RAY OZZIE: Thanks, Robbie.

Thanks for coming, and thanks for your time and attention today. I really appreciate the fact that you came here.

It's been about a year since I assumed the CSA role from Bill, and the CSA role itself is a fairly interesting and unique role, even within the tech industry. It's one that's in many ways necessitated by the breadth of our offerings, and the fact that in order to get some kind of synergy amongst the different offerings, that you need really a role that drives the technology and architecture and business strategy issues in a crosscutting way across the divisions and product groups which are more focused on their own specific success.

Today, arguably, the most significant crosscutting issue that's facing not just Microsoft but our industry is this transformation toward services. And so that's where I have been spending the vast majority of my time over the past year.

Last year when I was here, I talked about something that I like to refer to -- Richard Karlgaard said, coined this term -- the cheap revolution. Cheap computing, cheap storage, cheap communications all kind of coming together to cause an inflection point in our industry. And these kinds of things happen about once every five years or so as things build up.

These changes in the environment almost always catalyze the creation of some new solutions that leverage the new capabilities enabled by that technology shift. And these new solutions, inevitably, represent new opportunities for growth. In this era, the environmental change is about to shift from software, whether it's client or server software, to a software plus services model. And from my viewpoint, every one of our software offerings is either a socket for a new attached service that connects to that software offering, or an upgrade or up-sell opportunity to extend a product's value proposition up to the Web and, potentially, through mobile devices.

Services is going to be a critical aspect of all of our offerings from Windows and Office on the client to Exchange and SharePoint and Dynamics and other things on the server, and in order to gain leverage across all of our offerings, we're taking a platform approach to services, giving each of our products the common benefits of cost, speed, scale and monetization that a platform approach offers.

Cost, because as a computing and storage utility, costs are driven down and capacity is shared amongst all these properties. Speed, because by having a platform there and app models already designed for it, it helps products get to market much more quickly, enables much more rapid iteration in product cycles because we can watch what users are doing with the products and turn them around much more rapidly.

Scale, in terms of both raw capacity of the services infrastructure but also in terms of geographic distribution, it tends to be only when a product becomes a success or you start to deploy services infrastructure in datacenters worldwide, and by having a platform approach, you get that right up front.

And monetization, because when you have a platform infrastructure and it has many, many properties on it, and lots of users using lots of these properties, you can aggregate. You can observe and aggregate the activities of these users, which ends up resulting in better ad targeting and better monetization.

Last year, I spoke of this platform, of this services platform, at a really high conceptual level. And over the course of the next 12 to 18 months, we are going to begin introducing a number of new and very key components both at the platform layer and at the app layer. And so I thought this year I'd be a little bit more concrete and lay out a framework, a services framework so that you have some context about where exactly these new offerings fit into the larger strategy as you see them emerge.

And the best way I've found to do this is to basically step through the architecture of the services platform and the nature of the solutions that'll take advantage of that platform. So at the bottom there, the first and lowest layer of the services platform are something we refer to as our Global Foundation Services. This is a physical layer of our services infrastructure that includes our datacenters, the racks of computers and disks that are inside those datacenters, the network that connects them to the Internet, and the people who build and operate these datacenters and maintain them and monitor the activities that are going on within them.

The datacenters are of massive scale. There's a number of them. They're built with commodity components, and that's how you get the cost down, and they achieve reliability through redundancy, not the fail-safe nature of any given component within the datacenter. Our expansion continues at this layer around the world. Next week we're going to be breaking ground in San Antonio on a fairly big datacenter, and our deployed servers and infrastructure has more than doubled over the course of the past year, and we will keep investing.

The next layer above that is our cloud infrastructure services layer. And this is the most fundamental software level of the services infrastructure. You can think of this as a utility computing fabric upon which all of our online services run. You know, among other services, this fabric has an efficient and isolated virtualized computation layer. It has application frameworks that support a variety of app models that are designed for horizontal scaling. And it has infrastructure that manages the automatic deployment and load balancing and performance optimization of the apps that it's managing running on its infrastructure.

It also supports several types of horizontally scalable storage types like files and database and searchable storage that are needed for different types of apps that you put onto this platform. And of course, you know, another key element is networking services, where to efficiently serve up apps and content to Internet users worldwide in a very low-latency and efficient manner.

The next layer up from there is something that I refer to as the Live platform services layer. And these are services that are designed specifically to serve the needs of apps, of our apps predominately, that target individuals and very small businesses, unmanaged users. These are generally ad-monetized applications, and because of that, there's synergy in sharing data and features among the apps at this level. And so they all share many, many of these services.

These are services like identity services, contact lists -- this is the layer where our social graph of your relationships lives, your presence and rendezvous, communication services. Perhaps most importantly, our advertising platform infrastructure lives at this level.

So whether it's hosting our Live offerings for individuals or our service-based offerings that are more targeted for enterprises, or apps that our partners or customers will provide -- this platform will ultimately be used by and will benefit all of the audiences that we as Microsoft serve, because each audience is undergoing some transformation that's relevant to them, from software-based solutions to software plus services, or services alone.

For consumers, the services opportunity as we see it lies in connected entertainment, as Robbie was talking about, in commerce, in communications and community. From the sharing and publishing of personal media, news and information, the multiplayer gaming, our services platform will enable us to rapidly develop and deploy new consumer services as well as services that attach to our existing PC products. It'll also act as an experience hub, enabling us to observe how and why consumers use the different properties and to refine these services quickly and make them better, and also to optimize the advertising and better target the users based on their activities, respectful of their privacy.

For information workers, the services opportunity really lies in connected productivity scenarios. Seamless Office scenarios that span the PC, the Web and even the phone. Documents that go wherever you want them, news scenarios, sharing scenarios, meeting scenarios, note-taking, presentation scenarios that use PCs for what they're really good for: for document creation and editing and review. That use the Web for what it's really good for: publishing and sharing and universal access. They use the phone for mobile access that extends your PC-based and Web-based activities to wherever you go.

For the IT professional, especially in the enterprise, the services opportunity lies more in the realm of cost savings. For enterprise IT in the short term, this is mostly going to be about moving IT infrastructure to the cloud, either in whole or in part. Things like e-mail or content management, information sharing, and so on. Enterprises come in all shapes and sizes, and their requirements vary considerably. And they'll think about the transition to services on different tempos.

But we're in a very unique position because we can offer them a choice, actually three choices. Number one, on-premises servers, which will give enterprises the ultimate in customization and control and dealing with regulatory issues, compliance. Number two, partner-hosted services, where customers can take advantage of any given partner's unique vertical expertise or vertical solution. And number three, in Microsoft's own services in the cloud, in our datacenters, where our services will likely be much more horizontal in nature and where we'll take a platform approach to it and offer the lowest, lowest possible cost that we can.

Choice is a substantial differentiator for us, the ability to offer these different approaches to the enterprise. And we'll be very, very well positioned as enterprises get more and more and more into a services mind-set in the upcoming years.

For business decision-makers, generally within a line of business, the services opportunity lies not just in cost, but more the flip side, in the rapid solutions that they can build at the edge to help the business. Whether it's CRM or ERP, lightweight ERP even, even simple issue-tracking solutions. The definition, implementation and iterative refinement at the point of need is really an amazing -- has potentially amazing benefits for the business decision-maker within the line of business.

The promise of direct-to-VDM services is greater business impact more rapidly as compared with solutions that require IT involvement up front. And, again, because of our server-service symmetry, successful solutions can be brought to market -- I'm sorry -- brought in-house much more readily, as the application requires more integration with in-house applications or when you need to scale up the application to a much broader audience in-house.

Finally, for developers, the services opportunity lies really in the breadth and character of this new type of platform. At the back end, the promise of services for developers is the promise of utility computing in the cloud, as I talked about before. This enables them to run applications and store data at very, very low cost, for all practical purposes, with infinite capacity that's shared with other people like themselves.

Big companies will find this useful, especially for their customer-facing systems in handling demand spikes like holiday demand. They can essentially share capacity with many, many other companies who are also sharing a number of different needs. Small companies are going to find value in handling the surge of demand that occurs at the introduction of a new product, or improving performance globally where they might not have been able to do that in the past.

At the front end for developers and designers, the promise of services is in rich Internet applications, applications that span beyond the limits of the browser and are designed to run video and rich interactive media. We recently announced something that you may have heard of called Silverlight, which is an extension of our .NET family of tools and runtimes, and it's really oriented more toward the seamless deployment of applications across the Web, the enterprise server, the PC, and the mobile device.

As it turns out, we're shipping the first release candidate of Silverlight 1.0 tomorrow, and the final release will happen sometime later this summer. To show you a little bit of what Silverlight is all about, I've invited Forest Key from the Silverlight group to run you through a few of its capabilities.

FOREST KEY: I'm going to start off with an example of baseball. Major League Baseball is one of the largest video deliverers online, they're the sixth-largest Web site that delivers video worldwide. And, of course, for those of you that know the game, there are many games in the season, 160 games, three-hour games, lots of data associated with those games. So there's literally millions of hours of content that they want to deliver to their fan base.

This application I'm going to show you is a prototype of a demo that we built a couple months ago, but they're actually going to be going live in the next 10 days or so with the real application, and throughout the rest of the season, you'll see more and more of this functionality and other ideas integrated into the Major League Baseball experience.

So if I can launch the experience here. The live game is, of course, their biggest asset. So here we have a game that's in progress. There's some additional information and sights and sounds that we can take a look at. I'm going to go ahead into the featured game. And here you can see that I have not only the live stats that are associated with the batter and the pitchers, etc., also the ability to look at other things going on in the league.

Notice that there's a very fluid transition between states of the application, keeping the game live, keeping the viewer engaged. You can also watch that full-screen. It's very important for Major League Baseball to look at the social capabilities of this technology. And you can see at the bottom a series of widgets that I can bring onscreen. And these allow me to bring up my peers that are part of my social group that follow the sport, whether it be a specific team, or as I was mentioning earlier, the statistics game of baseball with virtual teams that people put together.

So here you can see I have some of my players that I'm tracking and their statistics; I also have some chat that I can do with some of my colleagues, my friends, additional visualizations of the game. Now, there's actually even a feature here -- a simulation of the feature which is the content feature. So you can see at the bottom that my friend Big Dog has alerted me to something going on in the league, one of his players has done something interesting. I'm clicking on that, I get a picture-in-picture effect. So I'm now watching two different games and seeing the relationship between these players in a virtual team.

To finish this particular example I'll go full screen, and you can also imagine sitting back on your couch and watching this. So as you can see with Silverlight, Major League Baseball was able to use their existing infrastructure because they are today using Windows Media technology, Windows Media servers, and they can now extend that experience into a much richer, more compelling, and interactive experience for their fans.

As Ray was speaking about services, you can imagine that the opportunity for us, Microsoft, to integrate our services into this application might include the delivery of advertising into this environment, as well as -- if you noticed the chat application, this of course could be based on Windows Live IDs and chat functionality using our system.

So that's an example of media. And there are quite a few more examples in here we could do, and that's because media is going to be a big focus for the 1.0 release, which Ray alluded to. We'll be shipping later this summer. This is an opportunity for us to drive the hundreds of millions of downloads of this plug-in that are going to be the precursor to us achieving ubiquity with the technology. Once we have ubiquity, over 500 million or so plug-ins worldwide, then the technology will be the focus of the development community as they confer those technologies to other offerings on the market such as Adobe Flash.

I want to now turn to some application examples that are more functional and might be applied both for consumer or for enterprise-style applications. And for that, I'll start off by just showing you briefly the performance benefits by using the full .NET capabilities of our .NET Platform within the Silverlight plug-in.

So here I have a game of chess, and I'm going to pit JavaScript, which is the traditional way that interactivity would be programmed in the browser, I'm going to pit that against C#, which is one of the .NET languages. As you can see that in a given turn, the ratio of what's possible as far as analysis of the game by the JavaScript engine is about one one-thousandth of the performance possible with C#. So a significant order of magnitude. In this particular case, that leads to the inevitable outcome that C#, which is a .NET language, will always win the game. But when applied to build an application logic, whether that be an inventory control system or a visualization of some other data for a dashboard within the enterprise, this allows for a lot more powerful processing within the client in the browser.

Let me show you some examples of applications. I'll start with a consumer scenario. This is an application for mashing up video and editing video on a consumer-contributed content Web site. Here you can see I have a series of clips that I've uploaded; these were probably generated from my cell phone. In fact, these were during a trip to Las Vegas that we did. And you can see I can immediately preview those, and very richly I can drag those out into a workspace here. I'll bring a couple out for an editing session. And you can see that I have a workspace that is zoomable, I can play these individually, set in and out markers, and select the best of my trip to Las Vegas for my edited version.

You can also have an extended view where we can actually extend this particular clip and in the gesture of dragging it out, we get a detailed view into the timeline. This allows me, of course, to get more precise in and out markings. In fact, I can play multiple clips simultaneously here and have all four clips playing. You can actually edit these as they're playing. So a much richer experience than we might have seen to date in terms of online editing capabilities.

Final gesture, of course, would be to assemble this into an edited form. And for that, I can do a simple drag-and-drop gesture, which we think is the much more usable, much richer way for consumers to do this type of editing. And with that, I can then do a preview and I immediately see a preview of my edited video right here on the site.

Now, again, the integration back to services, this particular application would logically be connected to a new service we've announced that was alluded to today called Silverlight Streaming by Windows Live. This is a service that allows the development community to build applications that integrate some of our back-end services, and then we take on the responsibility for delivering these video assets from our content network. So very cost-effective for the development community, and a big differentiator for the Silverlight technology to the development community.

Let me now show an example that is more of a line-of-business scenario because a lot of times people see the richness that's possible here, they see the video, and they associate that purely with consumer applications. I actually am a strong believer that the QX capability is even more applicable within the enterprise. I say that personally from my own frustration with some of the IT systems internally in terms of travel booking and new employee on-boarding, any kind of CRM application. There's an opportunity for a much richer, more usable, more productive interface.

This example here shows a travel booking application, which is a Silverlight experience. So I'm planning to go to Honolulu later next month. So I'll see what the available routes are to get there. And here I have a rich control for dates. Notice that when I choose a date, I immediately see available data. And from this visualization, I can do a lot of things that normally would take quite a bit of interaction before I'd get to that point. But here I can see there are several flights with different layovers. Additionally if I roll over, I actually have an animation that shows me that particular route. And hopefully we can avoid going to Anchorage in order to get to Honolulu, not the most direct flight.

Here, again, the animation is usually associated with entertainment and sex appeal. Animations can be very, very important in comprehension and retention of information. So here you can see just a simple example of how rich interactions and animations can greatly improve this particular process. And we talk to enterprise customers about how this technology can be used for some of their internal enterprise applications, they get quite excited about the possibilities. That is an important market for Silverlight.

I want to talk very briefly about Expression. Expressions are the tools for our designer community. And, of course, designers become important in the context of Silverlight, as well as Windows itself and the Windows applications that are built with the .NET Framework. And that's because as we talked about improved user experience and better visuals and better interaction models, there is a new class of developer, and we call that developer the designer. So the designer community is an important strategic audience for us with these technologies.

Here you have Expression, one of the products in the Expression family. I just wanted to make the point that obviously, for designers, the focus is on the visuals, the interactivity, the animation, and much less so on the code. So that is what the Expression product family is about, very relevant to this discussion.

To close, I want to show one last example. This is an example that shows some integration of some Microsoft research technology that some of you might have seen a year ago. There was a demo of an application called Photosynth, you might recall. So that technology is integrated here in the 1.1 release of Silverlight, which will be coming out in the first half of next calendar year.

And what this allows for is a really different modality in terms of dealing with high-resolution images. So I want to show you first the technology applied in the context of a Spaces photo album. So here I've gone to a page, I've double-clicked to go full-screen. And now using the mouse button when I scroll, you can see that I very seamlessly am able to zoom in and see additional detail on the photograph. And if I do it a little bit faster, you can see how responsive this is. This is not a cheat. This is literally how it behaves; it's incredibly fluid. And it allows me to move around within the space looking at photography in a very different, more dynamic way than the traditional page refreshes, et cetera, that are associated with looking at a photo gallery online.

So this is a really cool example of the technology. But we went a step further. And our ad team started to think about, well, how might that be applied and combined with our ad services and with ad units that we might offer to customers? So here is an example of that within a pop-up display ad, so within the actual home page of MSN. And even more interesting perhaps, here's that same ad, but now within a search result. So I'm doing a search for Land Rover, I can now be taken from that one keyword into a full-resolution experience where I not only can zoom in on the cars — notice as I get closer here the resolution is very sharp, very detailed. But you can see that this goes to an extreme as I move down here. Look at the chrome on the wheels, or even the dust on the dashboard.

Now, I know you guys are financial analysts, but that's pretty cool, right? (Applause.) That is Silverlight. Just to give you a taste of what's possible for the user-experience perspective. This is very much part of our outreach to the developer community. So with this technology, think of it as tip of the spear, it brings the attention to the platform, to the tools, and with that, to the services, the infrastructure, the services that we offer around that. With that, thank you very much. Thank you, Ray. (Applause.)

RAY OZZIE: So just a quick wrap-up. There are three big take-aways. The first one is that the services transformation, this transformation from software to software plus services, is a very, very big deal for our company. It'll be a very critical aspect of all of our offerings over the next few years.

We're building a platform to support our own apps and solutions, and to support our partners' applications and solutions, and to support enterprise solutions and enterprise infrastructure. We are the only company in the industry that has the breadth of reach from consumer to enterprises to understand and deliver and to take full advantage of the services opportunity in all of these markets.

I believe we're the only company with the platform DNA that's necessarily to viably deliver this highly leveragable platform approach to services. And we're certainly one of the few companies that has the financial capacity to capitalize on this sea change, this services transformation.

So thanks for your time, I appreciate it. I'll be out here in a few minutes to answer questions. Right now, I'd like to introduce Craig Mundie, my partner and Chief Research and Strategy Officer.

END

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