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Financial Analyst Meeting 2005
July 28, 2005

YUSUF MEHDI: Hello, good afternoon. I'm here to talk about Microsoft's position in investment and winning in Internet services, and if there are three things that you take away from this talk, they should be the following. The first is that our competitors' position and our progress in this space has never been stronger, and in fact, in the last 12 months, we have narrowed the gap dramatically in areas where we've been lagging, things like algorithmic search, we've in fact extended our lead in areas in which we have a strong position, such as communications for Hotmail and Messenger.

The second takeaway is that this market is a dramatically growing market, we have never had a bigger opportunity from an online advertising perspective than we have today, and in fact, consumer expectations are rising, so our ability to enter, differentiate and compete has never been stronger.

And the last point is that our commitment to invest and to win in this space has also raised significantly, and in fact, we're going to do what it takes in terms of investment, in terms of people, in terms of software innovation and capital expenditures to get to a strong position and be the leader in Internet services.

So before I talk about each of those things, I want to go ahead and talk first about how we did in fiscal year '05 and talk about our current position in that context. Now as you know, MSN has been investing for a number of years now in two basic lines of business: a set of information services and a set of communication services, founded through online advertising.

Last year, I talked about essentially having three major goals for our business. The first was to dramatically increase our level of customer satisfaction and engagement on the network. That was one of the top things we had to do in terms of the amount of advertising and intrusiveness of some of the things we provided, we had to address those issues.

The second goal was to drive the huge amount of software innovation and to start to use software as a way to differentiate, and in fact, last year we had a lot of goals like shipping our first ever algorithmic search engine and making massive updates to Hotmail and Messenger.

And then the third effort was to really grow with the market and to grow our online advertising business as a whole.

How did we do in each of those? Let's talk through them. First, I want to talk about what we were doing to innovate for customers. They've probably been in my five years, a Microsoft success, in terms of software innovation. In the last year, we shipped our first ever algorithmic search engine. In fact, last year, I remember being on stage here and doing a demo of an alpha of that and promising that we'd get that out in about six months, and we basically met that goal and shipped our first version, in fact we shipped a second version four weeks ago. I'm going to talk a little bit more about that search engine, but that has been a huge feat that in two years we've been able to go from taking some great work from Microsoft Research, combine it with our efforts and get to market.

In addition, one of our goals was to expand search, and to start to redefine what it was about, to go into other areas. And so we really focused on going into desktop search and taking the next step forward in that area, and in fact we shipped Windows desktop search to great critical acclaim, and in fact, we're winning head-to-head against Google on desktop search. That's the first time we've ever done that, to take the spot leadership and to win some technical reviews. And so that's been a great source of progress.

In addition to the progress in these areas, we've also made progress in some of the other areas of innovation. We launched, for the first time ever, our blogging offering with MSN Spaces. In fact, that was launched six months ago. I remember wondering if we were going to be too far behind when Google bought Blogger.com; we launched MSN Spaces six months ago and in six short months, by attaching that great service to our Hotmail and Messenger access, it has become the number one blogging site on the Internet. In fact, over 55 million unique users use that service on a monthly basis; we have over 18 and a half million blogs created; it's about ten percent of all RSS traffic. So we've driven growth through software innovation in that area of communication.

We also made tremendous upgrades to Hotmail and Messenger in terms of expanding the storage including audio, video capabilities in IM and adding a number of other features. And finally, there's a whole host of other improvements in the area of video, where we've improved that I'm not going to talk to now, but I will come back and talk to you a little bit later as part of the demonstration.

Second big goal that we had, and this is really probably the primary goal, was to really improve our customer asset by driving up both engagement and customer satisfaction and in particular, I look at some of the hardest measures which is what we think of as net promoter, and I compare it to its competition there with Google and Yahoo!, and we took some significant investment. As you recall, we launched a program called Clarity in Advertising to reduce the amount of advertising on our search service, to reduce the number of links, and to take out paid inclusion so we could build more customer excitement and demand for that service.

And I'm pleased to say that that investment, combined with a number of other investments which were in the high tens of millions, if not higher, in terms of dollars to week, gave up in revenue to build a consumer ad that had paid off. If you look at this line here, all told what we have a net promoter, a metric of customer satisfaction, you see we've actually turned around and started to grow our position in the marketplace, where our competition in many cases have been over monetizing or doing things that are intruding on the user experience and the user trust have decreased notably. So our strength and position here has really grown quite a bit, and we're excited about that.

The other part is we've actually grown our reach, we've grown our overall reach and our engagement with the user. And so year after year now, we continue to run the largest network on the Internet, with over 420 million unique users once a month, coming somewhere in the world to one of our properties, and more importantly paid use for unique users are up now almost 20 percent. And so that base has grown. So the success on this year has been actually quite strong. I wouldn't say everything's rosy, we are behind in a couple things yet, our page views relative to Yahoo! are still behind; we can still do a better job in some of our content channel areas; and our revenue for search, in terms of our paid search efforts and how we are basically working with our partnership probably lag I think what Google's doing today. But short of those, basically two major milestones, we have made some real big progress.

I want to dive a little bit now in search and talk about really the progress we've made, because I think a lot of our progress here has gone unnoticed, and I want to explain how this sets us up I think for expanding growth in the future. We'll talk first of all about how we're doing. Actually, one quick spot and that's just in terms of our revenue growth, which we've also grown as well, 68 percent year over year, even as we've made million dollar investments to reduce, as I've said, some of the advertising clutter, to invest in some of the other areas to grow the business.

So let's talk a little about query share, and I'll use the U.S. as a primary example. As you recall, for a period of time, we were losing share to competition with our search service which was sub-par and had over-monetization. And we were even higher up before January '04, but we dropped to basically a low of about 11.8 percent in November, and then about that time, just prior to that time, we had launched the Clarity in Advertising program, we removed paid inclusion, and we built basically a better offering for customers. The customer stat numbers I showed you paid off dramatically, and what you see there is we actually stem the tide in terms of query share loss.

So what's happened now since we launched our first version of algorithmic search, and now the second version which has just come out, we've seen an uptick and in fact, from the low point now, we're up three points of query share, and you've seen us making major strides as we start to engage customers. A lot of this growth has come from our current base of customers that use the service, that are now starting our search engine more and more, and I think we'll see dramatic growth as we continue to offer more services and start to offer differentiated services.

And so here are the slides on how we measure our relevance of the algorithmic search engine. So I'm taking the hardest area in which we're behind, and I want to show you how we're doing on that front. Well, you see there's a white line that's taking Google as a baseline, and we use them as a benchmark, and the other colored lines are our position in the United States, Japan, Germany, France, and in Great Britain. And what we've done in those markets is we've talked to basically hundreds of customers on a monthly basis, we give them a bunch of queries in a blind form, and we ask them, okay rate the answer to these queries on each site, and you get points if you get the right answer at the top of the page or further down on the page or not at all. And so as we've done that, what you've seen is going back to June '04, when we were 20 points behind, we've steadily made progress, and you've seen the big increase as we've launched our own search engine and then tried to really tune it with the second release, to the point now where we are roughly about six points behind Google in terms of relevancy and closing very fast.

The amount of ideas, the amount of investment that we have in this space, I couldn't be more excited about. I'm very optimistic about the day that we're going to be able to get there and do a Pepsi taste test if you will and prove that we have a better search engine. So progress here is fantastic.

Now let's flip a little bit and talk about communication. On the communication side, we're not coming from behind, in fact, we are the leader. We have been six years invested in Hotmail and Messenger and we have built some of the best assets, and I'm going to talk about that a little bit more in our plan to win. But what you can see here is just the growth, and if you look at the sheer numbers here, they're amazing. We have over about 387 million unique users on a monthly basis using one of our communications properties, Hotmail or Messenger, and the growth on that asset and what we've done to that has been dramatic. We are outgrowing all competition outside the United States and particularly in Europe, we are the de facto for things like Messaging, and Messaging has become a verb now for people out there who say, let's MSN as a way to do it. And you can see that our blogging service which just took off is already reaching dramatic scale with 50 million uniques on a monthly basis.

So let's switch gears now and talk about our market opportunity and why I'm very excited. I was looking at the slides I did last year, I actually have the total market growing to fiscal year '08 of roughly $19 billion, and the consensus analysts estimates which is what this represents now has it roughly around $28.8 billion. The growth is pretty dramatic, both in search and in display brand advertising. So the market growth is just dramatic. When I talked to a number of different accounts who are advertising on the Internet about their moving brand dollars over, suffice it to say, that that shift is happening really dramatically, in all categories, in all verticals, and in all types of media, be it brand display and search. Search is the fastest growing, but brand display is right behind it. The nice thing is that our share, actually in both areas, is maybe anywhere between 10 to 15 percent, that we can achieve query share goals that are more of those of our competition. I think not only will we ride the growth of the market, but we'll actually the grow our own network. So our ability to drive revenue for the company in this business is an amazing business when you look at roughly a $30 billion market opportunity in three years.

Now some people say, well hey aren't you just too far behind on some of these things? And relative to Google, are you so far behind that it's going to be difficult for people to catch up? And when we talk to customers all the time, in fact the opposite is true. I'll give you a couple data points to really think about. The first one is, talking about search, when we talk to customers and we ask them did you get the answer to your query in thousands and thousands of user research, one out of two times, 50 percent of the time, people say no, I did not get the answer I was looking for, I got related information, but I didn't actually get the answer. In the cases where they did get an answer, if it wasn't a very simplistic query, if it was anything remotely complex, the average time it takes to get an answer is 11 minutes, so whereas today the customer's sort of assumed experience is, I type in 2.4 keywords and in milliseconds I get 100,000 links in Ask Jeeves. Well I put to you that that is actually going to change as customer expectation raises. In particular, we're going to drive that expectation as we bring more services that bear on the things that draw the better experience.

I think of the cell phone - what happened with cell phones as having a similar phenomenon, where when they first came out, they really were genius because you could be untethered and make phone calls from everywhere. But very quickly what happened is that the notice of staticky phone calls, dropped calls, roaming charges, phones that were built like a brick that had short battery lives, that both became sort of unacceptable and you saw a big churn for a while until services got better. The same is going to happen here in search. We're going to drive that because we're going to build a better search service that is going to raise the expectations of the customer. So how are we going to do that? What is kind of our plan? I'm going to talk a sort of overview, and then I want to give you a demonstration of some of the key things.

The first thing is in the area of information. This is basically our investment with the MSN portal, the MSN search engine, and then the broader set of search engines we're going to do. As I talked about, the first thing we're going to do is we're going to make a bunch of work at the technology levels, that from a consumer perspective, I think about it as one simple concept, we're going to attempt to move the market, today's market, from links to answers. So we're going to try to change the default experience of customer's assuming that they'll get hundreds of thousands of links for every query to actually answer their questions specifically, on the page at the top of the page. And we're starting to do some of that now, and we're going to give you a demonstration of that, but that is, if there's one thing you take away, that's what we're going to try to do to differentiate for customers. It's what people tell us over and over is the primary need.

How will we do that? The first thing we're going to do is going to really make the math and the algorithmic relevant, I talked to you a little bit about what we're doing there. The second thing Bill talked a little about, is we're going to broaden the concept of search, so you'll see us not only go further in the desktop search that we've done, we're going to move into enterprise search, we'll get other types of content that are not currently on the Internet, with our premium content, things behind, you know, firewalls, and we're going to broaden basically the index that's available for people. And then we're going to basically create more of a platform-like opportunity with our search engines, so third parties can build on top of and add value. So that will be what we'll do in the broad area of search. Our portal, and then efforts like marketplaces and commerce is going to be added to expand that opportunity. So we're going to really dramatically change here, we're coming from behind, but closing very quickly, and I fully expect us to have a differentiated offering, look at the competition, broadly in the very near term. We're already doing that with desktop, you're going to see us do that in a couple of other areas.

Now on the communications side, as I said, the tables are reversed. In that standpoint, we are in the lead, we've had six years of investment on it, we've built the most phenomenal asset in terms of not only Hotmail and Messenger, but more importantly we've built what we call the account space clearing house, which is our notion, our directory on the Internet of every user, his or her presence, and the notion of his or her buddies and their friends of friends. And that network is, put to use, one of the most valuable assets on the Internet, because we can now turn around and create new software applications around those services and get them to scale incredibly close and quickly. In fact, MSN Spaces, the blogging example I gave you, is in fact, one of those examples, where we just attached it to the MSN Network and we gave it a viral notion, which is a little gleam in your Messenger list that tells you your body has posted something new to their blog, and that's what's driven the viral nature and had that thing take off. In fact, we have over 8 billion contacts in this asset, which is more than world's population, so it's really safe to say we have a little bit of duplication there, but it's still a very large asset and we're going to use that to build a bunch of efforts to grow. So that's a big investment.

A third area of what we can do is we're going to really draw for more seamless integration across all of the assets that we have with Microsoft, so whether it's Windows, Office, Xbox, the PC itself, we are big believers obviously in the desktop, we've done a lot of work to make sure that that experience is seamless for people across, Windows desktop search, what you've seen here rolls up the competition, and we've done a better job of integrating with the PC, with Windows, with Outlook, in such a way than anyone else can do, but have chosen not to, and we did and the user experience is much better. Other folks have basically adapted more to their view of the world, which is more of a Web wide view, and as a result, that is why we're winning a lot of the head-to-head reviews now on some of the assets, because we've done a better job of integration.

You're going to see us continue to do that, betting on the PC, betting on the climate for a rich experience to give you more control of data, to give you basically a better roaming scenario and to provide safety and security opportunities as you roam around. So we believe we can offer a better value proposition to people across information and communication by really betting on the PC and the seamlessness of what we do there.

And finally we are investing significantly in building the world's preeminent ad monetization system, so we're going to - we have an effort called MSN Ad Center, which we just demonstrated recently, which is our next-generation online advertising platform. This is the online ad platform for the company, this is the effort that we're going to bring for hundreds of thousands of clients out on the Internet, if not a million clients someday that will do their advertising through this system. It will do not only paid search, but it will do brand and display in e-mail. It will be a superior advertising system.

We are in fact, already today, in beta in France with our first offering, and we are running that service, and we're already getting tremendous feedback on improved click-through rates and the ability to derive monetization through this ad system. Over time, we believe we can differentiate at least on a couple of fronts, one of them which is already built into the first version of this system, is better knowledge of the user and better knowledge of their activity on the Internet. This is something our competitors don't have. They don't have that level of data and they don't have the software ranking to be able to rank paid ad results better on the user data. So we're making a huge investment in that area.

The second area is, because Microsoft has built it earlier, we've spanned both consumer and business. We have an ability to build an ad system that can take both consumer ads and take the cost-to-click model and migrate that to an even deeper version which is not only cost per acquisition, but potentially return on investment for every product that you are advertising on your system.

If we can basically tie the ad center into the enterprise, you know, research planning service, the ERP system, we can drive for individuals when they're selling products, we can tell them not only the cost to acquire a customer for that product, but we can tell by looking at the inventory in the system and the cost to build that product, what the ROI was for every unit that was sold out the door. Again, our competition does not have the investment in enterprise software that we have in that area and that's just another example how I believe we can scale. So just like in search, we're going to move from link to answers, I see us doing the same thing on the online ad platform, to move from basically cost-per-click basically to return on investment.

So those are really the big bets, the high level plan if you will, and I think at the end of the day, consumers will take away, number one this is a network that could answer any question I have on the Internet and complete the task in the shortest amount of time, it is basically my social network in the way that I interact and communicate with individuals in any form of collaboration, and finally, we have the most seamless way to connect people across all the devices.

Now what I want to do is I'm going to bring out Blake Irving, who heads up our Development - our Communication services, and we're going to walk you through a couple of things that we have in each of these areas, and in fact, we're going to début for you a couple of new areas that are just going to speak to the pace of innovation of how we're driving and how we're going to differentiate. So please welcome Blake Irving.

BLAKE IRVING: Hello. I got a bet with you that I can get through this in 10 minutes, so I'm going to speak as quickly as I can and just rifle through some things. I've got a lot to show you, so bear with me.

What you see right here is the future of Web mail, for Microsoft. So this is a mail that about a few thousand people are using right now. You can use, in fact I use my Hotmail account with this Web mail product, and just got a quick look at it, wicked fast, very simple, easy to use, and very safe as well. So let me just go into my inbox real quickly. In the inbox you see a metaphor that looks a lot like the mail metaphors you're used to using today. You've got a preview page, you have your list of mail, you have basically a folder structure on the left-hand side, kind of looks like Outlook, kind of looks like Outlook Express, very quickly, I'm just going to go ahead and just scroll down. We should be able to - Mike, do I have a keyboard live here?

So I'm just going to go click through these things here, you'll notice that I can actually select multiple individual mails - it appears that this keyboard isn't functioning or happy - let me go ahead to Chris Payne's real fast, you'll note that I've got a note here that says Chris Payne is an unknown sender up here at the top, it says I don't know who Chris Payne is. Over here I have something that says block sender or allow sender, you'll know that this little graphic down here is grayed out. If I say allow sender, what will happen is it will actually render that photo inline for me, and it's not actually the photo, it's just a small sample of the photo so I didn't have to download that heavyweight photograph, so very, very quick. You'll notice how quickly that's rendering, you know how fast that can actually go through with these things. This is using AJAX technology, which is basically an asynchronous JavaScript type of technology that gives us tremendous speed advantages.

So the next thing I'm going to do is grab my cursor back, thanks, and you'll note that I have that mail from Chris Payne, go back to that mail from Chris Payne, I'm going to add a contact very quickly. I'll just add him. I click it, and he's added. I go into the contacts tab, you'll notice that I have Chris Payne, in fact, it says Christopher Payne, we want to change that, so I'll actually change that to be Christopher Payne.

And I do have a dead keyboard guys, for some odd reason. And I can change that, I can actually show some more fields there, and you'll notice that I've got a number of different capabilities here where I can frankly create an entire address book that would roam with me anywhere. And again, notice how quickly the speed of the interface is.

I go back into the mail, I'll see that I got PayPal communication. I have something from PayPal, and I don't know how many of you have actually been phished, or understand phishing technology where somebody can spoof a Web site, cause a problem for you. In this case, it looks like I have a mail from PayPal and at the time, you'll notice it says, this message appears to be fraudulent or potentially harmful, indicating a phishing technology done by the anti-spam team in MSN as well, says we don't think this person is who they say they are, therefore we're not even going to render the message for you. In this case, I could say block the sender or allow it, I'll just block the sender and it just shuttles off into junk mail folder - I don't have to worry about it.

If I was going to fill out a new mail, I would come over here, fill out a new mail, try to type on this keyboard again, notice that the keyboard doesn't in fact work, so what you would see here is Word Wheel capability where I type in a couple of names and you'd see - just like that, somebody is backstage driving for me, that's terrific - but it actually fills out that for you, so it's an incredibly, frankly common thing that you see in desktop software today and a thing that I want you to walk away with, this is Web-based technology, that it actually behaves like client-based code and it's this wicked fast over any Internet connection.

So let me close that real quickly, and now I'm going to move to another field. What you see over here on the left-hand side - right-hand side is Messenger. This is a new Messenger UI that you haven't seen, this is not yet in beta with the capabilities here. I'm going to click very quickly on Christopher Payne user tile.

I click on that user tile, and you'll see something that pops up, this is available today, which is basically a content card for Christopher and it shows me sort of his personality of his face. So I can actually discover his face, and you'll note right here there's a little, I'll call it a gleam, attaching that gleam to Chris' point on Messenger, when you see that contact list and you see that little gleam, that's what's made the rapid take off of Spaces actually happening, taking this from zero from 18.7 million Spaces that quickly. From here I can basically click on that, I'm taken to Chris', you know, Space or blog, I see he's got photos up front. He can customize this. I've got a great little way of viewing photos and making them larger, etcetera, and then we're introducing a concept here, and again this is something that's shipped in the fall.

In that large contact database that Yusuf referred to earlier, where there's basically eight billion contacts, we have a number of relationship data mapped in there as well. So you'll see that I know the friends of Christopher and these are the ones that have allowed themselves to be seen. I can come over into Chris' friends and I can say, don't know Steve but he's got something new happening, I can see that gleam, click on Steve, and actually add Steve to my personal network. Now I'm not actually adding him, I'm just asking him to let me add him. So it's basically saying, hey, is this person okay? He'll get a request in his inbox, and he can decide whether he wants me in or not based on information he'll find about me on My Space as he cruises around and finds out about me.

Now, I'm going to go ahead and - okay, they're going to reset the keyboard. I'll type on golf, and I've actually search through MSN Spaces to get to some golf sites, to find people that are related to golf, I might want to have an affinity with these folks, maybe I want to add them to my friends of friends list, and you'll notice over on the right side that I've got sponsored sites, contextually they knew I searched for golf and they're going to give me golf addresses over here on the right side.

From here I can actually go to My Space, and well, we don't really need to do anything on this page. You'll notice I have Chris Payne, I can tell that Chris is online, and I have an interesting little icon that I'll show you very quickly. If you look up in the Messenger list, this contact list, I have a folder and I also have a green icon. You'll notice that green icon is also shared in the lower right-hand corner. That green icon indicates that I'm running something called Windows OneCare. OneCare indicates that I have the software running that protects my PC from viruses, keeps it up to date, keeps it managed, and because it's attached to Christopher, I know that Christopher is also running that software. His PC is also up to date, managed and virus free. So if I'm actually communicating with him on the network, using Instant Messaging, or any kind of attachment, I know that Chris is a safe guy to work with.

Now, I have a file folder next to it, and it looks like that file folder is also gleaming, so I can come up and click on this file folder, and what you see here is a series of shared files that Chris and I both share. He has these files replicated on his desktop as well. So think of a file replication technology between these two end points on the Internet. I see that there's a gleam; again, it means that there's an update on top of this birthday invite. I'll go ahead and open it. And it looks like, yeah, it's a birthday invite for Roger's 54th birthday. I'll close that and notice that the gleam went away, so I don't see that gleam anymore.

And quickly I'll basically move over and morph over to Ken's desktop and back, and now he's going to go up to My Computer, and you'll note that here we are just in a My Computer view where I have a shared folder that says MSN My Shared Folders. This is in the desktop metaphor.

In that folder on that other device is the exact same files that you just saw on my desktop, they exist on his desktop, too, and any replication that takes off between these two, there's my file, he clicks on it, now you see Roger's birthday invite, same state that it was in on my desktop. Any kind of changes that he makes are actually made on his PC. When he saves them, those saves are replicated on my PC in an encrypted channel. So he's going to go ahead and he's making some changes, he's going to add a picture of Jeff Gordon for this birthday player. He's a tenor player I guess. And so he'll make those changes, he'll save them, and those changes will actually be saved over to my desktop.

Now, I'll go ahead and morph back to my desktop, and I will open up this file. You'll see the gleam is there again, notice this gleam right here. And I will click on that, and all of the changes that were made on the other desktop have now been replicated to mine.

And if you think about the context, that's a contact list. I might not IM with anybody, I might not do instant messaging. That contact list might be there purely for the reason of sharing files with people, so it just gives us a little bit more power, another capability that we can add on top of that massive contact list that we talked about earlier.

All right, with that, I'm going to move onto some search technology, and we'll go into a series of pretty cool demos demonstrating some series of other frankly payoffs on some of the things that Yusuf was talking about.

First of all, we know that we have a gap in relevance between Google today. We know we have a gap that we are closing rapidly through a lot of the investment we're making. And I'm going to run up here and just I've prepopulated this folder just so I don't have to type a whole bunch of stuff, with some queries, and I'll show a quick query on I think Seattle's probably favorite athlete, probably Ichiro Suzuki. And if you get the result back from MSN search you get an incredibly contextually relevant return. Look at that result set. I can actually see what he's hitting, not hitting as well as he was last year, and I can see how tall he is, how much he weighs, et cetera. I can actually click on Seattle Mariners, get relevant information there.

And if I go to Google for the same result set, I will get a very different answer. I will get a series of links that are frankly very good, but I don't get that same information. And if I want to get a result set, I want it right then, I don't want to click again.

Let's do the same thing for something my kid's a complete freak about, which is tall buildings. So I'll go to the Empire State Building, and I will ask how tall the Empire State Building is, and I actually get the answer, in meters and in feet.

If I go do the same question up in Google, how tall is the Empire State Building, I'll get a series of links that I'm sure have that answer in there somewhere, but they're links, it's not the answer, it's not what I wanted.

If I go to Google and do a local search for Chris Payne, because I'm trying to find Chris Payne, who runs the search team, trying to find his address, I'll get one result that says here's Chris Payne in Seattle, Washington; doesn't look quite right to me. I only got one, I'm not sure, so let's go ahead and take a look at MSN's result set, Chris Payne, and I will get essentially what is a local listing, similar to what you'd get in the Yellow Pages. I'll go ahead and click on that, and I have a series of Chris Paynes. It's kind of the depth that you'd expect out of a Yellow Pages. And not only do I get that, I actually get location data that might help me discover which one of these people is right. So I'll go ahead and click, get a little bit closer, that does look about where Chris' house is, and I'll get an aerial view very quickly, and, yeah, that's about Chris' place. And, yeah, and it looks like there's a FedEx delivery being made. No, that looks like the postman actually.

So there we have a series of results, again pretty doggone powerful.

YUSUF MEHDI: The one thing on that, the point of that was not to claim that we are now better necessarily on all things algorithmic, but it was to show, in fact, that there are a number of queries now where we do do a better job. This is all live today. And even simple things like the stemming example, the Christopher Payne example, we do things now that Google does not do. They do it in other areas, but for whatever reason they don't do it in this part of the query. We're actually starting to beat them now in a bunch of things that they've not done before.

So we show it more just to show that we can beat them, and that we're starting to take a lead in some areas. We still do have room to catch up and pass, and we're moving very fast on that.

BLAKE IRVING: The next thing we're going to show is the MSN toolbar featuring Windows desktop search. So you'll note at the top I've got this new toolbar here, and I'm introducing something called the Widget technology. This will be rolling out in the fall. I have a little notion here that says 82 degrees Fahrenheit. We've actually written a Widget in a very simple language that allows us—and a very simple technology that allows any developer to add information, add little Widgets to our toolbar. This one is a weather toolbar for us, we did it ourselves. Let's go and do a quick change of city if you wanted to. And frankly, anybody, this could be an Accuweather toolbar, if we so desired, so anybody could write to this thing.

So the next thing I'm going to show very quickly is a—if we can alt-tab in the back over to the Outlook front, terrific.

So you'll note here that I'm in Outlook, and we have desktop search, the MSN toolbar on Windows desktop search actually embedded inside Outlook. This is something again that will be available in the fall.

I just searched on the word budget. It went through my entire Outlook, my entire Outlook PST file looking for budget. It found a series of files, it's looking at frankly a preview view of an Excel file. That's not what I wanted, I wanted something more, so we'll go up on Outlook, we'll touch all locations. Now we're looking at my entire desktop. I get information back, you'll notice I can get a preview of a PowerPoint file here as well. I can actually see the outline list, let's see if I can get a little bit more information, does that help me. You'll note we also have PDF previews as well, and I get a very speedy, very snappy PDF preview.

Now, I might want to save that. One of the things I hate is when I'm searching on something and I can't actually take that search and save it somewhere. So what I want to do here is save the search, and you'll note over in the folder tree I actually added something, something called desktop search results, I added budget. So the next time I want to search on budget, I'm just going to click on that folder and get that same result set back, so that's a very big and important thing for us.

The next thing I'm going to show you very quickly is something we call Virtual Earth. So the MapPoint team at Microsoft has been working on mapping the highways of this country, of other countries for a long time. Here you see a map of the United States. It's a big investment for us. We're going to kind of dial in, why don't we dial in 98052 area code and that will take us pretty close to here. Now, here you see that we're in what seems to be we're centered over Redmond. Let's kind of tighten that up and bring it into Microsoft. And we'll type in Microsoft and we'll dial that in a little further. And there we are, we're at Microsoft.

But I'm not really sure that's Microsoft, so why don't I just go ahead and click on locate me, and I'll tell you what we've done is we've actually geo-tagged Wi-Fi networks in major cities all over the country and are mapping those further all over the world that allow you to actually find out through triangulated geo-tagged wireless networks where you are, which is what we've done here, you are here.

So let's just take an aerial photo and make sure we are here. Well, that looks like it's about us, let's go ahead and just get a little closer. Yeah, that's the building. A little closer. Little closer. And is that anybody's car out here? Did you leave your lights on?

So again very, very close, and we know we're there. If I actually wanted to go take a look and find out if there was coffee nearby, for instance, I could say go ahead and look and see if there is any coffee using this current map view, and let's kind of zoom out a little bit, might have to zoom out a little bit further, and there we find a couple coffee places.

And now what I'm going to do is add these to my scratch pad. So you'll see the scratch pad in the upper right-hand corner. I've got some Japanese customers in town, I also want to find a sushi place, so we'll go ahead and push sushi up there. Okay, there's Keiko Sushi at the Owijimaya right up the street; I'll add that.

And so I've got this information and as I scroll, as I scroll all the way over to Seattle, if I just kind of back out and keep going, these things stay and you'll note that all of the other coffee houses and sushi places will be populated, even though that stuff is maintained in my scratch pad, which is a very, very powerful feature if you're afraid of losing a search result that you had and the relevance of that search result; so again a very, very important technology.

Now, real quickly, you remember I did that search on the Empire State Building? So an Empire State Building search, my kid loves tall buildings and he ordinarily remembers the height of all these things, so he'll go back to this thing over and over again. I don't think he's a savant, but he's too young to know yet.

So he's going to look at this thing, but what he really wants to do, he wants to see what that building looks like, he wants to kind of realize it. So we're introducing a technology—and again this will be available in the fall—called Eagle Eye. And the Eagle Eye technology it actually gives you like a 45-degree view of the object that you saw. So if you can imagine being able to add this rich type of result set to your query, you can actually see that this, in fact, is the Empire State Building. And if we scroll back up to the top, there's always the question of, well, how do you actually monetize something like this. I want you to notice that little foot action up here in the corner. Was that really on the building or was it just an ad that we put on the building? Just kind of think about that for a while and think about some of the power of that technology. (Laughter.)

Yusuf, take it away.

YUSUF MEHDI: Thanks, Blake. (Applause.)

It was a great demonstration, it gives you a view of some of the things that we're doing in the area to advance in search, that Virtual Earth one in particular is a good one; the layering of the hybrid view is something that our competition cannot do because of the investment we've made to get more accurate targeting. The ability to use that as a new way to search is very powerful.

So those are the things really that we think will differentiate and help us close the gap and get some excitement. I know you guys are excited about some of those things.

I really want to close with a couple things. In terms of next year, there's going to be a lot, a massive amount of innovation and investment we're making. A couple things to look for, number one, we're going to continue to innovate in algorithmic search relevancy. We are hard at work. I expect us in some period of time to really close the gap and then take leadership even on the one thing that we're still lacking on algorithmic search. We'll continue to extend our lead on desktop search and push into new areas.

We'll be working to release our best-in-class advertising platform that will work across a number of markets. We'll take the France pilot we're in now, we're going to extend that out and try and get that into other markets very quickly.

You're going to see us continue to innovate in new communication services Blake demonstrated for you, a couple things for the first time, a brand new way to do Web mail that's very, very fast. He demonstrated for you a friend of friends network, a social network, if you will, that just harnesses the power of our contact store and builds a bunch of new applications like sharing, as he demoed.

And finally, we're going to deliver for consumers a superior Windows and Office experience on all of these services, Internet services that we're building, and we'll talk more about that over the coming year. There's a lot to be excited about.

With that, I want to close; thank you for your time. (Applause.)

END

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