Mobile and Embedded Devices
2003 Financial Analyst Meeting
July 24, 2003

PIETER KNOOK: It's great to actually be able to link into the platforms business, both from the client point of view but also from the server point of view, which I'll get to in a minute.

I'm going to talk a little bit about what we're doing overall in the mobile and embedded device space, and then I want to talk about what we're doing specifically with the Smartphone, and Pocket PC, which we've now rebranded as the Windows® Mobile effort, and I'll talk a little bit about that.

So what my group comprises, as Jim mentioned, we've got the embedded device piece, which I'll talk about briefly. That's part of this group, so that's the foundation for all the devices that we build that are outside of the PC unit, the Windows CE .NET particularly; the Automotive Business Unit, which takes that product and brings it into the automotive realm, particularly inside the vehicle; Windows Mobile, which encompasses the Pocket PC and Smartphone, and then the marketing of those, obviously, significantly with the operators as well as with other channels like retail, but operators are really the key to that, and that's why we have the sales force that talks with the network operators.

Now, we also made a small change there to encompass not just the network service provider customers but, in fact, expand that to include media and entertainment customers as well, so that's now rechristened as the communication sector sales force.

And then, lastly, we have a group that focuses on the OEMs, the people that are actually going to build many of the devices that we'll talk about and see here in a second.

When we think about the opportunity for these devices, we look at which software is going to make a difference in the device experience. And that doesn't include every single device, but when you look at a definition that includes devices that might need a 32-bit MMU you end up with some very large device categories, which we're obviously focused on and I'll address here in a second, which is the cell phone is the biggest category, 494 million units shipped; PDA, obviously a big market by some measures at least, declining slightly but certainly our share of that market increasing. And then we talk about the compressed audio arena as another significant device area, certainly a fast-growing one and one that we want to play in, and I'll talk a little bit about that as well.

Then there are a variety of smaller device segments, many of which don't share too many characteristics, so, for example, the notion of a set-top box or other consumer electronics devices that don't have much commonality and so these are a smaller segment, which we address with a more horizontal approach, where we provide an embedded operating system that many of our hardware partners then use to build things on top of.

So before I get into some of the Windows Mobile-specific things, I thought I'd quickly address what we're doing to tackle the device markets that do not include cell phone and PDA. And, first of all, I want to talk quickly about the MapPoint® business, which is a business we've just taken on. This becomes critical when we think about particularly things like the location-based scenarios, where a lot of the cell phones and the PDAs are using the operator's location information about users.

And so the Web service that we're running here in the MapPoint group that provides mapping information, at least in North America and many of the European markets, is a critical component. So how do we bring that location scenario to life, and, in addition, do it on a platform that is truly Web services–oriented? In fact, MapPoint is a great example of a commercial Internet-scale Web service that we operate today.

In addition to that, of course, we have some of the consumer products in this space where you can get your maps offline, on a CD, with updates from the Web service. And so there are a lot of interesting scenarios—tracking deliveries, tracking truck drivers, tracking your assets—which span, in many cases, both the business type of scenario as well as the consumer scenario, where you might want to track your buddies and see where the closest restaurant is and things like that. In fact, we've launched some services here with AT&T Wireless that really show what is possible, even though initially that will be a relatively small market.

But MapPoint is an interesting business and certainly one that's critical in our quest to differentiate what we're doing on our devices and how the services that work on those devices can be made to really benefit the operator as well as the consumer.

On the embedded front we've made a great deal of progress. In fact, IDC and several other analyst organizations rate us at Number One now in the embedded device space in terms of our revenue share of that market. And certainly we've scored a number of very significant wins with the core Windows CE platform.

We've brought out a new, low-priced SKU, which takes us into a lot of areas that we couldn't address before and, of course, with the key distinction here that we offer a level of IP indemnification that really differentiates not only what we can do but how we protect some of the IP rights of the partners that we work with who build this technology into their devices.

In its own right, Windows CE .NET, which we recently launched the latest version of, 4.2, has a great set of technologies. We've got all the IP, all the connectivity technology—we've got a great deal of modularity and it's a great platform from which to build many devices. Of course, one of the core design points is to make sure it's a great operating system to build our mobile devices on, and we'll talk about that a little bit more here in a second.

The other element that's critical to our success in this embedded space is the embedded developer, and we've been doing a lot of work to make sure that they understand what the offering is that we have, that they have access to many of the tools that we make available, especially through academic environments, to ensure that there is wide knowledge and understanding of the power of these tools and the modularity that we provide in terms of how you can choose which components of the operating system you want to build into your device.

So this is a very complex business but one in which I think we're doing pretty well, and certainly one in which we're fully vested to make sure that we continue to capture our fair share of all the different device categories that we're talking about.

One of the areas where we use that core CE operating system and then ensure that it really meets the needs, particularly in the auto environment, where obviously people are concerned about battery consumption when the device is not active—when you turn the car ignition off, you want to make sure that there is no battery drain. So that's a set of technologies that we built on top of the CE environment to make sure that it met the needs of the automotive customers.

And we've made a lot of progress in this space. Design wins tend to take a long time to flow through between the process of winning the car manufacturer or the ODM that's building the technology inside the car and then seeing it in the consumer space, but, nevertheless, in Japan particularly we've been very active and won many of the core ODMs that build technology that goes inside the car. And today we have about 20 different solutions with different vendors who are shipping Windows CE for Automotive inside their motorcar.

One of the things, in fact, we've stepped up our activities on is to make sure that we coordinate this better between our sales force, between our MSN® services, and we've recently appointed Dick Brass to be the VP for this Automotive Business Unit, so he's fully focused on this particular business opportunity.

Now I want to turn my attention to the biggest segment of this pie, the cell phone and PDA arenas, which is really the area that's covered under what we term the Windows Mobile initiative. So I'm going to spend a little bit of time talking about what we're doing in that space.

The first thing to note is that we really feel that we have a number of strengths from which these devices will really succeed. Obviously, when you think about particular scenarios like the mobile information worker, it's very logical that when you see some of the things that we're doing in Outlook®, when you see some of the things that we're doing with the Office applications, we want to make sure that our PDAs are the best possible adjunct to that experience on a PC.

The same is true on a Smartphone, even if perhaps on a Smartphone—smaller screen, single-handed operation—you're not necessarily going to be able to do all the same things as you do on a full PDA format. Nevertheless, that information worker scenario, where people want to have e-mail that arrives always up to date, that allows them to see when their calendar appointments change as they're traveling around, as they're moving between meetings, that is a powerful scenario and it's one where obviously our devices are going to be able to make a difference.

In fact, let me just move over here and I'll show you the mechanism that we can use to control how these devices are managed to synchronize with the Office environment.

So if we turn onto the WolfVision here, then what you'll see here this is a Pocket PC Phone Edition. You can see it's got the keyboard accessory added on. We will be coming out with fully integrated devices later on.

And as I zoom in—let me just go back a step here—you'll see one of the things that we've added to the Pocket PC is the ability to set up when e-mail and calendar appointments are synchronized to your device. So, in fact, here you can set up a schedule that, you know, every five minutes, every 10 minutes or when new items arrive, your device should be woken up and synchronize with the server to pick up those items. In fact, I also have the flexibility to say, well, when I'm off-peak, outside working hours I only want to do it every 60 minutes because I don't want to consume as much battery life or consume as much of the network data traffic that's going to cost me money. And obviously, when I'm roaming, I can set up a separate schedule here as well. And, in addition, I can control exactly what my peak times are, so if I'm a Microsoft person and perhaps my working day is a little bit longer I can change that and save that and now the synchronization happens instantly. So anytime a new item arrives on my Exchange Server this device gets updated.

Now, one of the ways that we've been able to do this is by using all the power of Exchange Server 2003. And, in fact, one of the exciting aspects is our ability to link directly to any Exchange Server without any additional Exchange Server products. In the past you used to have to put extra servers that would take care of security and so on in the DMZ, and, in fact, now all of these Windows Mobile devices will be able to connect directly to an Exchange Server and have instant, always-up-to-date e-mail and calendar appointments. So that's a big advance for us and a very compelling aspect of the information worker scenario.

So let me move back to the slides here. The mobile information worker is clearly one of the areas where we've put a lot of our investment to make sure the application area is strong—make sure that our devices really fit well with the Microsoft assets. Obviously we also want to make sure that we satisfy the needs of the IT professionals. They're concerned about things like security, and we want to make sure they're happy.

One of the other scenarios we're focused on is the MSN communications one. We want to make sure these devices are a great adjunct to receive your Hotmail®, to look at your Messenger cloud and be able to interact with that. And certainly the aspect of bringing that monetization opportunity for the operator is also one they're very interested in, and, as you've seen, we've signed many, many different agreements with operators around the world around this topic.

Media is another area that we're putting a lot of investment in, and I'll touch on that a little bit more, but the whole notion is that you can take some of these things that you're doing on your PC with you on the road. So Jim showed that Photo Story. One of the great things you can do with that Photo Story is, in fact, bring it down to your PDA-class device and take your holiday snaps and show them to people off your PDA. So that kind of scenario where you have the ability to manage your media harmoniously between the device and the PC is one that we feel we have a lot of strength in.

I've already mentioned location-based services a little bit. That's another area that we're invested in, and with MapPoint certainly we bring more value to that whole scenario.

In the automotive environment, we've got a number of projects underway that will bring some of the speech-based work that we're working on into the Windows Mobile environment and really make it easier to use these devices when you are supposed not to be distracted as you drive your car.

And then finally, but certainly not least, the notion of focusing on the developer is an important one for us. We have a lot of developers that are using Visual Studio® and all of the ancillary tools very successfully on a PC platform, and we want to make sure that many of those same experiences can be used when building applications on a PDA and Smartphone.

Again, we view it as a strength that all those people who know how to build applications on a PC environment can, with very little retraining, build applications in the Windows Mobile environment. And, in fact, it's also clearly the case that as you build those applications and you want them to address not just PCs but other clients, we make it very easy, from the server point of view, to build applications that target Windows Mobile devices in addition to PCs.

So these are the important propositions, the strength of what we're saying to the customer, to the operator. And let me just drill down on that a little bit as we talk about how we talk to the different audiences particularly.

So really we think about four key constituencies in the Windows Mobile context. The first one, obviously, is the OEM, and we're persuading the OEM community that betting on a Windows Mobile device is a good bet—a lot of developers who know how to build applications on these devices, a lot of people who already have PC experience who are going to benefit and gain a lot of value out of adding PDA and smart phone devices.

Enterprise IT: Obviously they're concerned about how security works. I think we've done a lot of work with Exchange Server 2003 to make that seamless, make it much easier to set up, control and manage how people get access to their e-mail, even when they're outside the firewall on a device, on an operator's network. Certainly the whole aspect of the developer obviously is important to enterprise IT, as is the fact that there are many SIs.

The end user is obviously concerned about the value that we're bringing directly. So the notion that you can have your e-mail, your calendar, and, now, with the latest releases, you can have that always up to date—that's a big win and that's a big benefit to those end users. Of course, in addition, they're getting video, their audio, all their MSN messages, their Hotmail account. All is accessible from the device, so we're bringing a lot of value to these users.

And lastly, the developer, who, as I've indicated, gets great benefit from using the same platform, the same tools and the same approach overall to make sure that they have the same productivity benefits as you see on a PC.

One of the big constituencies obviously is the operator, and that's one of the reasons why we have the operator-focused sales force. And, as I said before, we expanded that to include media and entertainment, particularly as we think through some of the end-to-end media experiences where digitizing content, distributing content and experiencing that content on PCs and devices becomes important.

As we think about what dialogue we have with this set of customers, we have a number of very strong value propositions for this audience. Certainly we have a lot of CEO dialogue, as you can imagine, and our ability to provide huge flexibility with the platform that we provide obviously enables the agility of their business.

But in addition, with MSN, with mobile devices, we have a strong way of going to market in unison with these companies that attracts them to working closely with Microsoft and making sure they get all the benefits of the way those devices are built, but also the way the services that are built that support those devices with .NET technology.

For the marketing offices, we talk a lot about both the new services that we offer, whether it's high-speed exchange, whether it's media on demand, whether it's MSN—there are a range of new revenue opportunities that we bring to this audience. Surely they need those at this moment in the economic point.

So we see a lot of pressure on both the cost sides where we can help a lot—and we talk about internal use and we're talking about making it smoother to interact with customers, to make it easier to provision new services, to take costs out of the call center—we have strong propositions on the cost-saving side, but we also have strong propositions to bring them new revenue stream.

And lastly, for the technologists inside these organizations, obviously we're focusing a lot on the platform benefits: the cost savings, the developer productivity, and the integrated solutions that we're bringing when we pretest it, preconfigure some of our servers to working in an operator's or in a communications sector's data center.

So those are important elements that really make sure that we have a strong way of tackling this market opportunity that's available to us, and we've made a lot of progress this year as these customers have been in a great deal of pain and our messages have really been resonating.

Now, last year when I was here, we talked a little bit about what Microsoft can do to help the business case, to help the environment. Certainly at that point the data usage was still full of promise, and other than SMS we haven't seen a lot of real impact from the data side of the business.

Now we're starting to see real evidence for people who've been using some of these smart devices on their network—and I'll share that with you in a second—on what impact that has on average revenue per unit. Certainly we showed the Pocket PC Phone Edition, and at this point we have 25 mobile operators shipping, with many more committed to do so. And on Smartphone, we showed that last year we got the big launch with "Orange," and we now have over five mobile operators shipping, again with many more coming through, and certainly this fall we'll see some other launches that will reach permanence.

From the developer standpoint we've seen a big investment. We've seen now a catalogue that we've produced, which has over 600 entries in it of applications that are currently shipping on Pocket PC and Windows Mobile.

But we've also had some learnings. We know that when we are clear about the value that we're driving, where we have obvious strengths, where we can clearly play, then we really resonate with what the operators need from us, what the OEMs want to contribute, and certainly what the user expects and wants.

We've also learned that it's important to light up these devices. Just shipping a device on its own is not very interesting. If you really want to drive a data business, you need to make sure that there's compelling content, that there are compelling services. That requires work, and that's been a lot of the learning that we've had. And that's true for the industry at large, not just for the Windows Mobile devices.

Thirdly, I think we've learned that we need to really focus on making sure that the experience that the end user gets is a quality one. We want to make sure that we trial these devices, that we get good experience. And we've had some hiccups on that, but we've addressed those hiccups and I think we're now off to a flying start as these devices really are meeting the quality expectations of our users.

And it's also important not just to launch these devices but to keep the momentum going. We need to refresh things. We need to keep excitement. And obviously we're addressing our marketing to make sure we do that.

Our partners are learning, too. For many of them this is brand-new business. For many of the operators, doing devices that really link to the PC arena, that do some of the things that we've promised we can do, is a new game. And so there's, you know, a lot of new things that we're trying to achieve.

But the good news is that we deliver real profitability and real future for how the business model might look for an operator. In fact, when you look at what's going on with Windows Mobile devices you see a pretty significant uplift in data RPU. From the operators that we've looked at, we're seeing data RPU particularly increases, as you might expect. Obviously people are browsing, people are synching their e-mail, so there's a significant data RPU uplift, which is very important as far as the operator is concerned. And certainly the users are obviously getting real benefit, so they're very happy to spend that money.

At the same time, the other thing that's interesting is the actual basic voice business has also increased modestly, and one of the reasons we attribute that to is the fact that you're carrying so many more of your contacts around with you and they're liable to be up to date. They're synchronized with your PC. All of that is seamless. But, in fact, as you have more of that contact information with you, you're more liable to make voice phone calls on these devices than would otherwise be the case.

When we look specifically at particular devices, you can also see the impact of how the RPU looks. So an average base device RPU might look like this. When you compare that to a Nokia 7650, which is one of our high-end Smartphones from Nokia, you'd see a big increase. But then compare that with the Orange SPV, and look particularly at what happens when you add true HTML-class browsing and a really nice UI to that whole experience, and you see a significant uplift as people really browse the Internet far more on an Orange SPV device, where the software is optimized towards that experience.

So certainly these users are accessing the Internet more, they're able to look at the news stories, they're able to get SMS alerts that might tell them there's something interesting for them to look at, and these people are also sending a lot more e-mail. Sixty percent of the users of these devices are sending and receiving e-mails, and 72 percent upgraded their software as we made new patches and fixes available. We found that for the first time people were actually in the mode of upgrading their phones, which is also really a brand-new concept in this business.

So let me share with you some of the excitement we have around the devices. Here you can see some of the devices that have made an impact. Certainly the Dell and HP devices have made a big impact from the price point of view. We've been able to get into price arenas with the new Dell and, in fact, now with HP as well, that take us into new territory. And that's allowed us to grow our share pretty significantly. And, in fact, HP is now a solid Number Two in overall PDA market, and we've seen our share of that; when you add up all the Windows Mobile shippers, we've seen our share continue to rise, even though the market has actually been declining.

And on the right-hand side of this slide you see many of the different phone form factors that are coming out to market. So you see the standard candy bar smart phone that many of you would have seen that I showed you last night, and you also see some of the flip phone devices that are coming to market.

One of the easy things to do here in the Windows Mobile area is to make sure that I get at least one good evaluation from the audience. So I have here a PDA that I want to give out. And the way we're going to do this little contest here is have you shout out a number here in a second. Let me just check with my list. I've got a list here of the audience. You don't know which sequence this is in, but I will be able to give this to the number that I hear the loudest from you, the audience.

So what I need you to do is to shout out the number between one and 185, and I will then pick the winner. So, on the count of three: one, two, three.

AUDIENCE: (Shouts of various numbers.)

PIETER KNOOK: Okay, I heard loudest number 20, and that is Craig Bloom. Are you in the room? We'll find you and we will deliver this. Yeah, great. We'll find you at the back of the room after this session and we'll deliver it. In addition, we also have a GPS connector so that you can find yourself and we can find you.

QUESTION: Does it work on buses?

PIETER KNOOK: It does work on buses. So that's an HP 2215, which is one of the nice new devices that HP has come out with, and it represents one of the great new form factors that we're seeing.

So we see a number of very rich opportunities for our overall broad devices business. The excitement for us is clearly launching many of the devices that we talked about. We're going to launch some more phones. We're going to launch some more Pocket PC Phone Editions, and particularly this fall you'll see a number of launches that will be very interesting.

So we're really focused on how do we get those services built out to make sure that the Orange experience, in terms of uplift with RPU and the richness and value that they're able to bring to their customers, that we replicate that with some of the other operators who also want to invest in building out new services.

We've focused a lot on launching our Windows Mobile brand as we released our latest software, the Pocket PC 2003, the Smartphone 2003. We've seen a new excitement about the Windows Mobile proposition. It's an ingredient brand. It's the software that describes what's running in that device, but it also tells the user what they can expect out of that device and perhaps also importantly tells the developer what they can target as a base for their applications, and that's where we've seen a lot of these certified applications, a lot of interest from developers and a lot of momentum.

Exchange 2003 I mentioned. That's an important opportunity for us, because that really gives us a new way to bring new value to the customer who really wants their e-mail and calendar appointments to be up-to-date as they're traveling around.

The portable media player is another big opportunity for us. This is where we think of not only a Pocket PC with media capabilities but perhaps a dedicated device that's optimized around the needs of media. And we've code-named that "Media2Go." That device really will allow us to extend that media scenario where people can look at video and audio offline, and we can deliver that content to a dedicated device as well as to the Pocket PC or Smartphone that's optimized for that purpose.

We've talked a little bit about the Windows CE for Automotive arena. There's a lot of opportunity there. And certainly with MapPoint and being the real Web service platform that we provide there to location scenarios, we have a lot of excitement in that arena.

And then, finally, I think we see really very great richness in the deployment of all these different types of devices. We see different price points. We see different characteristics—some with keyboards, some without keyboards. We see a lot of maturing of that. And certainly as we propel the vision of Web services, we see new ways of bringing fantastic new opportunities to the way we light up these devices, and that's very exciting.

As we do that, of course, we'll expand into new geographies and new categories, and certainly we see that as the future path to continue for our device business to be among the fastest-growing businesses at Microsoft, even if we're relatively small today.

With that, I thank you. I'll be around the rest of today. And as I leave, I'll show you a video of the Windows Mobile brand and what we're trying to present to the marketplace, as to what that brand should mean to the user.

Thank you.

END

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