CRAIG MUNDIE: Yeah, I'll be the pointer. So, who would like to be first? Number two back here.

QUESTION: Hi, Ray. Charlie DiBona, Sanford Bernstein.

You know, in many ways I think the breadth of your offering sort of gives you the pole position on the software plus services initiative, but maybe you could talk a little bit about the competitive landscape, you know, who the other players are you see developing, and in particular maybe you could focus on Google and its changing position as it tries to expand its footprint, its offering with things like Gears and get something on the client side, and how that might impact the competitive environment.

RAY OZZIE: I think part of the real question you have to ask yourself or that I ask myself is what piece of this transition is technology-based and what piece of it is more or less customer-based or solution-based. The thing that I believe that excites me about Microsoft's position in this transition to services is that we already have the customer relationships. We have touch, we understand what their business needs are. We understand what they're running, we understand the management challenges they have; if it's an enterprise, if it's a small business it's a different set, if it's a consumer it's a different set. And that lets us extend those things that they're doing in the cloud in a way that helps them without a tremendous disruption. I think a lot of the tendency that you probably see in something like Google Gears, or things like that, they tend to lead with the technology, and it's a “build it and they will come.” And it's always good to do that kind of thing whenever there is such a technology transition, but that doesn't necessarily lead to success in the market.

I think we're going to see lots and lots of experiments done by startups, done by Google, done by Microsoft, done by other big companies in terms of new scenarios, and extensions to the product offerings, and that's where the opportunity lies. My specific focus right now is making sure that everyone at Microsoft, every developer, is thinking about how, given their markets, how they can leverage services, how they can take advantage of services to broaden the opportunity within there, as opposed to enable somebody to come in and disrupt that opportunity.

CRAIG MUNDIE: Number two, there's another one down here, too.

QUESTION: Ray, two questions for you, Sarah Friar from Goldman Sachs. Firstly, just in terms of advertising, we heard a lot earlier about advertising in the online services businesses, but how do you think more broadly about advertising to help monetize software applications; do we get to a point where advertising is incorporated into applications for maybe SMBs, for example?

And then, secondarily, obviously with Silverlight, you're going head-to-head with Adobe, and they're moving with Apollo down onto the desktops against you guys. How do you think about that competitive standoff position, and how do you think about your position vis-à-vis Adobe?

RAY OZZIE: Sure. In terms of advertising, I believe that it is as you point out with SMBs, it depends on the market segment, and we have offerings, like Office, that are offered to different market segments, and the answer related to ad monetization of it will vary based on those markets. So consumers clearly, if they're given a choice of paying for something, or getting an ad-subsidized version of it, as long as it's not intrusive, and it helps them, there is an opportunity there to consider whether that might be a model that works in certain applications and test the waters.

In small business, very small business that have no IT departments, they're also very cost-sensitive, and it might also present an opportunity in that realm. We don't know yet, we're at a transition point, and I think we will all, as an industry, try experiments, and see where it works and where it doesn't work. In the enterprise, I have no reason to believe right now that it's going to be material. I think that the licensing and subscription models that enterprises use to pay for the value that they get is probably going to be the way it will primarily remain.

In terms of Adobe, again, I believe let me just back up and say, I really am a believer that devices, whether those devices are PCs or phones, or other forms of device, really should have software on them that takes advantage of the nature of that device, the unique input characteristics, the high bandwidth between if it has storage and memory that it should take advantage of that to help the user experience. There are a number of people who started with services, and now are realizing, well, there are some scenarios that involve the desktop or the mobile phone or something that we would like to extend our value out to. So they're finding clever ways of taking the Web programming model, and extending it out there.

Earlier in my career, I have worked on products that try to take a least-common-denominator approach to user experience across different devices, and I don't think it works. And so I believe that given a really rich interface on a PC as compared to a Web interface that's a local interface, I believe that if you spend any significant amount of time with it, the rich interface will win. Which is why with Silverlight and .NET, you know, which is in Vista, that those applications will be much more embraced by the individuals who use them.

CRAIG MUNDIE: Number two.

QUESTION: You've spoken elegantly about software and services, but if you actually look at Office Live and Windows Live today, many of the services are still pretty basic, and they bear a lot of resemblances to the early bCentral, and even the early .NET services. So maybe you can share with us your view going forward about what in practical terms might some of these software plus services applications in practice that are actually more compelling than what you get today? Are there some examples or scenarios, or use cases?

RAY OZZIE: I don't have products to announce today. I tried to set the framework so that as you see products come to market, you can kind of place them within that. I will just say at the highest level, the biggest services opportunity from Microsoft is the services relationship to our class of software products. So it is our responsibility to take the Office value proposition, and what people use Office for, managing documents, doing lightweight projects, and meetings, and things like that, and to create services in the cloud that do things that Office users want to do in conjunction with the PC-based Office. Whether that is more the publishing and sharing phases of the scenarios, or whether it's core editing, there are a number of things that we can try. There are a number of things that might make sense. On the Windows side, the same thing is true. You basically have to step back and say, what is the core value that people get with Windows itself? It's about managing applications. It's about managing their data. It's about how they manage their different devices, and settings, and things like that. The promise of services is that potentially it makes those things a lot easier. That if you have multiple PCs, if you have multiple devices, that the service can bring them together in a way that makes the psychological barrier of buying a second PC lower. That lets you buy multiple phones, you treat phones as fashion, and suddenly have your settings and e-mail, and media, and things like that automatically roam from one device to another. There are a lot of scenarios that are related to what people use these things for that the service can act as a really strong assist.

QUESTION: Marcus Bowman from Gartner. It's very easy to get distracted by Google's apparent success. I wonder if you'd comment about another company, IBM. In terms of computer science, in terms of relationships with customers, in terms of experience with services, there's a lot there. Could you describe a bit about what you think about IBM, perhaps as a competitor, perhaps as a partner, or something else?

CRAIG MUNDIE: I'll make a comment, and then Ray may want to add to it. We have had a long history with IBM from the earliest days of trying to collaborate and build things to, today, a very rich coopetition environment with them in terms of their services people; they do a huge amount of work with Microsoft technology for their customers, and that's a huge part of their business. On the other hand, you know, they've been a big proponent of some of the free software assets, and trying to nurture those things as another base that they can support.

My own sense is that in the computer science realm, two things are beginning to differentiate the companies. One, I think their focus always came a bit up from the hardware more, and didn't get as far into the software aspects of this, and certainly in recent years I don't think they've continued on the software side to be as broad or as deep as what we have attempted to do. I think in a world where we think software is going to be the malleable technology, and the one that gives us resiliency as the world continues to change, I feel good about that relative balance.

Their business model is clearly trending more towards scaling through people, and selling services around that, and less and less the technology and products itself. One of the things that's also very different is, they don't have any of these global Web service capabilities. I think that will turn out to be the most fundamental difference, no matter what our aspiration and their aspiration is. If you do believe that the world requires this software plus service environment, then I think we have a remarkably different asset base in everything from the basic research in the software necessary to do that, and certainly today in building up the business assets and the operational assets to make that something that you can add to this.

How the two companies move in the future will be hard to say, but I suspect there will continue to be a coopetition relationship.

RAY OZZIE: I'll just add that something has happened over the last at least over the period of time that I've been in this industry, which is when I came in, technological innovations first hit within the corporate data center, and it worked its way outward. Nowadays the most exciting things are happening in consumer electronics, and the technology innovations really find their way into IT, as opposed to the other way around.

One of the things that I'm extremely happy about, about Microsoft, is the breadth. The fact that we have Robbie's business all the way at the front edge lets us build things and work them into an enterprise in a way that matches the way that it's working in the entire ecosystem. And I think IBM in general, or any IT company that lacks that consumer component, is going to be disadvantaged from the perspective of IT.

We have situations where enterprises really benefit from the fact that the people who come in from the outside already know how to use the tools and technologies. They buy the interesting phones before IT has embraced them and certified them. And this can be challenging for IT, but business also benefits from those dynamics that are going on, on the outside.

CRAIG MUNDIE: Number three?

QUESTION: Ray, I wonder if you would comment on Amazon's EC2 beta offering, and is there any sort of a timeline you could give us of when Microsoft may have a similar offering?

RAY OZZIE: Amazon has several services under the category of Amazon Web Services, Elastic Computing, EC2, S3, which is a storage thing, SQS is a queuing service. These are it's really great, because it's essentially showing the industry and today it's mainly showing primarily showing Web 2.0 startups that there might actually be something there with regard to this utility computing model. Whether it's the right set of services exactly, or whether the way that they've designed them is exactly what matches the needs of those potential developers, there are some questions. But I think they've done the industry a service by beginning to open people's eyes to the potential.

I don't have any announcements at this point in time. But directionally, I think you could see in my presentation that we believe very heavily in this utility computing fabric concept; it's the only way, even internally focused, it's the only way we can get scale amongst all the properties we run internally. And I think it just makes sense to offer those services to developers and to enterprise customers over time.

CRAIG MUNDIE: Number one?

QUESTION: Two observations, and I was wondering if you could put your minds together and answer them. The very first one is regarding the new products, like Silverlight, AJAX toolset, which are very exciting, and at the other end we have a business model which is a little outdated. The reason I say that is, all the technology development that you have put forward and you showed are based on in-place rendition of information; you don't have back-and-forth transportation between the Web browser and the server. So basically the page metaphor is extended in your new product line. And in one of the presentations we saw, we saw, we are trying to drive more page views. I was wondering, probably there is an issue here, because Yahoo's problems were based on an outdated business model, which did not allow them to use new technologies, which are based on-page metaphors, and I was thinking the right metric to call your success of your technology is based on time spent rather than page views.

If you add to that further down the adCenter product that you're creating should not be a me-too product like what Google or aQuantive have; it should be going to the marketplace and saying, we have an adCenter product that is based on time spent on Web sites, page views and Google are history, try and take new products into the market and come out and join us; because I do see the market has shifted from page views to time spent, and the current generation of adCenters are only targeting yesterday's situation. Any thoughts on this?

CRAIG MUNDIE: I tend to agree with you that we are trying to get away from the experience of waiting for the pages to reload. All these technologies have been moving in that direction. That said, you may be able to keep many aspects of the same business model; you just have to redefine what a page is, or conceptually. I agree time spent is going to be an important component, and just as people program networks, in the TV sense, to try to keep people on the same channel, keeping people within the same family of Web sites and services is a key part of increasing monetization, because it increases the likelihood you're going to encounter something that we can monetize.

I do think one of the practical challenges, although this isn't my area of expertise, is it's hard enough, a little bit, to move the whole industry from, hey, I used to buy print and television, and now I'm buying these other things, and what do I buy in the future. There is an acclimation process. So I think the fact that some of these things have to be introduced in the monetization paradigms people know is not a reason that we can't gracefully move them to something else as it becomes better defined.

RAY OZZIE: Yes, the only thing I'll add is that there are multiple models out there, ranging from CPA to CPM, and it is going to be some time; from a brand perspective, CPA is not going to be as effective. If Coca-Cola or someone wants to position themselves a certain way with their brand, it might be the amount of time that their brand is in front of a customer, it might be the relevance of where that thing is placed. At the other end of the spectrum, it's did they close a deal, did they sell a product because of something. And engagement, the amount of time that somebody spends in front of a product, doesn't necessarily generate a lead for someone. So I just think there's going to be spectrum depending on what the person who is buying that advertising or buying that lead really requires.

CRAIG MUNDIE: OK. Briefly, let's have one last question, number two.

QUESTION: Two real quick questions.

CRAIG MUNDIE: I gave you one.

QUESTION: OK. I'll make them fast.

CRAIG MUNDIE: Get one out first.

QUESTION: Live services initiative, identity, how are you thinking about persisting profiles across multiple user experiences, and what are you guys going to do for commerce services within the entire stack?

RAY OZZIE: Identity, we have something that we believe in, that's used throughout our properties, called Live ID. It gives the user a common profile and login to all of our families of properties; whether it's Xbox Live, Office Live, Windows Live, it is the central point. It's got it's backed by the social graph underlying Live ID, meaning people who use Live ID, if they have a contact list, or friends, or other buddies in the Messenger context, because it's used by multiple properties each property can potentially take advantage of the relationships that you've already set up in the other product. Those are the Live ID is being offered essentially as a service, in the service platform, so that other properties can take advantage of it on the outside.

Furthermore, we support OpenID and Active Directory federation for enterprises, so that enterprises will be able to if you're General Motors and you want all of your employees to be able to use Live services without a second login, you can have one point of federation between that, one point of trust and federation between that enterprise and our entire Live ID infrastructure, and suddenly that will happen. That's going to help us tremendously in our business services.

So identity is very strategic, that's why it was called out on the platform.

CRAIG MUNDIE: That's great. We're out of time for this session. I think with that, we'll thank you, Ray and I, for coming and listening to us. And I think we're going to take a break now before we finish up the day with Chris. Thank you.

RAY OZZIE: Thank you very much.

END

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