumer is where ultimately the value has to be delivered and where the rewards are going to come from.

The other important part of our role is to help provide the technology and the leadership to make the whole interactive TV industry profitable for the people who are involved with TV today. And it's quite important. We think that Microsoft can be a leader and we wish to help and aid in building the market and evangelizing the market and helping make clear the benefits of interactive TV to the world, so the market can grow and prosper.

Our activities in the area started with WebTV. So I'm going to hold up one of the original WebTV classic devices. This is the world's first Internet appliance. It was out in 1996 and was really a huge breakthrough in its time. And the Internet on TV, as I said, will be an important service going forward. We've refined our vision around what kind of services that people will get from their TV to add a lot of services that are specific to making the TV experience better.

This is an Ultimate TV device right here, which we did in partnership with RCA and Sony and DirecTV. This is an integrated device that has two digital tuners so you can record one program and watch another one or record two programs at the same time. You can do things like picture in picture. My favorite use is to sign up for the NFL Sunday Ticket where you can watch 13 games every weekend, and I have the capacity to record six of them and you can watch picture in picture. So one of the cool things you can do is you can be watching the game that you're interested in on the main screen and watching another game on picture in picture. And because the DVR is integrated with both tuners, if some big play happens on the picture in picture, you can swap the main screen, rewind a little bit and see the big play that just happened in picture in picture, and really get the enjoyment out of spending the money on something like NFL Sunday Ticket.

So we're really excited about Ultimate TV. It's available now. If you haven't gone to the store to look at it -- we would have demonstrated it today, but we showed it last month at this meeting, so we didn't think showing it two months in a row was the right thing to do. But it is available now and a very cool product.

And then the product I'm going to spend most of my time talking about today is Microsoft TV, which is Microsoft's work to take all the technology, all the things that we've learned from WebTV, all the things that we've learned from Ultimate TV and package it in a standard way that allows the customized ability for our operator partners, the openness for all of our third party partners that make different kinds of interactive TV applications and other services, so that Microsoft TV can be one of the building blocks that builds an interactive TV service.

So just quickly to cover what we have in Microsoft TV, we have software that runs on set-top boxes. We think there are three major categories of set-top boxes. One is the type of set-top box that is being distributed today, which we call "current generation set-top box," and so our product there is called Microsoft TV basic digital.

And another important class of set-top boxes are the set-top boxes that are coming in the future. We have an example here, which is the Ultimate TV set-top box and the example here, which is the set-top box that's being used by TV Cabo, and an example here, which is the one being used by AT & T and other North American network operators that we call Advanced Set-top Boxes. They have hard disks, broadband network connectivity and processors and RAM and graphics infrastructure to support creating a really rich experience for the consumer and doing things like DVR and other advance interactive services. Our product there is called Microsoft TV Advanced.

And there's a third class of device that you'll see connecting to TV networks, which are PCs that have tuner cards and other infrastructure that people -- there are a class of people, if you look at the demographics, between 20 and 25, over half of the people in that demographic have their PC and their TV in the same room. And so people are using their TV to do media things today.

When I started at Microsoft in 1984, if you would have told me that college students would use their PC as their stereo, I'd have thought that was really funny; unbelievable, in fact, but I think right now you see that most college students use their PC as their stereo, and with the digital music phenomenon on the Internet, it really made that an enticing thing.

So I don't think that people are going to use their PCs to watch TV in any kind of mass way anytime soon, but there are people who are going to be very interested in having their PC connected to their TV and it should work just fine as a TV device.

So, another important part of the software infrastructure to build that end-to-end interactive TV service is what goes on in the head end. The set-top box is the like infrastructure, which can help deliver the services, but the services that you create really will be made in the head end, and our product there is Microsoft TV Server.

And going one step farther, to go back, if you remember my taxonomy from before, you have all these third party services, which are going to be integrated together, and that's one of the major functions of Microsoft TV is to be able to take all these different services, whether they're from third parties or our Microsoft TV partners or from Microsoft and integrate them together to create a great interactive TV service that can then be managed by the network operator and be integrated with things like their billing system and their customer service system, so the network operator can offer superior customer service for their complete package. As I said, the consumer is going to think of this stuff as I just buy my TV service from AT & T or DirecTV or whomever, and with that perception from the consumer comes the need for all this stuff to really be integrated and be seamless -- there is one phone number to call for support, not three phone numbers to call for support -- and all the things that are necessary to make it truly simple for the consumer to have this service.

And that's what Microsoft TV Server is about. And also a lot of tools to help you manage that business, know what's going on in the network and be able to maximize the economic opportunities.

Then what happens on the network operator's part is using their infrastructure, whichever it is -- if it's cable, great; if it's satellite, great; if it's terrestrial broadcast, great -- and I didn't put the dial-up telephone line on here -- but that's the network mechanism where the services get ultimately delivered to the home. And now you see a picture of an end-to-end interactive TV service using Microsoft TV as the essential software building block.

A very important thing happening in the industry right now is it's great that you can make all this stuff come true. And like other elements in the high-technology industry today, people are asking, "So where is the money going to come from?" And again because consumers are the ones who are going to need to understand why they're going to pay, why are they going to look at ads, why are they going to do transactions, and consumers are interested in, "Well, what are the services you're going to give to me?"

And consumers are really going to use these services in a few different ways in terms of they will look at the advertising, they will go to shopping areas, they will participate in enhanced advertising, which will create transaction revenue for the network operator, and services will get developed that will create subscription revenue, new subscription revenue for the network operators.

So when you look at some of the services we can offer here, you see the program guide, which is I didn't offer as really kind of a fourth way, a way that consumers get extra benefit and it helps them churn away from the service less, which when you look at the economics of the business, reducing that rate of churn is one of the true fundamental business levers for a network operator to push on to improve the economics of their business.

So you'll get things like targeted video and banner ads that partly is a way there is going to be monetization for the network operator. Interactive advertising I talked about -- video on demand, the ability to navigate a huge database with different programming and watch it exactly when you want, integrating that with digital video recording so you can help save some of the ways the network works to deliver that experience and watch what you want when you want it, but we think digital video recording and the way that personal TV evolves can generate significant subscription revenue for the network operator.

Streaming media is interesting, because it can do two things. One is to be a way to deliver content in real time that helps make the other services better. I'm going to show you a music service in a minute. And the ability to show or experience clips in real time as part of that music service helps make the penetration of people using that music service better so the consumer likes the service better. It also helps them buy more CDs when they're on the music service. And so streaming media can help facilitate those kinds of things, and eventually be a way to lower the cost of delivering music and TV directly to the consumer.

Communication services are interesting. Network operators are really excited about e-mail, for example, because when people get an e-mail address, that's another way that the consumer is depending upon the network operator and it will be a way that will help reduce churn.

Telephony, people have probably read a lot about that, about the cable company being able to compete for phone service. It's quite true and it's another way that the network operator can derive revenue.

You'll get Web-based services. The walled garden is a concept of having what's a lot like a Web portal, but have it be available for free without having to charge an extra access fee and include in that things like the music service I'll show, a shopping area and be able to generate e-commerce for the network operator.

Internet service, as I said, probably not every person will want to pay money to browse the Internet on their TV, but there is a significant part of the consumer audience that will like that. You can generate another significant subscriber revenue for the network operator.

We talked about shopping and e-commerce games as a great possibility, both playing games directly on the set-top box or providing games to a PlayStation or an Xbox that's connected over the network. When you go back to my slide about what is ITV, that connected TV, that game console can be connected to the TV to take advantage of the network.

And then all the other devices, I talked about the camera, talked about hooking up your PC. There are a lot of companies, network operators in Europe, which are looking to the set-top box to be the one piece of hardware that they put in the home. And as they go to a customer to sell them digital TV, broadband connectivity for their PC and telephony, they can save a lot of expense by having the technology in the set-top box and a simple wiring installation to go along with it, and so lower their cost of installing their three major services.

So there's also ways that you help save money in the existing service. When you look at things like self-provisioning, I talked before about data warehousing as a way that you can analyze what's going on in the network and make intelligent business decisions out of that. That's very important to be able to mine that information and do better ad targeting, better service tiering; all those kinds of things are important and ways that the technology can help the network operator generate significant revenue opportunities.

So what are the kind of services? I went through a bunch of them quickly. There's another dimension in the industry, which is about should I use a current generation set-top box; should I use an advanced set-top box; what should I use exactly? By our analysis, you can double your revenue on these new services by using an advanced set-top box with DVR and broadband connectivity. If you look at the left-hand side, there are a certain number of services that you can do an existing set-top boxes, but without having the kind of connectivity that you need or the horsepower to create the consumer experience that you need, those opportunities are somewhat limited and you can do better as a network operator by moving up and adding in DVR or by moving up all the way and having DVR and networking.

So with DVR, when you have a hard disk, now you can start doing things like trickling content down and having it more cached on the set-top box that will create richer services and create more opportunities.

When you add in the true broadband two-way connectivity, then that opens things up even more and we'll show you some examples of that; in fact, right now. I'd like to ask Ruston Panabaker to come up and we'll show you a demo of a sample interface that we have with Microsoft TV and highlight some of these services that I've just talked about.

RUSTON PANABAKER: Thanks, Jon.

JON DEVAAN: So on the left-hand side we have some of the major categories. You know, I talked about services and e-mail before, and we'll focus more on music down here, because we have the notion of My Web as an example of a walled garden. We won't go way in, but you have different things to think about on the Web today, but highly customized for TV and really easy to get at for the consumer with one click.

Then you have search, which is how you can get the Internet at large, because that is one of the services that you want to participate in.

We talked about games.

THOMAS MIDDLEHOFF: These are just examples, Jon, of a lot of the content that partners in our content development program are bringing to show network operators the sorts of things to snare market revenue ahead.

JON DEVAAN: That's right, and games -- well, games are interesting because you can play them. You can play them on a "pay as you play" basis or use the space to upgrade people to a subscription service around games.

And we'll spend some time on My Media here, which is where we can use some of the new media types. So, you know, people go to their TV to watch television and video. It's an important part of their experience. But other kinds of media that are important to consumers, like photographs and things like music, and we can create a compelling experience with interactive TV to give the consumer the convenience of getting at those types too, but I'll let Ruston show you a demonstration.

RUSTON PANABAKER: Sure. First of all, I thought I'd go to something, which is a little more of a particular service, if you will. This is an example of a photo service -- we have a couple examples. And this is a photo service that's brought by -- it's done with Kodak and NDS, and this is an example of a service where the business model works such that you can take a roll of film and you can mail it in with an envelope provided by the network operator or by the service provider, and they will not only send you back your prints for competitive rates, but will also put them up on your interactive television site and potentially on the Web site as well for your PC browser, but the important thing being is that you can actually get in front of your television and work your way through your photos and even do things like watch a slideshow on your television perhaps while you're not using your television. When you've left it on a screen that's not TV, it could even start cycling through your pictures automatically.

So this sort of service where I could now manipulate these photos and then actually order a bound photo album of my photos of my grandchildren or share them out with other people in my family, it's a very personal service where this device is connecting out to one of those services in the cloud, if you like.

JON DEVAAN: Right. And you'll see a lot of services that re going to focus on making TV more fun and better, but also services that bring these new media things into the realm. So the TV is a great place for the family to sit around and look at photos. So you're still using the media experience of the TV but allowing access behind this as well.

RUSTON PANABAKER: Let's look at an example of digital music. This is an interesting one, because this is a service that network operators already offer today. You might not know it, but cable operators and satellite operators have been sending down digital audio programming in their bandwidth and it's often available on channel 941 or 932 to get classic rock. Now you can actually build out an actual digital music portal with the interactive television capability and start to do more interesting things around the music.

Sure, the person can sit back and listen to music or go off around the house while music plays over their expensive sound system connected to their television, but they can also, when they hear things that they're interested in, drill down into that content. And you can see here this particular digital music provider, Music Choice, is doing things like offering trivial about the artist that's currently playing and also allowing you to drill down to actually buy the CD, which is currently playing. So obviously an interesting model for people who hear songs that they're particularly interested in listening to; the audio is still playing in the background, they can actually go through all the way through the transaction process using either a wallet service, which is provided by the network operator or perhaps actually having to go through and do a fulfillment as you would on the Internet today with entering your details, et cetera.

So a couple other interesting things within this digital music experience that really shows off the power of building up these interactive television environments, instead of just listening to the channels, which are being broadcast, when we put this together we thought we might play with some fun ideas like allowing the network operator to promote or the service provider to promote within this region of the screen and they can put literally advertising, they can promote special audio services et cetera, and down here on My Radio, if I just go into that, we thought, "Well, what about instead of using the broadcast audio, now we start to use streaming audio." So what we've just started up now is streaming audio over the Internet. So now we're using the cable modem built into this Advanced Set-top Box to do audio on demand.

Now, the fun thing about that is the consumer can actually specify their preferences as to what type of music they're interested in or not interested in. So here I can go down and say, "Okay, classic yes; country, absolutely not; and dance, yeah, that would be great as well to get a little bit of that into the situation." And you can imagine building this out in almost any way, where the consumer at home is allowed to say, "Oh, never play that artist again; I never want to hear that artist play again," right from the click of a remote control. It really makes it a personalized service for someone who's using audio through their television.

So I'll quickly click back up and look at one other scenario with music that we were playing with, what could you do with the music experience to make it more exciting for the consumer. From the channel guide we thought, "Well, if we do that with streaming audio, what about if we were to try that with music videos as well." So we created an area where the consumer can drill in and get videos promoted to them and come using Windows Media Player. So in this window here you can see we're just loading up a clip of Vitamin C. In this particular model, the network operator or the service provider could be promoting a series of videos, but also allow you to purchase them or to add them to your favorites to be viewed over and over again.

And in this particular instance, streaming media, there's nothing to stop them from using other pieces or architecture or infrastructure such as video on demand or a live broadcast music channel to be linked to this as well.

So on the theme of media, I thought I'd also show you, speaking of video on demand, a scenario of a video on demand experience, which we put together. And video on demand is really important to the cable network operator, particularly right now. We look at it as a great way to offer some premium service to subscribers that can represent a revenue stream.

So let's just look at this particular example. Here all of the content for this video on demand application is actually coming off the Microsoft TV Server on the other side of campus. So the subscriber doesn't know that they're actually taking part in a network application, but as they browse through these things and they go to search on specific things, they're actually working against the .NET service, which is running out on a service operator's machine or off on the network operator's machine.

So here you can see I'm drilling down into the drama section and we have a series of movies, which are promoted to us to watching within drama. Now, that area could also be used to do something like promote "get all of the James Bond movies for $19.95" and you could then watch them at your leisure. Because it's a server application, we can really track those preferences and those purchases, and people can come back to the system to use those sorts of things.

Let's look at one of these movies like Gladiator . Great special effects in this movie. Here you can see that you get more information about the movie, the ability to look at the dustcover, perhaps go and watch a five-minute preview of the movie and then you're stuck with the choice of either having to purchase the movie or watch it later.

The other thing we threw in was adding as a favorite, because when you're browsing through movies, you might find movies, which, "Hey, I'd love to watch that sometime; just right now is not the right time while I have all of the children in the room." So we added an area called My Movies, where it's very personalized movie information. It includes things like the favorites, which you have, as well as recently viewed movies. And you might not be able to read it from where you are, but that particular movie is Final Destination. You have the right to view it for another period of time. You might have gotten a 24-hour pass or a week-long pass.

So let's actually look at one scenario here, where we go into Bicentennial Man and we decide that, yes, $3.99 to watch this great movie, let's go ahead and purchase that, and we go through this transaction process here, and you can see that we've started, we're now beginning to watch a movie that stars on demand.

Just by clicking any button on my remote or by using the keys on the remote, I can also do some fun things like fast forward into my video on demand experience or rewind or pause that experience as I go off to the bathroom in the middle of my movie to come back to watch it.

So you can see how video on demand really has it up even on personal video recording and that sort of feature. But actually that's an interesting point with personalized video recording is the network operator can start to play with that network architecture and say, "Oh, this is a really popular movie; we're actually going to put that onto the hard drive as opposed to on the network." And that's something that can happen seamlessly with this sort of technology.

So those are just a couple examples of the way media can be used on these advanced devices.

One other thing I forgot to mention when we were talking about audio. Jon, you talked about the connected home. Well, I brought my MP3 player with me from Rio, which stores MP3 and Windows media files on it. Well, this particular set-top box has a USB port on the back of it, so what I'm going to do is plug this in and we're actually going to not only download the drivers for this particular device from the network, we're also going to navigate, if we're successful here, to a page, which allows you to now choose music and genres of music, which you're interested in watching.

So there we go. We're very slowly getting some content. Let me try this one more time and see if this works. This is actually coming off a server on the other side of the Internet, so you can see that we're truly connected up here. There we go. So now I can choose some categories that I'm interested in downloading music from and actually drill through a commerce opportunity to download the music to my device. So let's pick a couple songs from here. Actually, let's finish this process.

So this is an example of just one device. With the model of being able to share your media, at Microsoft we're pretty confident that media is going to be distributed on your devices and that it's the power of software that's going to allow you to actually connect those, whether it's on your stereo system, which is connected to your home network or your set-top box or whether it's on a music service on the Internet, so you'll have access to those.

So let's go down and punch in my secret password, which I don't want you folks to see here and I'll cover that up. And if everything goes right, we download some music to our MP3 player and we're good to go.

So it's just an example of how these devices can start to connect the home and allow people to access these services.

JON DEVAAN: Great. Thanks, Ruston.

(Applause.)

So going through that demo, you get to see some of the ideas of the different kinds of services. We've focused our services on the new media, as I was talking about before, but it really highlights the fact that these services are going to come about from partnerships with a lot of different kinds of companies, and we believe in that quite a bit. I've talked a lot about network operators as a big class of partners, and in the demo you just saw we have Sonic Blue, we have Motorola and we had the company that did the photo service, a lot of different opportunities for partners to work in this space and build these interactive TV services. And Microsoft is committed to working with partners across that whole value chain to create successful interactive TV experiences.

And we think we have a great set of partners. We've been working for a long time in the industry and as it is coming through, with people deploying interactive TV services, we're really glad to have these partners on board with us.

So let's get a quick update on the Microsoft TV business. Last fall we had some very highly publicized difficulties with our business, but as we worked through getting our software to shipping, things are in a much different state now.

Recently, we announced Globo Cabo, who's gone into trial with our Microsoft TV basic digital product.

Rogers in Canada is using a product and service from us to deliver Internet on TV to their subscribers in Canada.

In France, there's a very interesting company called TAK. Now, TAK is a consumer and electronic company owned by THOMSON Multimedia. So there you go to the store and you buy a TV and the TV has all the electronics integrated -- the access, the TAK service. The TAK service is free and it really pursues that walled garden and advanced media delivery to the consumer, the set of services that we've been talking about through the course of the discussion today.

TV Cabo, they are launching, in fact, today. They've been trialing for six months and they launched their commercial service just today. Steve Ballmer is in Lisbon with our friends at TV Cabo. They're also eight hours ahead of us. They're all done launching. And that went very well and we're very excited by that. And they've done a great job of taking the Microsoft TV software and customizing it to their exact needs.

We talked a little about Ultimate TV. They're another important customer of Microsoft TV, and we think really represent the example for North America of what kind of things can be done with an advances set-top box and some great software like Microsoft TV.

In the future we have our partner with AT & T, where we continue to work on very closely. AT & T has some turns in the road perhaps, but we're very much committed as a strategic partner of AT & T to deliver a service with them in the near future.

And also UPC in Europe, who actually started trials recently with Microsoft TV in Europe, and there will be more to come. In fact, we'll talk about more in just a minute.

So to talk about TV Cabo, it's unique for several reasons. One is they're the first cable operator to deploy Microsoft TV Advanced. They're the first cable operator to offer an integrated set-top box that has DVR. In fact, their set-top box is pretty interesting and innovative, because it has a DVD drive and the DVR, as I talked about before, and has the program guide and everything integrated. That launched today and again it's using Microsoft TV Advanced.

What we'd like to do now is unfortunately we dropped the set-top box so we're not going to show you the demo on the set-top box, but we have a video that shows the service, and we'd like to show you that now.

(Video presentation.)

So the set-top box also has a combination magnetic card reader and smart card reader. And in Portugal in the markets that they're shipping this, the local bank actually does a lot of things, a lot of different interesting transactions that we can't do today, they can do through their banking machines. Well, they're extending that out and on part of this interface you'll notice on the homepage "Banco," which is Portuguese for banking, of course, and they'll actually allow you to do some interesting things like ordering tickets, paying bills and all sorts of things, really progress in that environment.

So that's the homepage that you navigate through: Moro Domo, the red button, everything is color-coded, Moro Domo being a butler service or a set of your services like your agenda items, your calendar items, banking. The Internet page, the parent company of TV Cabo also runs an Internet access portal in Portugal, and so this little frog character is their mascot. And what they've done is created a series of pages, which allow you to jump to communications, jump to a lot of content that's made to fit within this really nicely on the television, but they still give people the option of entering the URL of choice and navigating through the Internet. I think they give an example of that here.

Again, you can see a very different user interface than some of the user interfaces, which we've played with here, and that some of our other network operator partners have decided to use.

So this is actually the homepage for that Internet portal, which I mentioned. You can see they've re-paned the television even on their Web site.

So this video shows a number of different scenarios of things that they do with the box, and I want to get to the point where we show some of the DVR functionality, because it looks very different as well. I think this is it actually. Here we're watching television and decide that they'd like to jump to something on their disk. All of those different controls are mapped to the keyboard and the remote control, which is shipping with the service.

If anyone knows Portuguese, you can add something to this.

So you can see they've gone with a model very different from what Microsoft did with Ultimate TV. They have a model where you can scroll back and forward through the program and jump to that point in the program.

And then finally, the last thing I'd like to mention is interactive TV. TV Cabo, even though they're a cable operator, they also have satellite properties as well. They've worked very closely with the local broadcasters to do broadcasting of interactive content. So this is content, standard taped content, which they're broadcasting from the local operator TVI. And you can see that this is an environment, which is available all of the time, but they also specialize in programming, which is synchronized with the programming. So children's programming comes on on some children's programs, interactive programs. This is a user interface, which again was paned for that frog, which is the mascot, and allows kids to drill down and play simple games.

So right from the launch they have a lot of content ready to go and a lot of different services for people to use.

That's great. Thank you, Russ.

So one last part on updating the business that I'd like to do today, we have some new customers to announce for Microsoft TV. So there's a cable operator in Mexico, Cabo Lucion, who will be using Microsoft TV Advanced with a commitment of 350,000 set-top boxes, and represents our first customer in Latin America for Microsoft TV Advanced. They join Globo Cabo from Brazil in South America, who are using our Microsoft Basic Digital product.

And also today that Matau, the cable system in Israel, is going to trial with our Microsoft TV Access Channel Server, which is part of our product family that allows for the applications to execute in the head end and use the image of the application on the set-top box as a way to provide advanced applications, even on the low end current generation set-top boxes.

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