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ANNOUNCER: Please welcome Group Vice President, Worldwide Sales, Marketing and Services Group, Kevin Johnson.

KEVIN JOHNSON: Good morning. Leading our Worldwide Sales, Marketing and Services organization, I have the opportunity to live in the world with customers. Customers have choice. Choice creates competition. I love customers and I love competition.

Last year I talked to you about competing versus Linux. This year I want to talk to you about competing and winning versus Linux. Three years ago there were a lot of perceptions around Linux in the marketplace and a lot of predictions that I think today people are realizing were a number of false predictions and misperceptions.

I want to give you three things: I want to talk a little bit about how we mobilize. I want to talk about how we are now really targeting some very specific workloads. And finally, I want to touch briefly on the work we're doing with government around some of these digital inclusion scenarios.

I'll start with the mobilization. In 2003, we really focused on how we can tell our story and send the messages to make clear that there is a clear value proposition of Windows versus Linux. The perception that Linux provides lower total cost of ownership is not true. And so Get the Facts was all about having the third-party analyst evidence and communicating the facts broadly. We are running the Get the Facts campaign in over 50 countries, and we continue to accumulate more and more analyst evidence.

In 2004, we built on that. We trained the field, and we started focusing on increased field engagement, both with our field selling teams and with our partners. Certainly we added more analyst evidence. I think we started with about 11 pieces of analyst evidence. Today we have over 45 different analyst reports showing various aspects of the value proposition that the Microsoft platform delivers, compared with Linux. We have layered in a number of real-world customer case studies. We now have over 300 customer case studies where real customers in real scenarios have either benchmarked, tried Linux, benchmarked it versus the Microsoft platform, and made the decision that the Microsoft platform provides clear value to them. And we've injected some new things to help our field and help our partners.

One of those is something we call COMPHOT. It's our internal process for handling hot competitive scenarios. Anyone in our field, if they're in a hot, challenging competitive scenario, can push the COMPHOT button, and we have regional specialists and links straight into our business groups to ensure that we go in and we really help support our field team and our partners as they're engaging and communicating with customers.

Now, in 2005, I would characterize our work—we've got sort of the broad marketing campaigns taking place, stating the facts. We've got the broad field and partner engagement. We've now expanded to include more partner engagement. At our Worldwide Partner Conference last year and again this year, we've amplified the fact that we now have COMPHOT available to our partners, our partners who are out selling the value of the Microsoft platform and the value of the services and innovation they bring now have the benefit of utilizing COMPHOT to help them in their selling processes. And we're seeing more and more customer win-backs, customers who had deployed Linux and found that the promise that they went into it with was not true. They've experienced the challenges, and they are now switching to the Microsoft platform.

We're going to continue to execute against the value propositions that really resonate with customers, the way we focus on the customer, understanding what they need in their objectives, and then deliver a clear value proposition.

Now, what does that value encompass? Well, I touch on four key pillars here on feedback from customers.

Number One is reliability, and where many had perceptions that Linux was more reliable, those have turned out to not be true. In the latest study that was done by Yankee Group, they surveyed 550 users of real platform workload scenarios, comparing the reliability of the Windows platform compared with Linux. Eighty-eight percent of those came back rating the Windows platform far more reliable than Linux. That is up from 70 percent a year ago. So as customers move more and more to Windows Server 2003 and the Windows Server System, they're seeing better performance, better reliability.

In the area of total cost of ownership, we continue to see more and more studies that support that. This META Group study was one with 200 enterprise IT managers, and they focused on file, Web, and database servers. They found that IT administrators can deploy the Web and the file servers, and database servers in less than 50 percent of the time, with much less labor, once again supporting the lower total cost of ownership.

Gartner just released a study that they had done I think with a large financial services institution that evaluated Linux on the desktop. And they found that not only did Windows provide lower total cost of ownership but even the acquisition costs of that Linux solution was greater than the acquisition cost of Windows. So more and more evidence rolls in supporting the value proposition around lower total cost of ownership.

IP indemnification continues to be a topic on customers' minds. This year we announced we expanded the benefits of IP indemnification beyond just our volume licensing agreements to all of our agreements. This IDC study compares our IP indemnification, which is world class and leading in the industry, with other vendors and other Linux distributions that do not provide that same level of IP indemnification.

And then finally the area of security: Certainly customers are very focused on having a secure, robust infrastructure. And security is one that many people have been studying, certainly over the last several years, and that we as a company have been very focused on.

I'll drill into it just a bit. First of all, in some of the latest studies, one of the things that was done was looking at the number of vulnerabilities in browsers since Firefox 1.0 shipped. People look and they say, okay, Firefox had 60 vulnerabilities as compared to 15 for Internet Explorer 6 on Service Pack 2; so again, these are perceptions around security.

Security Innovators just did a study. They looked at vulnerabilities on specific workloads. When they studied the workloads of Web servers and the workloads of databases, they found that the Microsoft platform had far fewer vulnerabilities than the stacks involving Linux and open source and other vendors, once again supporting the facts that there is a value proposition on the Microsoft platform of providing a more secure infrastructure.

Most recently Wipro did a study that said, if there is a vulnerability, is it easier to deploy that security update in a Linux open source world or in a Microsoft world? And their finding was that in the area of deploying security updates, the work Microsoft's done around automating patch management and software updates provides customers a far greater benefit in terms of lower cost, less labor, and faster time to actually get those software updates or security updates deployed.

So when you look at the value proposition all up, we continue to focus on providing better value through lower total cost of ownership, higher reliability and better performance, better IP indemnification than any other software provider on the planet, and on providing a great, secure, robust platform that customers can feel confident they can run their business on.

As we focused on Get the Facts, we're finding more and more customers that deployed Linux thinking, "Oh, this is going to lead me to lower costs, better performance and reliability." And they found that not to be the case. I'll show you one example, an airline, Independence Air. It's a low-fare airline that was a spin-off of United that went down the path—they deployed Linux, ran into a lot of problems, and have now switched to Microsoft. Let's take a look at Independence Air describing their situation.

(Video segment.)

KEVIN JOHNSON: So there's an example of one customer that experienced some of the challenges running on Linux, and decided to make the switch back to the Microsoft platform. There's a strong pipeline of many customers just like Independence Air. And we've got our Get the Facts campaign, our field's mobilized, our partners are mobilized. But we're not finished with that.

We're now going a step further. We are targeting workloads. We took the install base of Linux servers. Out of the total server install base, we just said, "Okay, where did those Linux servers land by workload?" And if you look at that install base of Linux servers—say it's about 3 million servers out of a 24 million server install base in the world—about a little over 50 percent of the Linux install base is in three workloads: Web servers, high-performance computing, and edge servers. We are targeting very specific technology offerings that align to the unique needs of running those workloads. We are focused then on how we're engaging our partners, our services teams, and our sales teams in a way that we are going after that install base. These are customers that we believe are experiencing the same kinds of challenges that Independence Air experienced, and we want to go help those customers.

Let me give you an example of what we're doing for Web workloads. On Web server workloads, we know that for the most part intranets are running on Microsoft platforms. A lot of these Web servers running Linux have to do with Internet, the external sites. Over half of the Fortune 1,000 sites are running some element of Windows and IIS. We've seen the percentage of satisfaction with our product on IIS increased from 40 percent to 70 percent. That's because of the innovation our business groups have put into Windows Server 2003 around the specific scenario of running Web server workloads—for hosters where they have thousands of sites hosted on a single box, or for enterprises where they want fewer apps on a single box, or Web farm scenarios. We're targeting the very specific pieces of value that can really help customers.

We've also put together a set of solutions, prescriptive guidance, templates, scenarios. We've trained our partners, our field teams, on how to bring these solutions for Web-based hosting. And IDC and others are noticing that we are now fine-tuning that value proposition in each of these workloads.

So when you think about it, you can think about the broad mobilization we have with Get the Facts, the very specific field engagement we have broadly, and now we are targeting workloads.

Now, we're optimistic we're going to make a move in terms of seeing customers in these specific workloads shift to a value proposition that is better for them, and so watch us over the next two years as we do that.

I'll show you one example of a hoster that was 100 percent Linux and is now down that path where they now have a significant mix of their install base for Web hosting running on Windows. So let's take a look a look at Rackspace.

(Video segment.)

KEVIN JOHNSON: So there's one customer's experience relative to Linux and the fact that they have switched to a 50 percent balance on Windows—and we would expect that to grow even further.

With our laser focus on these workloads, I expect to see us continue to win more and more customers, more and more units, and more and more usage.

The key focus is really the customer: Understanding the customer and the value proposition that we deliver really helps support that customer as they operate their business.

I want to transition into thinking about that value proposition for government and government leaders. I'll start by framing how we work with our public sector teams and the way we established a globally managed public sector organization two years ago. This globally managed public sector organization is 100 percent focused on government and education around the world.

As we've engaged with government leaders, they talk about their priorities, their agenda, whether it's about economic prosperity in their country, healthcare, education, national security, and a set of issues like digital inclusion. There are many ways some government leaders early on might have thought that Linux or open source was the path to help with these areas. And we've been focused on engaging in a way that let us show the value proposition of Microsoft to government. So if you just take economic prosperity, and how to create a strong healthy economy, we take the technology industry, and the technology economy in that country is a very important aspect of that. So how do you create a strong healthy technology economy in a country?

Well, it starts with education, and the educational system. Does government sponsor at least one or more research institutions that do pure research in higher education? How do you commercialize the innovation that comes out of research? Well, you have to have intellectual property policies, you have to have access to capital, so you can create startup businesses. From there you start to create a local software economy, that then creates a local technology economy, both servicing that country and potentially building it so they can have exports. Now that local technology economy helps support other industries in the country.

So we, as a company, have been very engaged in helping support government leaders with this agenda. We now have a program called Partners in Learning that's engaged in 91 countries, where we provide software for education, we train teachers, and we partner with local business to recycle PCs. It's part of digital inclusion, bringing technology to underserved schools. We work very closely, certainly in higher education with research, looking at IP policy and access to capital, helping create thousands and thousands of partners that we work with in countries around the world.

Certainly in the area of government security, we now have, I think, over 45 different countries that have signed up on the Government Security Program. Through our local language pilots, we now have localized our products in 40 languages, to reach out again to people who may not have had access to technology.

One example we find in many countries is that they focus on these people's PC programs. I'll just take you through one scenario. Will touched upon Windows Starter Edition, but I want to take you to the scenario in Brazil. The government in Brazil was very focused on digital inclusion, and they started a discussion around what they called PC Connectado, the connected PC, which was providing a low-cost PC for first-time PC users in the country. The government, through good discussion with partners, provided tax relief to PCs independent of what operating system they used, whether it was Linux or Windows, letting consumers decide.

We then worked very closely with consumers in Brazil, to create the Windows Starter Edition with the Brazilian Portuguese version. We worked with many Brazilian companies, including Positivo, one of the local OEMs, and other OEMs including Itautec, Novadata, Semp Toshiba; and we worked with leading retailers in Brazil including Magazine Luisa, Casa Bahias, Extra, and Insinuante in Ponto Frio.

And as the government continued to shape this program, we found that by coming to market with these partners, with the very focused Windows Starter Edition version, we've seen some very good results. In fact, in Brazil, if we looked at this Q4 versus Q4 a year ago, PC from the consumer side grew 45 percent, and our Windows unit shipments grew 107 percent.

Windows Starters Edition was a big part of that, but also Windows XP Home Edition grew, so not only did we reach out to first-time PC users, but the value proposition of Windows Home Edition as an upsell opportunity in the country is still very positive.

Let's watch a video that the team in Brazil shot of one of our local partners and their experience working with us on this program.

(Video segment.)

KEVIN JOHNSON: So that gives you a little flavor of the work we are doing with government leaders and our public sector team around the world. We're very pleased with the level of discussions we've had with government leaders in Brazil, the fact that we have many, many partners in Brazil participating in this. And it is focused on digital inclusion, bringing technology to first-time PC users, whether it's through Partners in Learning in education or the work we've done with Windows Starter Edition and the local Brazilian teams who are building a more healthy local software economy, local technology economy in Brazil. We're showing that there are some good benefits that we could deliver, not only to consumers, but for the country at large.

So overall if you look at the work we are doing, I think we had a clear value proposition for our business customers. We are now targeting very specific workloads and strengthening, with a laser focus, the value proposition we have around Web servers, high-performance computing, and edge servers. And we are very focused on the needs and the value propositions for government.

If we look at the year ahead, I think this really is the year where we will see a significant acceleration of what we call win-backs. These are customers that deployed Linux, tried Linux, and found that all the predictions turned out to be false predications. All of the perceptions turned out to be misperceptions.

So in the area where we have over 100 win backs documented on our Web site, we're going to continue to see win backs like these: Independence Air, their e-commerce win-back; Fender Musical Instruments, which now uses Windows Server 2003 for its worldwide dealer and distribution sites; Adecco in Belgium, a desktop win-back; China Mobile, which was running Linux MySQL, has converted to Windows and SQL Server; and CheckFree, which was an IBM shop with a Linux stack, but looked at Get the Facts and really focused on its new applications and shifted to the Microsoft platform.

So if we look at the competitive opportunity, not only are we competing, but we believe we are winning. And it's a never-ending journey; we're going to stay focused on the customer, we're going to stay focused on the unique value we deliver, we're going to listen, we're going to innovate, and we're going to drive hard to win customers and drive satisfaction. Thank you very much.

(Applause.)

END

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