ANTHONY NOTO: Good afternoon. Well, I'd like to say I'm Rick Sherlund, given he's been a partner at Goldman Sachs since before we went public. I'm also happy that I'm not Rick Sherlund since he turned 50 yesterday, but Rick asked me to introduce Yusuf Mehdi from Microsoft. Yusuf is the head of MSN. Rick covers Microsoft, as I'm sure everybody in this room probably already knows, and how the stock is rated and how it performs. And Rick has been a great supporter of our Internet research through both the difficult times post the bubble and now during the more I think favorable times. And we've been lucky enough to have Yusuf from Microsoft, because of Rick's relationship with the company and because of our focus on the Internet, here for a third consecutive year. And it's a real treat to get the insights directly from the man at the top of the division of Microsoft and what they're focused on strategically.

Yusuf specifically leads the effort to empower people globally by helping them find, discover and experience whatever they want online. In his role he oversees the global strategy, design, development, programming and marketing of Microsoft's information services as it relates to search, MSN.com, My MSN, MSN Music, MSN Video, MSNBC, MSN Money and MSN Autos.

He's also responsible for leading Microsoft's platform efforts for online advertising and digital marketing, with responsibility for brand, direct marketing, pay for performance and business intelligence.

Yusuf is at the center of the key themes that we talked about regarding the positive fundamentals of the Internet sector.

With that, please welcome me in welcoming Yusuf up here. Thank you. (Applause.)

YUSUF MEHDI: Thanks, Anthony.

Well, I'm excited to be here again. Graciously, Anthony has invited me back after a couple of years, since the last couple years and so I wanted to again just take a half hour, give you a quick update on how the MSN business is going, how some of that ties to what Anthony talked about today, and there's a lot of things in there that Anthony talked about that fit with what's going on with MSN, and then open it up for question and answer, because I'm sure there will probably be lots of questions about things we're working on because there's a lot we're working on that we haven't come out yet with that we will be coming out with sometime soon.

So the first thing, just a quick word again about what is MSN. MSN has gone through historically many different evolutions, has many different components. We have an Internet access service, we have a global worldwide portal and we have a new premium software subscription effort.

So just to kind of talk about, well, what is it we're really trying to do, we're really about two things. We're about trying to bring people closer together with other people and with the information they care about. And, in fact, some recent changes, one of them I'll talk about in a second is we recently reorganized the division into two lines of business, one that is all focused on the communications services, things like Hotmail, Messenger, communities, and then a line of business all around the information services that include our portal, our search service, our forthcoming music download service and a number of other efforts. And these two businesses really are what we get completely behind in terms of trying to drive MSN.

A couple words about those businesses: On the communications side we have a lot of assets that we've built around, but in general I would say all of our aspirations about what we want to do as a business and for consumers pivot on Hotmail and Messenger. Hotmail is upwards now of 190 million people that use the service on a monthly basis and I guess just a fun fact there that 35 million more mails are sent every day than the UPS delivers physically in terms of the amount of mail that goes through that system. In fact, our total number of users would rank Hotmail as the sixth largest country just to give you a sense of the size of the thing.

And Messenger, four years ago we didn't have MSN Messenger. Today we have 120 million users. And at any given time there are probably 12 million people talking one-to-one on the service. It's really become a pretty amazing set of services.

On the information side for our business a couple of different things there. It continues to be the most popular destination on the Web with 350 million people that come once a month to someplace on the network somewhere in the world. We're in more countries than any other provide, Yahoo, Google, AOL included. We're in more languages and that worldwide growth and globalization has helped us get this success.

We have a bunch of services in here that as I talked about with the portal, with the search service generating two billion queries a day, which is okay but we have a lot more aspiration there.

And then we've introduced recently new things like MSN Video that's probably one of the best places to come get free video broadcasts on the Web.

All told, it's also a great online advertising vehicle, which I'll talk about. Just one highlight there, we did a commercial for Adidas on the homepage for our site and close to one million people came in a single day and watched the video broadcast. You can probably compare what you'd do with regular, traditional media. It's almost impossible to get that kind of result on TV and we're able to get that on the homepage with great creative advertising from Adidas.

So what are the changes from my talk today from a year ago? These are a couple of the ones I'll talk about. One that I'm incredibly happy to talk about is the profitability trend. We have moved from quote/unquote, "investment" mode in MSN into making real profit like the rest of the industry and I'll show you the numbers on that in a second. I talked a little bit about the reorganization of our business.

The third thing is that last Christmas we launched for the first time our first really true access independent software subscription, which is a big focus for our business as we try and build a premium software business that is not based on access, that runs on anyone's access, that's global in nature and that pays us for what we think we're very good at, which is software. And so we just launched the first version, having good success there with partners like Verizon and Qwest but still more work to do on that front.

And then MSN Internet access has also really been focused now to sort of optimize for profit and for customer satisfaction. So unlike three years ago where we were spending a lot of money to try and grow that narrowband business, we're now really managing it tightly and that's contributed a lot to our profitability and it's also given us the clarity to focus on software instead of just going after the access business.

I think the two areas for us to make more progress on, one is on just general customer satisfaction with issues for the Web, which I'll talk about in general, things like spyware and viruses, and then just with MSN in particular. We've made fine progress but we've not, in my mind, gotten to the point where we need to be, where people are really evangelists or loyalists with the services we have, and if we can do that we can really turn around on the financial upside for the business.

On the other side is just very strong progress and lots of competitors. So as the industry has grown and the sector as grown we've seen just tremendous progress and a lot of other companies, even as we've succeeded. I'm not necessarily actually down on that. In some respects I'm actually happy about that because it helps us grow the overall sector for online advertising. But there is upside for us there.

So let's talk a little bit about financials. To understand the financials on what's going on with MSN you have to get a couple of key points of the story. One is that we have this big access business that we are no longer trying to grow in some aggressive way. So the revenue on that is naturally declining as people move from narrowband to broadband and that's just going to happen. The profitability is looking better and better but the top line revenue growth isn't happening there.

The other thing that's happening is that we are obviously really just kind of cranking up on online advertising. The market is growing pretty significantly, as you heard Anthony talk about, 20 to 30 percent, and we are more than taking our share in that category. In fact, year over year we grew 43 percent on online advertising and really just driving tremendous numbers on that front.

And then the third thing is that we have these non-access subscription software services that are up and starting to grow and that's starting to grow our revenue as well.

So that's kind of the story on the revenue front. So you see kind of a dip in growth. That number, if you took out access, is much, much faster on the revenue side. You get a better picture when you look at operating income. So this is our operating income. This is internal Microsoft and what we report externally through GAAP reporting is slightly differently here but these are the numbers if you're going to look at sort of the true results the way I look at the numbers for how we run the business. As you can see there from last quarter, fourth quarter of our fiscal year, of fiscal year '03, which was basically effectively a year ago today, the loss and in every quarter since we have been making a significant amount of profitability there. And there's a couple one-time things there but suffice it to say the profit growth is going very well for us in terms of how we're driving.

Again, the successes there, a couple big stories there. Number one, online advertising has been just growing across both brand advertising and search-based advertising, both factors having tremendous success and I think, as was talked about earlier today, the brand advertising is having at least as much success in growth as search. So everyone knows the hype and excitement about search but plain old brand advertising is having the same level of success.

The second thing is a goal I had set out last year was to really get our arms around our cost controls. There was a hiring of really a seasoned veteran in terms of running our operations, Deborah Chrapaty. She has helped us really get our arms around the cost control and as a result we've made massive progress on cost control. I would say that we are now closing in on parity with some of our best in class competitors in terms of how they run operations and that's showing in the profits that we're driving. And then finally, as I talked about, some of the effects that we've done on Internet access.

In terms of online advertising, we're really doing very well here and, in fact, some of the numbers here, you saw some of the other numbers earlier, I think the big one for us is that we have grown our share of the online ad market. So even in a rapidly growing business where you have roughly 20 to 30 percent growth in online advertising as an industry, we're actually able to grow faster and take share. We're up to roughly 12 percentage points of share in that business and that continues to grow, in spite of the fact I think we have a lot of upside.

As you can see, I talked a little bit about what's going on there. I think the big successes there are our efforts in search and just in terms of what we do today, not even the new search, which I'll talk about in a second, and then also what we've been doing on brand advertising in terms of the areas on the network that people are finding very valuable, the fact that we're doing a lot of industry efforts with people like Yahoo to get global ad standards, working with media agencies who have been key to making the volume go to the next level and just starting to tap into online potential that has led to this kind of phenomenal growth.

So as we look forward, let me talk a little bit about challenges and opportunities. In terms of challenges, as an industry and then for MSN in particular, we're going to make a very big investment in targeting personalization but it's very clear, as you've seen from some of the steps some of the other companies have made, that privacy and consumer trust is a really key thing to getting your arms around this personalization effort. Some companies have just not done it right and they've gotten a lot of bad publicity and a lot of bad consumer demand as a result and I think that's very, very key. So things like e-mail, if you wanted to be able to do advertising in e-mail, which we think is a big opportunity, you have to do it right or you're just going to really I think turn off a lot of consumers.

The second thing is Internet evils, things like spam, viruses, spyware and intrusive advertising. Not all advertising is I think equal; some of it's intrusive. Popups or the annoying things that come in that people don't want are actually a hindrance. In the last year these four things have risen to the point where when we look at our consumer research people say, "I won't use the Web and I won't use the Web to the degree that I do today because of these types of problems." And so as an industry if we tackle these things the Web will really skyrocket. If we don't, I think we're actually at risk of having the Internet sort of grow much more slowly than it is today. So we have to make sure we do a good job there as an industry and certainly within MSN.

I think a common thing is just the consumer mindset, you know, getting people's ability and interest to pay for premium services. That's happening a lot now. I would say there's a lot of encouraging success. Things are really starting to take off more and more. Apple's success with their download music service has been a good one. A lot of premium subscription things like the Wall Street Journal and then our own services have had good success here, but to get to the next level we really have to work through especially when you get outside the United States where people don't have credit cards and people don't pay for things in that way, you need to have a different type of payment infrastructure and those are things we're looking at.

And finally a challenge for us is as we launch a number of new services that we're about to come out with we want to really be aggressive and take some share, some user mind share, but the investment to do that while still keeping the profitability trend is something that for us will be a challenge.

In terms of opportunity I pretty much agree with the list that Anthony talked about. Broadband, all the data he's quoted we see 100 percent, which is broadband users are more likely to shop, more likely to click on ads, better overall value of the network. It's just an amazing phenomenon as people move to broadband and what that does for our business. It's huge. Even more so I would say then for the industry because of the investment we're making in things like MSN Video, things in music and software that really sucks up a lot of cycles on the modem, these things can really take off when broadband becomes mainstream.

Growth of the online advertising market, there is this big delta between people's time online and expenditure online and what they actually do in terms of minutes spent and that bucket is closing. And as that bucket starts to close I think this business can really grow. So it's just a question of what percent of online total media spend do you think a company should be spending online. Today it's 2.5 percent. I go out and talk to a lot of companies and they're very much thinking when do we get to 10, when do we get to 21, when does it go even further than that. And if that happens soon that will be a big growth.

International expansion is a big opportunity especially for us in MSN. We have, I would say, phenomenal presence outside the United States in minutes and time but we don't have the profitability compared to the time spent and even compared to some other companies in this area that are doing pretty well.

And then a couple things I'll talk about here in the next slide, we're making some big bets in search and communication over the next year, so there are some very deep technology bets that I think are going to be big opportunities for the consumer and for our business, ad targeting and personalization and then some specific vertical areas like entertainment and small business.

So my last slide, to talk a little bit about what's in that area just on the slide, a couple big things that are coming in terms of our investment focus, one is a big investment in our algorithmic search effort. So we are making a very big investment here, we have been for some time. We see a phenomenal opportunity to go forward. Our view of the search market, based on consumer research, is that one out of every two search queries doesn’t get an answer. People go online looking for something, they don't get an answer. When they do get an answer they get a list of Web links, not necessarily the data they want. And the opportunity to solve that problem is something that we're going after directly and tackling.

There's a whole problem about how do you get access to all of the information that's not on the Web today, so there's a lot of information on the Web that is behind deep databases, that's behind a corporate firewall, that is a subscription. For example, if any of you subscribe to a reputable paper that you might follow, the Wall Street Journal, New York Times and then you go do a search online, you'll never get Wall Street Journal news headlines at the top for the result because there's been no integration. So you might get someone's blog but you've actually chosen to pay 100 bucks a year for a premium editorial but that doesn't show up in your search results. Even that basic piece of work has not been done.

Searching on local PCs for e-mail, for files, it's always a mystery, especially to us who do work on PC operating systems, why does it take so much time to search the PC when you can index the whole Web and find it in milliseconds. That's a big opportunity clearly and, yeah, we'll take that one on personally. And so that's one that we know is a big opportunity.

And then again the opportunity to just get outside of even the intranet, so if you wanted to know how long does it take you, so you say I want to know sales in China for my retail manufacturing division, what were they last quarter, why can't you get a result back in milliseconds, why is it that you have to find the intranet site, find the Excel spreadsheet, do the pivot, then get the data. This is an ability to get all that effort solved.

So I could go on for ten minutes about the various problems that are on there. There are a lot of efforts there that we're looking at to get out. Our point is to get a first version out. Within 12 months, if not sooner, we'll have a test version out, hopefully in a very, very short time period that will be impressive in the sense that it works end-to-end not so much in that you'll go and you'll see all these brand new features in our first test version but the fact that we were able to basically write a complete system from scratch end-to-end on an entirely brand new architecture is something that we're really excited about and we think will bring a lot of value and innovation to this space.

So we've been doing a lot of other efforts. The MSN search toolbar that's gotten out there and is already upwards of ten million people having it installed and growing quite a bit. That helps us a lot with doing things like local search.

And then a number of other enhancements in terms of what we'll do on the search side.

On Messenger there's a bunch of efforts there around what we're doing in the MSN messaging space to dramatically improve that phenomenon. There are a number of ideas that we've got coming in there. If you look at a number of things like even social networking and how people that you know becomes an amazing opportunity to validate things that you might do that are commerce related. We talk about shopping and the best thing that happens in the shopping side is not so much what experts say or what the World Wide Web says but what people that you trust say. That's a big value opportunity that's not been tapped I think in large margin and I think that's something that we'll look to try and tap.

Advanced e-mail and small business services, these are another big set of things that we're investing in. There's a lot of demand for people who use Outlook as an e-mail client who don't have an Exchange server, whether it's a small business or you're an individual and you say I like Outlook, I love that experience, I'd love to be able to run Outlook but get the ability to have portable mail and mail I can get access from anywhere. Connecting those two things up is something that we're about to launch. We have it as part of Premium. We're going to make it a standalone offering shortly. That thing is going to be an amazing opportunity for people to do premium e-mail in a way that you can't do and then there's a bunch of other services on top of that that we're looking at.

Music download service, people have said, hey, why is that taking so much time, what's going on. As I look around at the various other offerings, outside of the Apple offering, I think it's been okay that we've taken some time because I'm not sure any of the other ones out there have done anything of note.

We're taking our time and we're going to make a very simple, very easy to use service that will be among other things the best way to discover music online and the discovery part is I think the part that's sort of untapped in the big opportunity and that will be coming out later this year. We think that's going to be an amazing thing for our business not just because of what we do for consumers on it but because of the transactions and the relationships with customers on billing and what that does to inform our online ad business, what that will do to really perfect our search service. When someone wants to be able to search for an artist and be able to one-click buy something, the ability to do that is very powerful.

An update to our MSN Video plans, I don't know if many of you have seen our MSN Video service. Just out of curiosity, how many people have actually seen our MSN Video service, taking a public poll? So just a couple. Maybe I'll just give you one look at it. This is place to come get free broadband video on the Web and run advertising. You know, Anthony talked about the ability to do really rich, interactive, immersive TV advertising online and when does that happen. I can show you some of it now in terms of what's actually happening. Our success going to talk to the top 200 advertisers is that this thing is amazing. It basically sold out in beta and after we've run it people's real enthusiasm for this as a vehicle to build brand on the Web is just I can't even quantify it. So it's very small, it's not like a huge part of our overall revenue stream but as it grows it will be very significant.

Efforts to improve things on the new MSN homepage, so for those of you like me who hate to have to log into your homepage and you just like to have an Amazon-like experience where you come back and say, hey, we think we know who you are, so it just works, I've been dying for that feature, we're going to get that feature up and running; and then a lot of great personalization, implicit personalization not explicit personalization like we've done where today among even the best, us, Yahoo, My Yahoo, My MSN, everyone else, the most you can get is somewhere between 10 to 15 percent of personalization because of that explicit thing that's required. We're going to work on getting so where as you click and surf that we learn about you, we'll just build custom pages. We have a test of this up and running on kind of our sandbox, our Google labs equivalent, if you will, where you can go up on a news service and as you click we learn about you and customize a news service for you.

Finally, some progress on targeted advertising and personalization I talked about and then a big scale-up of MSN Shopping and our commerce services. Our shopping site to date has mostly been focused on a small number of partners and trying to do a good job for those folks and we've done a great job for those folks and it's been a great revenue opportunity. And it's not been necessarily a great consumer service in the sense that we don't give you access to all of the products that are out there on the Web, so are really moving to that model using search as a key engine for that and making it very simple to go out and find any set of products that you want that are out there. And this has become a big way that people start and shop, their experience online. About 35 to 40 percent of all search queries on the Web in general are commerce related. Half of how people come and look for products online is done through search. Even music, which we've not even launched at all, we went and looked at our data, 5 percent of all search queries were music related. If you summed those up, it's something like 700 million people coming to look for music. More people will search on MSN for music today without us even building a brand than will walk into a Best Buy store in the next year. And so that is an amazing fact there.

So that's basically just a short summary. Since it's lunchtime we figured you should have some sort of entertainment at lunch. Let me just show you a couple things here. Let me show you the video service since no one's seen it. This is basically the MSN Video service, just a free Web-based e-mail. You come in here and it will launch. And we're testing all sorts of different types of advertising so it will launch first as advertising. It ranges between 15 seconds and 30 seconds.

(Video segment.)

YUSUF MEHDI: Actually that won't work as I pump it out here but you can go out to the full screen mode in that effort and you can see how the advertising will work. And then it flips over and it will run that content. And the content on the site is actually pretty rich and you can come down and look, buy a number of things here, news. You can follow decisions; you can come back at any given time and find out what the president said, what's going on in the political campaign. In sports we did a multiyear deal with Major League Baseball and we have exclusive rights to show a lot of special video there as well in terms of baseball highlights. You can come watch compressed games, any game that you missed, that you were gone, you can come back and actually watch the game online. Busy people like yourselves they have a compressed game that you can watch a whole game in something like 20 minutes with the removal of commercials and the time where Martinez is fixing his glove and just watch the actual action plays. So that gives you a sense of some of the strength in the video here.

So with that I'll stop there and open it up for questions.

ANTHONY NOTO: Thank you. I didn't realize Rick Sherlund was on the Web cast. I just got an e-mail from him. He wasn't happy about the 50-year old comment. (Laughter.)

But more seriously he did e-mail me a question and he was wondering if you'd comment on search as it relates to MSN search and Longhorn and the timing of the two.

And then I have a follow-up question. If you could comment a little bit on what's the greatest risk to your strategy from Google.

YUSUF MEHDI: Okay. Search as it relates to Longhorn: The search that I talked about, now there will be a lot of innovation that we're going to do in MSN oriented search. And to be fair, there's a lot of cross-company investment in search from a number of people, so we are really leveraging the strength and talent from our Microsoft Research group under Rick Rashid, who folks there have spent five, ten years investment doing things like image recognition and a number of other things, things from the Office group, things from the advanced user interface group.

But we will do an MSN search starting shortly with a beta and well before Longhorn ships everything across local PC search, e-mail search, Web search, deep database search, and that will, as far I think as the consumer is concerned, be an end-to-end system for searching across any data types.

So we're going to do the work to figure out how and when we add value to Longhorn. There's no specific plans. We've had a lot of discussion, nothing to really talk about yet. But we certainly will do that effort but I think it's fair to say that we will tackle of the things that you'd expect, even PC search, as part of the MSN effort well before the Longhorn time period.

And your second question then was about --

ANTHONY NOTO: There's just a lot of rhetoric behind Google and what's the real end game as it relates to operating system versus just search and as you think about where they could be ten years from now. If you had to sit in a strategic room war-gaming where the competitive threat could come from, what would be the thing that would scare you the most and surprise us the most?

YUSUF MEHDI: With Google it's hard to say. If they aren't at the peak of everything glorious then they're close to it, because they're trying a lot of different things. They're into e-mail now, they're into social networks, they're into a number of different areas. And I think that as you lose your core competency things get much harder. E-mail is a good example where it's very hard to do a good job in e-mail if you're focused on things like spam protection, people's privacy, reliability of that e-mail and so I think it remains to be seen how they do.

There is no specific thing I think outside of the search effort that at the moment I look at and say, wow, that's something that's completely different. And even the search effort I think is early days. Even the research you saw in the Wall Street Journal two days ago that talked about people's basically willingness to go to any different search service if it answers their question means there's a lot of opportunity.

I'd say in some respects the biggest thing that Google has is I think their current culture of innovating fast, working quickly, the focus on simplicity and speed of the Web user interface. I think that's the thing that is probably right now the most impressive thing. They've got that great focus on the consumer experience, which I admire and I think respect.

It will be interesting what happens as they try and broaden their ambition to get into other areas and as they're set to become a public company and have to show revenue growth, in spite of the fact that they claim they're an unconventional company and won't be held to quarter over quarter results. I think that will be tested and we'll see how that does.

But I think they're an interesting juxtaposition. They're full of opportunities. They can probably do anything they wanted to do. And it's unclear from the things they're doing now that there's one thing I'd look at and say, oh wow, that thing has really got massive headroom and phenomena that we should really take a look at, in general I would say respecting all the different investment areas that they've got.

QUESTION: I want to ask you sort of a loaded question. I'd make one point, about a year ago somebody asked Steve Ballmer what his commitment to the media business was and he said, "I'm not a media company, I'm a software company." And what you're talking about here is mostly media.

Secondly, if you look at some of the companies that you're going to compete with, like Yahoo or Google, they're relatively smaller, they can incentivize people and they can give them the opportunity for capital appreciation. Now you look at Microsoft, it's big, it's viewed as mature even by the guys that are recommending it, they're worried about what you're going to do with your cash, so how do you attract the bright people, the smart people to really do the kind of creative things you're going to have to do to compete with those other companies, particularly given Mr. Ballmer's comments?

YUSUF MEHDI: Both good questions. On the first one, oh yeah, a software company, a media company, I think that he and I are completely in synch on what we're doing. How it's described sometimes I think gets more confused than just the words of describing the actual intent. The intent is that if you said why would you be any better than, say, Yahoo in terms of what your network offers versus what Yahoo offers, it's going to be about software at the core and in software in a broad sense of the term. That will be our definition of why we are better. And so we're going to invest a lot in more core things, we're going to really invest heavily in search, I think we might out-invest in search but we might not go and do travel, for example, or we'll instead rather partner on travel, partner on careers, partner in a bunch of other things. So in that respect I would say we're certainly a software company.

You're correct, I talked a lot about our media here, we are a media company in the sense that to audiences and demographics to advertisers, have one of the top online media properties online and think of ourselves as selling media in every bit and shape and form, and Steve agrees with that too. So I think that's the way I'd describe it.

The second question, how do we attract top talent when people can go and get IPO shares or go into a company that's rising, whose stock price continues to go or you look at the recommendations and it looks like it might grow some more. It's a good question.

A couple of different things. One, it certainly is a challenge. It's not without challenge. I think in general people who come to Microsoft come for a couple reasons. A lot of times we get a lot of really smart technologists who come because of the ability to really tap a greater set of R&D opportunities. If you consider we spend almost $7 billion a year on research and development, if you're a technologist of any kind you come and get access to the best minds in the world, to the best research in the world, things that you can't get in some of these other companies. I mean, you've got people like Jim Gray who's the founding guy of databases that you can go talk to in California. You have some of the best researchers in China who are doing things like image search, people in Cambridge. And so technologists enjoy that as much as anything, enough for them to come shape it.

The second thing is just a chance to shape the world. The level that we get to put things in and make changes on when we want to do something is of another scale. Now, some of these companies have great reach but we really can do some significant things in those areas.

And lastly, we do offer actually very good compensation packages and anyone who's looking for a search job come talk to me and I guarantee you -- I guarantee you that we will have a very competitive financial package for anyone who wants to come do R&D in search, guarantee you.

Other questions? Yes, in the very back there.

QUESTION: (Off mike).

YUSUF MEHDI: Okay, yes. The question was how are we going to compete with Apple when a big part of what's driving their success both with consumer excitement and probably financially is the iPod.

A couple things. Number one, our strategy is certainly to offer a multitude of devices. So we think that the Apple iPod, I think that's a great product but there's a lot of opportunity. They're only in 4 percent of U.S. homes today, even with all the success they've had. There are a number of other great devices that are coming out. I've spent time with a bunch of hardware manufacturers who will launch hardware products when we ship our service that will look and feel as good as the iPod product. And they will undoubtedly be a little bit less expensive and so head-to-head against Apple we'll have a device that will be available to the consumer. We won't produce it but it will be available to the consumer. We gave a lot of input. And then we'll have a bunch of other devices, some that we've already talked about, one the Portable Media Center, which is a device that's a little bit bigger and a little more expensive that has video and audio, much higher end looking device. It's for people who really want to sort of look at music videos and not just music, which is very powerful, we'll have that offering. And then a bunch of devices in between, little ones that cost 50 bucks and you can go running with.

And so the proposition is that you can buy a number of different devices with the MSN Music Service as opposed to just a single device from Apple and that will be a good choice.

The other thing is, of course, we'll have a very broad selection of music. My goal is that if we don't have the broadest selection, we're tied for the broadest selection of music. We'll have the best discovery. It will work with your Windows PCs and that alone I think will give us a big enough market share that we certainly should be able to go out there and be in a nice horse race if not take the lead at some point in the future.

The only tough part with what you were saying is there's a lot of financial benefit to Apple that is made on the sale of the iPod that we don't have because we don't sell that device ourselves. I do think there's a lot of opportunity financially for us on online advertising and on search efforts that music will help that we are going to invest in that will allow us to fund and drive.

And again one of the nice things about us at Microsoft is we'll take a long-term view and so we will fund and we will invest to be competitive. The lack of economics from a device will have no real impact in terms of how we compete in the marketplace.

So we'll take one more or two more and then we can kind of adjourn early. Yeah, in the back there, last question unless there's anyone else.

QUESTION: I'm not sure if this is a fair question but I'll ask it. I was amused by your description of Google as a company where everything is glorious. Is there anybody out there now, somebody in your space where things aren't glorious or things are perceived not to be glorious that you think you might have to worry about two to five years from now?

YUSUF MEHDI: Yeah, definitely. I mean, the best thing about this space is that there are so many companies that can come from nowhere and be successful. And we're watching some and I bet you there's a ton we just don't know about yet. I mean, Google themselves you have to give them some credit. You would have said to people five, six years ago, oh, search is done, look at all the companies that have come and gone and they came with a very bright idea and said we're questioning the fundamental nature of how this business works and a lot of people didn't think that they had something there and they broke through and had a great user experience model and then they kind of copied the page system, which allowed them to take off. And so they did great and I think a lot of people sort of discounted that service.

I think there are a lot of other companies right now like that in this space with a lot of great ideas that are up and coming that could be successful and could blow out. And there's a number of different companies that do little parts in niche areas around any of the things we're talking about, commerce, search, information management, that you go and you take a look at. I won't name any names because I don't want to highlight anyone but there are lots of companies I look at who have great products and certainly any of those can blossom and be very successful.

Okay, I think we'll wrap up there. Thanks very much for the time. (Applause.)

END

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