OPERATOR: Thank you for standing by and welcome to today's UBS Hosted Frontline Update Conference Call. Today's conference is being recorded. Now at this time I'd like to turn the conference over to Dan Barrett. Mr. Barrett, please go ahead.

DAN BARRETT: Thank you Dwayne. Thank you all for joining our latest Frontline Update Conference Call. On behalf of our host, Aryeh Bourkoff, UBS Equity and High Yield Cable and Satellite analyst, and John Hodulik, UBS Telecomm Services Analyst, we would like to welcome our guest speaker, Moshe Lichtman, corporate vice president of Microsoft's TV Division.

I'll let Aryeh go into more detail on the format for the call and I'll take a moment to go through a few housekeeping items.

First, we are making available a replay and transcript of Aryeh's conference call last week on the Cablevision privatization bid, and we continue to get a slew of questions on the structure of the deal and our outlook for the next events to follow the announcement, so please contact us for further information regarding the replay, transcript or any other information.

We have another busy week of news flow in the sector and, as with the previous calls, John and Aryeh are available to field questions on any of these topics. Some of the topics I'd just highlight now—the Supreme Court ruling in favor of cable in the "Brand X" case, SBC's aggressive satellite DSL promotion offer to cable subscribers who switched to its service. On the international front, we had Microsoft IPTV agreement announced with British Telecom. Rogers launched voice over IP service in Canada and finally Belgacom launched TV over DSL in Belgium.

So with that, I'll pass the call over to Aryeh. At the end of this call, important disclosures will be made regarding the stocks mentioned today. In the event there are media on this call, the Q&A portion is on background only. So, Aryeh, take it away.

ARYEH BOURKOFF: Thanks Dan and thanks everyone for joining us today, before a holiday weekend. We're very pleased to have a special guest speaker today from Microsoft. As Dan mentioned, Moshe Lichtman is corporate vice president of the Microsoft TV Division and really Moshe is responsible for the development, sales and deployment of Microsoft's platform products for the interactive television industry and he's joined Microsoft since 1991 in various capacities, the latest of which is heading up the Microsoft TV division.

On the call today, the format's going to be that Moshe is going to give an introduction on the IPTV technology and the stage of development, a progress report on Microsoft's agreement with the telecommunications providers in the US, opportunities to work with the cable industry, as well as elaborate on the agreement and any other international opportunities like the one this week announced with BT.

Microsoft's TV platform works with a slew of blue chip partners, I'll just name a few in North America and Internationally: Bell Canada, BellSouth, Comcast, Megacable, SBC, Verizon, BT, Swisscom, Telecomm Italia and others. So we're very pleased to have Moshe go through the strategy here today as it impacts the telecom and cable industry.

Thank you for being with us, Moshe, and I'll turn it over to you.

MOSHE LICHTMAN: Good morning, everybody. Good morning to all the investors and some folks from the industry, I understand.

What I thought I'd do is actually start with just a quick how do we fit into the greater Microsoft, and then jump right into IPTV, and sort of end with a little status, and then opening up for Q&A.

So if you look at Microsoft's overall business, $40-plus billion, about 96 percent of that is coming from a single phenomenon, and that is obviously the PC that's taken about 30 years go get to about 750 million worldwide.

At the same time, there are two big phenomena that we have been watching very closely, and I think that we're finally at a stage where software can make a big difference in each of those areas. One of them obviously is mobile phones. There are about 1.6 billion today, going up to about 2 billion at the end of this calendar year. And then obviously TVs, surprisingly enough, are about the same number, 1.6 billion worldwide, and arguably one of the primary consumer phenomena across the board.

Both of these markets, the paid segment of those two markets, is growing at 30 plus percent, and obviously that is a very high growth area across the board, and very interesting to the company.

Microsoft TV is going after the TV opportunity obviously, and our focus is on providing platform software to network operators who deliver pay TV services.

Before I jump into IPTV, some of you may know that we have introduced in June of '03 a product called Foundation Edition. That product, from our point of view, really maximizes what you can do on a broadcast network. It's a product that includes all the things that you would expect from a TV product: high definition, video on-demand, fourth-generation digital video recording capabilities, as well as an electronic programming guide that's very advanced, and we have also added to that platform interactive capabilities that allow cable operators to offer interactive services, as well as a mini version of .NET, and all of that platform fits into the 30-plus million set-top boxes that are deployed in North America, starting from the Motorola DCT2000. For those of you who are familiar with cable deployments, that's a very low capability set-top, yet we have been able to get all of those things to work and perform well in that type of a platform.

The product was launched in June of '03. It's now deployed both in North America and Latin America, growing very well across those regions. We have about 40 percent share in Latin America and growing with the market. We have signed a very large deal with Comcast, about five million licenses have been purchased by Comcast and the product is being deployed in the West Coast currently, and very strong reception from consumers.

We're continuing to invest in advancing that platform, and also looking at bridging some of the capabilities from the broadcast network to the IP network.

But at the same time that we have advanced the state of the art of the broadcast technology, we've realized that in order to take TV to the next level, in order to really introduce what we call next-generation TV, the way to go is to really capitalize on this overall trend of moving services over to the IP networks, and that's where IPTV comes into play.

So one of the things that we always try to emphasize when we talk about IPTV is what IPTV is and what it's not. And IPTV is definitely not video streaming over the Internet, it's not watching TV on your PC, although the PC may be one of the devices, it's not delivering video over best-efforts networks.

So what it is, it's a highly competitive, 24-by-7, mission-critical type platform that delivers all the services that you would expect over a pay-TV type service: broadcast television, all forms of on-demand, including the latest generation DVR, and an electronic programming guide, as well as a whole bunch of new services that we believe will only be facilitated on an IP network. And we sort of bundle these new services under the umbrella name of “Connected Entertainment”.

Some of the benefits that we highlight as part of our IPTV Edition platform, which by the way we introduced in October of '03 at ITU Telecom, I would sort of divide into three areas. First and foremost is Better TV. We want consumers from the time they hit the On button on their remotes to have a better experience with their TV.

So one of the things that we have put a lot of focus on is the user experience. You will see a much richer, much more entertaining, animated experience. We have made a lot of investment in usability, and that's an ongoing effort, and that has resulted in something that's been highlighted by our customers as a superior experience to what's currently available in broadcast networks.

One of the things that we have invested in, for example, is what we call instant channel change. One of the things that consumers have complained about when moving from analog TV, where they have gotten used to channel zapping, when they have switched to digital TV they immediately face this up to two second delay when tuning channels, and that's just the physical limitations of digital broadcast technology.

We have fixed that with the IPTV technology. There is a lot of innovation that's gone into facilitating that, both in unicast as well as multicast type scenarios.

As part of Better TV, obviously it's starting to offer these connected-entertainment capabilities, and that is not only connecting the different devices that are out there, be it cellular phones to the video experience, or PCs or set-top box obviously, but also starting to connect the services, and for network operators providing the capability to create a much stickier experience to consumers, and that means connecting your voice services with your entertainment services with your broadband services, and all of those capabilities are part of what we say is the Better TV experience.

The other bucket of benefits to operators in the IPTV Edition platform is the integrated nature of the platform. This is really an end-to-end platform that provides all the capabilities from the time the content gets down-linked via satellite, ingested, populated with metadata, and all the Digital Rights Management and security capabilities, and then going through the head ends, distributed across the video servers, the live video servers, quality of service, all the way to distribution and subscribers.

That is a very comprehensive platform, and one where we have put a lot of focus on scalability and reliability in a telco-grade environment, and, in fact, one of the things that I'd highlight, I'd point out the differences between our Foundation Edition platform and the IPTV platform is the fact that we have started moving the center of gravity from the set-top box back to the network, and that really recognizes the overall phenomenon of this world where you have triple and quadruple play all hosted on the same network.

This immediacy provides capabilities where the data is hosted in the network, enables multiple devices to access the same data, it simplifies this and reduces the operational costs and deployment costs. Because you have a single operational system monitoring multiple services, you have a single billing system, ultimately, that delivers and provisions all those services, and that we believe is a significant benefit to operators.

The last bucket of benefits is really coming from sort of the industry-wide approach that we have taken to bringing this thing to market. We view IPTV as something that happens maybe once every 50 years in television. The move from black and white TV to color TV is such a phenomenon; the move from analog TV to digital TV is such a phenomenon; and obviously, the move from broadcast TV to broadband TV is one such phenomenon.

And a paradigm shift like that requires an industry-wide approach and that implies working very closely with a lot of partners across the different types of components that feed into a network like that. That implies chipset, set-top boxes, encoders, infrastructure equipment, content providers as well as the network operators themselves.

We have taken that partnership approach. We have announced a whole bunch of partnerships in these areas. You've heard some of the names of our customers but equally important is our partnership with those folks: Intel, ST Micro and Sigma Designs on the chip set side; Samsung, Scientific Atlanta, Motorola and others on the set-top box side, as well as folks like Harmonic, Scientific Atlanta, and Tandberg on the encoding side. And obviously, and even more importantly, our partnership with Alcatel that we announced at the beginning of the year. Alcatel is obviously the leader in broadband technologies, and we are very happy at how this has come together. This is off to a great start both at the sales front as well as catering and servicing our mutual customers around the world. So, those are some of the benefits that I'd highlight as far as our IPTV initiative.

So a little bit of where we are, you've already heard the names of the customers that we are working with. Obviously, there are a whole bunch of others that have not announced their engagements with Microsoft. This is something that will happen over the coming months. There is definitely an obvious trend here where, at the beginning of this calendar year there have been a whole bunch of announcements in North America. And really if you look at those announcements, those customers cover about 75 percent of the residential telephone access lines in the North American region.

And, most recently, we've announced the relationship with Deutsche Telecom and their T-Online subsidiary in France. We announced BT just earlier this week and obviously, those are sort of—and Swisscom is a company that we have been working with for a while. So you should expect to see more focus, more announcements, in EMEA over the coming months.

I would say, and we've also said that in the past, that across the board we see about the same market share from an access line point of view that we see in North America, in Europe.

And then obviously, down the road we expect to see similar momentum in Asia. It's a very important market, a market that has different dynamics than the dynamics we see in North America and Europe, but it's a market where the role of software obviously is very intriguing to Microsoft and there is a lot of emphasis there in delivering the type of product that enables triple and quadruple play, that enables the type of connected capabilities that our IPTV platform enables.

Where are we? We are on track for delivering the platform commercially at the end of this calendar year. The platform is in trials across all of these customers that have been announced. The feedback from customers has been very positive across the board, both in terms of the quality of the product, in terms of the reliability and the preferedness for their deployments.

I know there's been quite a bit of confusion recently about the capabilities. There were questions about the number of channels. So I can say that this platform supports, from day one, hundreds of channels. There were questions about capabilities, whether it's standard definition or high definition. I'd say that the platform supports all those capabilities from day one. There were questions about digital video recording. I'd say that the platform supports those capabilities from day one. There were questions about streaming to multiple TV's in the home. I'd say that the platform supports that from day one.

All of those capabilities, it's clear to us that in order for our customers to offer a competitive service they need to have something that is better from day one, and we are 100 percent focused on that, and on track to deliver that type of a platform this calendar year.

If you look where our customers are, I think that you know better than I do what the public positions of those customers have been. SBC has stated that they're on track for their market trial later this summer. They're on track for what they call a controlled commercial deployment by the end of this calendar year/early 2006, and scaling deployments from there. We've heard similar timing from the other customers and we have no reason to doubt that this is indeed, going to be the case.

There have been a lot of announcements recently about products that are coming from our ecosystem partners. One of the key ingredients of this, in terms of getting to scale and the promise for the future, is what we call the System on a Chip or the S.O.C. This is a chipset that includes all of the hardware decode capabilities as well as the IP capabilities, as well as the security capabilities, all in one chipset. And obviously at scale, you're looking at something that will cost in the mid-teens US dollars and therefore the CPE costs are going to be very, very compelling to operators.

Even more interesting, down the road we see that type of a chipset being integrated into almost any consumer electronics device, and that will enable what we call the retail scenario where you go to a Best Buy and you buy a DVD recorder or you buy a TV and that device is basically a retail device, gets provisioned with the IPTV service because it includes that System on a Chip, and because, as I said, the platform is hosted in the network.

So I'll end with that, and I'll open it up for questions, I'm sure you have a lot of questions, and try to address as much as I can.

(Operator Direction.)

ARYEH BOURKOFF: John you want to start?

JOHN HODULIK: Yeah sure, that'd be great. Moshe just do sort of, you know, again, to continue to clear the air, I mean a lot of what you said was very helpful. You've had two sort of high-profile clients, Swisscom and SBC that have, whether officially or unofficially, seem to have delayed their roll-out of their video platform by about six months. I guess you're—just to formalize everything—I guess you're contending that the delay isn't on the part of the Microsoft platform. And could you just give us a little detail on what you think maybe—you think there's a common issue that both those companies are facing that they're working through?

MOSHE LICHTMAN: Yeah, I don't think SBC has dramatically changed their timeframes. I think that the thing I'd point out is just for the sake of perspective it's taken video on-demand 13 years to get to where it is today, in a usable and mass market form, from the times that the MSOs started their video-on-demand trials in Florida in the early 90's, as some of you may recall.

We're looking at deploying the platforms that are much broader than video-on-demand, less than two years after it's been announced.

So a month here or there, I wouldn't pay that much attention to that type of a shift. This is a very complex puzzle; sometimes it takes a little longer for the pieces of the puzzle to fall into place.

And I think one of the things that I'd point out, specifically with regards to Swisscom, they've said from the get-go that they want to launch with an integrated set-top that has the hard drive built in. Since the hardware from the vendor is coming together a little bit later on in terms of those integrated capabilities with the hard drive built in, I think that's one of the reasons why this is happening a little later for Swisscom.

But, in a broader sense of things, the operators have not dramatically changed their plans and are on track for those types of deployments.

JOHN HODULIK: Okay, and just one quick follow up. I understand that you guys are releasing sort of new releases to SBC, and I would imagine to Swisscom periodically. Can you talk about what features you expect to add to the platform between now and, say, the final release date, which I believe is later this year?

MOSHE LICHTMAN: So we are not going to add any new features to the version 1.0 platform. Where we are right now is, if you're familiar with software lifecycle, we are in stabilization and ship mode. So basically its bug fixing, it's getting the type of feedback from our customers and making sure that all of those are baked into the final release. The feature set is baked, that's the feature set that will get tested later this summer and deployed by our customers starting by the end of the calendar year.

JOHN HODULIK: Great, thanks.

ARYEH BOURKOFF: Operator, any questions from the audience?

(Operator Direction.)

ARIAN MAYER (Credit Swiss Asset Management): Morning and thanks, both Aryeh and John for hosting the call.

I have a question from the telecomm front. I understand you're pretty optimistic about your own capabilities with your own systems, but what about the copper network? How do you know that copper can take that kind of signal when you know it has already a lot of issues with just DSL? And, this issue may have nothing to do with you, but I'd like to understand how it affects you as those roll-outs take place and how much testing have you really done outside the lab? Thank you.

MOSHE LICHTMAN: Yes, so I would say I cannot get into a lot of confidential information here, but I can tell you that those tests have already been done; they have been done in the field. That's one of the reasons why there is so much excitement around this thing. I think people are seeing very, very high bandwidth; in fact higher than the ones stated as targets by the operators in North America. So, we are extremely confident that they will be able to deliver. You know, I think SBC said they would like to deliver four streams, including an HD stream and three SD streams, as well as a high capacity data service, as well as voice. We see no reason for those things not to fit into the type of bandwidth that has been tested in the field.

So this is not just a lab test, those tests have already been done in the field. They have been done on various grades of wires and stuff like this. And, the results have exceeded expectations.

ARIAN MAYER: Okay, just to follow up and I am not an analyst in your particular area. I don't cover your industry, but I do know as a user that Microsoft does have a reputation for delivering products that are not necessarily finished. And consumers, I'm sure you've heard all this but I have to say it nonetheless, consumers have had the impression of funding a good part of your development costs. And frankly, I'd like to hear from your perspective what you are planning to do to perhaps address concerns that this again will be an unstable product, it will not be finished. Are you doing more extensive tests than you have done before, you know, perhaps more rigorously? And are you going to give deadlines for when you're going to roll out the product or perhaps wait until it really works? Any feedback on that would be very much appreciated. Thank you.

MOSHE LICHTMAN: Yeah, one thing I'd point out is we already have software deployed in this industry and, in fact, the stability of that software has exceeded some of the competitive offerings. So, I think we have already done a lot of learning as to what it takes to deliver this software in this type of an environment. We've actually implemented a lot of testing procedures that automate and puts tremendous stress on these systems at very early stages in the development. And we've done that, as I said, in our cable platform that's proven itself in the field. The feedback from our customers has been extremely positive, as well as from consumers.

We're implementing the same practices, as well as some new practices, relative to the IPTV platform. One of them is the Early Access Program that we announced at the same time we launched the IPTV initiative back in October of '03. And what we have done with the EAP, which stands for Early Access Program, is, from the very early stages of the program, get together with our customers on a regular basis, making sure that there is a very short communication loop between them and the development team and the engineering team. And, actually, that enabled us to get early feedback from their experiences with their field trials, with their lab deployments and so on, and bake this, at an early stage, into the product.

As I said, the product is targeting the five-nines telco environments. That's a different mindset than we have in the more traditional Microsoft software business. By the way, the things that I focused on is bringing the type of talent from the telco world into both the engineering team and our deployment teams to make sure that we have the same service level and the same quality that those customers have gotten used to.

ARIAN MAYER: Okay, thank you. If I could just finish off, you haven't actually answered, or maybe I missed. On John's question, SBC's delay, Telstra, you know, how do you explain that decision? Also, Verizon going for different technology at least for now, could you give any feedback on, perhaps from your perspective, their rationale? Thank you.

MOSHE LICHTMAN: Sure. Well, you asked a lot of questions in one question, so let me try to address one at a time.

Well, Telstra basically, I think that they have been investigating IPTV for a little time. They have made the announcement that, for a variety of reasons, none of which is related to Microsoft, they have decided to put a hold on that. Those are internal decisions. I would recommend that you go and take a look at where Telstra is these days from a whole bunch of aspects.

There are a bunch of dynamics there in the market, both in terms of structural dynamics and so on, that the company is facing. And I think, until those are figured out, IPTV has basically been put on hold. Telstra was very adamant that they are continuing to work with Microsoft, and when they are ready to entertain the IPTV deployment again, which they've said is absolutely the right thing for a telco to do, Microsoft would be one of the primary platforms that they will look at.

With regards to Verizon, Verizon has taken a slightly different approach to their television deployments. They said that they preferred to take what they call a lower risk approach and adopt, first of all, fiber to the premise, which obviously has a higher investment profile, but also adopt some broadcast technologies because those are tried and true.

I think that what I'd point out is they have chosen Microsoft TV as the software platform for their deployment, first and foremost because they believe in the roadmap, they believe in the direction that all this over time takes this towards the IPTV realm. And really this is the only platform that delivers those types of capabilities, both the most advanced broadcast technology as well as the IPTV technology.

ARYEH BOURKOFF: Okay thanks Arian.

Next question please.

(Operator Direction.)

TIM MCDONALD (Merrill Lynch): Yes, good morning. I have a couple of sort of strategic level questions. The first is, you know, Moshe, from a competitive standpoint, how do you view this week's release by Google of Google Video and the Open Source video player that they are embedding in that offering?

And, as a follow on to that I just had a couple of other quick questions. One is how you view the role with respect to this sort of new, next generation of TV, how do you view the role of sort of niche content versus sort of content for broad-based consumption, what we'd call more broadcast oriented content?

And, the last question is how you see sort of mobility in terms of alternative channels for consuming video playing into your IPTV plan, relative to watching it on a computer screen or on a traditional television?

MOSHE LICHTMAN: Okay, so I'll start with the niche content because it's actually related to the question about Google Video. So, one of the things that's really important to explain about IPTV, and I actually missed that point, one of the huge benefits is it completely eliminates the capacity limitations that are part of the broadcast platform. In broadcast obviously you have to send all of the channels, all at the same time. That puts a lot of stress on the platform, particularly as you migrate from standard definition to high definition content. And that also makes niche content very expensive for operators.

With IPTV obviously you have infinite capacity because at any point in time there is only one stream that goes to a given TV. That immediately introduces the ability to offer what we call the “long tail” to consumers. And it turns out that that is actually a higher margin content that the operators can offer to subscribers, as well as starting to offer what we call community, or audience-specific content. Whether you're offering Spanish content to the Spanish speaking population or Indian content or Bollywood content to the Indian ex-pats, that is a very profitable segment if you have the ability to deliver it. So it's a very important capability of the IPTV platform.

In some of the emerging markets actually, operators are talking about distance learning as one of the applications that they would like to try with an IPTV-like platform, so that's a very important focus for governments in those emerging markets.

I think Google Video is really it's a bigger question about video over internet portal scenarios. You have obviously MSN doing video, you have Yahoo doing video; a whole bunch of people are offering video content and are seeing that as an opportunity to grow their advertising revenues. That will continue to be sort of a factor that the operators will have to cope with. Various operators have different strategies of how they co-op or partner with folks like that and try to operate as part of a walled garden type service.

I would point out that at the end of the day there is tremendous value towards what the content providers are doing in the mainstream, whether it's "Six Feet Under" or "24", or "Desperate Housewives." The quality of that content and the applicability of that content to the mass audience should not be understated. There will be a role for niche content, there will be a role for video blogs, and the operators will need to be very smart about how they incorporate and integrate that into their broad, mass market platform.

I think there was another question about mobile video? Actually at the Consumer Electronic Show we showed the scenario where the operators can use the mobile phone as a merchandising platform by downloading previews and allowing people to purchase those movies or set up DVR recordings directly from their mobile phones. As screen technologies improve and the networks improve their capabilities, we absolutely see one of these business models the ability to bundle an on-demand session with a mobile derivative such that you pay, for example, maybe $3.99 for the stand-alone title or $4.99 for the title that you can take with you on the road, and that is absolutely a value add scenario that's enabled by the Digital Rights Management system in the IPTV platform.

ARYEH BOURKOFF: Okay thanks Tim for your questions.

I just wanted to drop in quickly—this is Aryeh—before the next question. With respect to the cable industry, you mentioned obviously, that IPTV being—or once every 50 years a revolutionary product, which would imply that it should be widespread. And the cable industry, aside from Comcast with the Foundation Edition set-top, what are they doing with you, Moshe, and Microsoft? And does the conditional access given that Comcast has sort of play into it at all or will the cable industry sort of sit on the sidelines, vis-a-vis telephone?

MOSHE LICHTMAN: Well, from day one we have been very clear that IPTV applies to any broadband network. Today, those networks obviously that are viable are both DSL and cable networks. In the future, it might actually be wireless networks that will be viable for IPTV delivery. So we have been working very closely with the cable industry in a variety of capacities to figure out how to migrate or transition from the current broadcast QAM technology to the IPTV MPEG-4 and VC-1 technology. I think obviously, you guys know as well as we do that there has been a tremendous investment made in the QAM infrastructure and so there is a certain path that we believe the operators will pursue in gradually integrating IPTV-type technologies into their overall offerings.

You know, I think that our position on conditional access is that it is a legacy technology. As you move to the world where you have connected services and content flowing across multiple devices, the type of technology that we are integrating into the IPTV platform is really the best of both worlds. You have open standards, encryption technologies that are part of our IPTV platform, things like Kerberos and AES encryption, combined with an advanced Digital Rights Management technology. And because of the IP capabilities, this system is more secure than a broadcast, conditional access-type system because the only thing that you can pirate is a single connection. You cannot get access to the broad network by having access, for example, to the encryption technology because of the one-to-one connection between the end device and the service providers.

ARYEH BOURKOFF: Okay thank you, operator next question.

(Operator Direction.)

RAY ARCHIBALD (John Levin & Company): Thank you. A couple of questions. One is you went through a list of the features and functionality that you'll be delivering on day one, and I don't watch a whole lot of TV, so maybe I'm naive here, but it doesn't seem to be highly differentiated from what the cable is currently offering. So maybe you can walk us through, one, what are some of the differentiators that will be present on day one? And also, how should we think about the roadmap going forward in terms of new product releases, generations in terms of frequency. Is this going to be an annual or six month type of process? And, then I have a couple of follow-ups.

MOSHE LICHTMAN: Actually, I thought I did give some examples of things that are going to be better in these platforms than what's currently available. We talked about a richer experience, we talked about instant channel change, we talked about some of the connected services capabilities. I don't know if—I don't know if I want to re-run through those things.

RAY ARCHIBALD: Okay. All right.

MOSHE LICHTMAN: We believe that this will—from the minute you hit the On button—you will be in a better world.

As far as what to expect down the road, I think that one of the things we've very focused on is obviously broadening the ecosystem in terms of more set-top boxes, lower cost CPE, that will enable a much higher margin type business model for our network operator customers. Also, many more, what we call connected services/connected entertainment, providing more connectivity with the operators, both in portals, providing more connectivity with their mobile services, that's an area of investment. And finally, advertising is an area that's very important to us and you should expect to see more capabilities in the platform down the road.

In terms of release frequency, I think we are looking at a typical cycle of somewhere between 12 to 18 months, with interim releases, as we have done in the cable space. So actually one of the things that we have been very focused on is servicing our customers, both in the interim as well as major releases. So we've tried to follow the same trend here.

RAY ARCHIBALD: Okay, and then maybe you can elaborate more because I guess in terms of addressing the cable and telco industries for the video offering in general and beyond that, I guess at Supercom the highlighted concept was this idea of a connected services framework, so maybe you can elaborate how this ties into that, and does one have to embrace that framework in order to use the Microsoft IPTV platform?

MOSHE LICHTMAN: Microsoft Connected Services Framework is really a staging engine that allows you to orchestrate different services in a network. So, if you have a voice service or a data service or a video service, the ability to pass events across those different services and connect between both the operational systems and the BSS systems, is done through the CSF framework. It's not a prerequisite; it's something that adds value we believe, to the operator's service and something that we have invested in. So, it's a value-add that we offer to the operators if they choose to take that value-add.

RAY ARCHIBALD: Okay, and then the last question is can you talk to us about how this is related to Microsoft's initiatives, in terms of Xbox 360, Xbox Live, as well as the Media PC Center in terms of how this fits into that overall strategic objective in terms of penetrating the digital home?

MOSHE LICHTMAN: Right. So, obviously the Xbox is first and foremost a gaming platform. This is a very broad phenomenon, I forget how many gamers are out there but it's well over 100 million today, so that is a very important market for us. We said in the past that we see IPTV getting baked into every consumer electronics device. And obviously both Xbox and the Media Center Edition PC are two such examples of where this technology will get baked and offer this capability to operators to offer their services to the installed base of people who either play console games or use Media Center Edition type PCs.

Again, this is a great benefit because they do not have to subsidize the CPE in that case.

RAY ARCHIBALD: Thank you.

JOHN HODULIK: Can I jump in for one second again, Moshe? I mean, a long time ago when Microsoft was starting to do a lot of work with the cable industry, there was sort of a financial element, strategic element to the partnership. That's why Comcast agreed to roll out the boxes. It was a strategic investment, same way with companies like Telewest and NTL in the UK. On these contracts, is there ever any sort of strategic or financial element to it or is it simply obviously an enhanced sort of a vendor relationship?

MOSHE LICHTMAN: Those days are gone. I took over this business a little bit over three years ago and we have made no investments and/or no such agreements since that time. All of these agreements—and it's sort of, honestly, one of the things I'm very proud of—all these agreements were absolutely 100 percent on the merit of the product, and I think that's the way it should go moving forward.

(Operator Direction.)

MITCH LUSTER (Luster Brothers Capital): Aryeh, thanks for the call and, Moshe, thank you for your time.

You said there's some beta tests going on now. Are there also tests going on—because I thought you made an aside comment about the ability to use IPTV over handsets to show like trailers from the films and applications like that, or were you just talking conceptually that might be something to come down the line?

MOSHE LICHTMAN: We haven't made any announcements relative to work on headsets.

MITCH LUSTER: Okay, thank you.

(Operator Direction.)

STEVE ROSSE (Greentree Capital Management): Yes, good morning. My question is in this era of digital convergence, to what extent will the IPTV offering cannibalize revenues from, say, traditional PC-based software platforms? Will the IPTV platform command higher margins? And then if you could tie that to how that might affect Microsoft's projected five-year growth rate, I'd appreciate any insight you could offer.

MOSHE LICHTMAN: Well, one of the things I would point out here is that the model, the business model behind the IPTV platform, is a server-based model, so it's not—you know, one of the things is that obviously you're always challenged when you go to consumer electronics type segments is that the margins are very low and therefore there is some pressure on the type of business models that you can command with software.

The IPTV platform really replaces a lot of legacy infrastructure and therefore is really commanding that type of a business model, and that's one of the reasons why we're very excited about this opportunity.

In terms of how it would impact Microsoft's revenues over the next five years, I don't think we have provided any guidance. We're not in the position to do that right now.

JOHN HODULIK: Moshe, hey, it's John Houdlik, I'd like to just follow up to the first part of that question. There's been some—again, I don't know if it was in the press or not, I think it's just two questions. One, there is the expectation that it might take quite a bit of servers to support the instant channel change technology you guys developed. Can you just address that? One of the things circling around was that you might need one server for every 10 users. I know—it sounded sort of—

MOSHE LICHTMAN: Sounds like a winning business model there!

JOHN HODULIK: It sells server software, which you guys happen to, strangely enough. And then the other question again, sort of more general on that topic, I mean is there any sort of rule of thumb, just to get an idea of how many servers it would take to support, say, a million users with sort of typical viewing habits, based on the existing packages we see? Just to get an idea of what kind of cost these carriers are going to have to sort of pay you guys licensing and sort of manage that type of infrastructure?

MOSHE LICHTMAN: Yeah, I don't think we've announced or advertised any of the scalability metrics. But we obviously have done a lot of work with the operators in this area. And I would say that the cost per stream, including all the overhead for means of channel tuning and so on and so forth, are significantly lower than what's currently available using legacy infrastructure. Significantly lower, and that's what counts at the end of the day.

ARYEH BOURKOFF: Any range you could—what is significant --

MOSHE LICHTMAN: You'll be the first one I will call when I have that figure for you.

(Operator Direction.)

TIM MCDONALD: Yeah, just sort of following up on my original Google question, I mean, it relates to the server requirement. You didn't really address the fact that Google is leveraging their global server infrastructure to host, at no charge, the content that they're promoting. Do you not see that as a highly disruptive model?

MOSHE LICHTMAN: Again, I would repeat what I said that there will be those types of offerings moving forward. There are whole bunch of offerings right now that are destructive. There is the Akimbo Box that a lot of people said would completely disrupt the on-demand phenomenon. Yet Comcast's, I think, latest figures are showing over a billion Video On Demand downloads this year. I believe Time Warner figures are not far behind.

I think again, there will be alternatives that will attract consumers' eyeballs and the operators will need to figure out how to both offer a better mousetrap. You know, I think that at the end of the day, what Google is offering today is not TV. It might turn into TV at some point, but then they'll obviously have to assume all of the regulatory issues and all of the quality expectations that consumers have for a TV service.

Let's not forget that TV is the device you turn on when you come home tired from work. You lean back, you want high quality, you don't want to wait for things to download, you don't want to hassle with a whole bunch of buttons and windows and stuff like this. And I think that's what we have all been focused on is that type of a lean-back, entertaining experience.

OPERATOR: And with that, there are no further questions in the que. I'd like to turn the conference back to the speakers for any additional or closing remarks.

ARYEH BOURKOFF: Yes, I just had another question—this is Aryeh. In terms of the encryption technology that you were talking about, how does it work with the Windows platform in terms of bringing down the DVD copy and sort of piracy issues? Are you working with some of the operators right now to sort of figure that out?

MOSHE LICHTMAN: Well, I'm stumped. This is the first question that I need to ask you to explain; how does the DVD thing tie into this IPTV service?

ARYEH BOURKOFF: Well, I mean with the Windows platform within the encryption technology you have, in terms of movie downloads and sort of breaking the normal sort of another window of sort of movie rights. Like in terms of downloading movies and so on, do you sort of have built in any sort of encryption technology?

MOSHE LICHTMAN: So the security technology that we have integrated into the IPTV platform is 100 percent controlled by the network operator and the content owners. If the commercial agreement between the content owners and the network operator allows the network operator to offer download-and-play type functionality, then consumers will be able to take that content and burn it onto a DVD and play it elsewhere and so on. But, it's 100 percent at the control of the studios, the operator and the commercial agreements between the two of them. Does this answer your question?

ARYEH BOURKOFF: Yeah, that's clear. And my second question is on British Telecom and the agreement that you did this week. Could you just review what they said about when they're going to be rolling out the IPTV platform in the UK?

MOSHE LICHTMAN: Yeah, I believe they said that they're looking at the summer of '06.

ARYEH BOURKOFF: And that's for testing or for a launch?

MOSHE LICHTMAN: No that's for a launch, early '06 for testing. And one of the things to highlight about the service and the platforms that British Telecom will deploy in the UK, as you know, digital terrestrial is very successful in the UK. It's actually a free service. And so the service and the platform that BT will deploy in the UK will really integrate that type of functionality with all the other stuff that I described, on-demand digital video recording and all the connected-entertainment capabilities. Again, it really highlights the flexibility of the platform that we have built.

ARYEH BOURKOFF: Okay thank you.

John do you have any other questions?

JOHN HODULIK: No, I'm all set.

ARYEH BOURKOFF: Okay great, well with that, Moshe I really appreciate the time and Microsoft's involvement in our Frontline series. It was very helpful to get a lot of these things on the table.

Operator, do you have any closing details that we need to know about or are we all set here?

OPERATOR: Just no further questions.

ARYEH BOURKOFF: Okay we're going to read some disclosures over here, but thanks everyone for joining for the call, have a great holiday weekend.

JOHN HODULIK: Yeah, thanks Moshe, I think you really helped dispel a lot of rumors there.

MOSHE LICHTMAN: Thanks guys.

END

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