RAY OZZIE: Good afternoon.

So a few minutes ago, Craig talked a bit about how we work together, kind of a unique way that taps our respective strengths. My role in our leadership team is really twofold: First, to look outside the org to identify environmental or competitive shifts and to drive early action within the organization based on those shifts; and second, to look across the org internally to identify opportunities for synergies or efficiencies and to drive alignment across the teams.

My approach, both internally and externally, is kind of based on pattern matching, spotting pitfalls and opportunities early enough to make a difference, refining our strategy and driving action in the product groups.

I work very closely on a continuous basis with my colleagues up here to decide and to continuously revisit where to invest based on what's being incubated and what's going on outside; where not to invest; and in some cases where to de-invest, based on things that we've built, you know, that have been in the market for a while or may not yet be in the market but are not as relevant as they might have been when they were first envisioned.

Since coming to Microsoft three years ago, I've focused a lot of attention on our transformation toward services. I've done this because it was very clear to me that a very, very large industry shift was on its way, a transformation fueled by cheap computation, cheap storage and, most of all, ubiquitous broadband communications.

This transformation will bring us from a world of pure client software or pure server software into a world of not just pure services but also service-enhanced software, as we've heard many times today.

Also, this transformation will take us from a world where the dream was a PC on every desk and in every home into a world in which it won't be uncommon for families and individuals to have many, many PCs in their homes and in their lives, as well as many other Net-connected devices such as mobile phones, set-top boxes, game consoles, digital picture frames and so on.

And so during my first year here at Microsoft, I spent an immense amount of time on the ground with the teams. We first assessed our platform-level investments, making changes to their plans and realigning so that we were on track to building a highly capable, highly efficient, highly leverageable platform for services innovation that would benefit all the groups in the company.

Then at the app level, I've worked with the teams to help them conceptualize how they would use this new services platform to transform and to grow their core businesses in a way that was relevant to their market.

When I've worked with these teams, I've stressed three key principles underlying what I think are the common themes of this shift to software plus services. The first principle is that, on the client, we need to deliver value beyond the level of a single device.

As I said earlier, and as you heard earlier today, we're now in a world where the number and diversity of devices that we deal with on a day-to-day basis is on the rise -PCs and phones, game consoles, media players and the like. There's significant pain, and there's also significant opportunity in helping individuals to manage all these devices that we might own and in helping to get these devices to work together in useful ways and to get them together to work well with the Web.

Software and devices that operate in a stand-alone mode, kind of disconnected from the Net, will look increasingly isolated and less relevant as we move forward. And so teams across Microsoft have begun to reshape their software using services to enable seamless, cross-device experiences.

This is probably most evident to many of you in what we've done with Xbox for quite some time now, where the seamless Xbox plus Xbox LIVE experience has been the source of tremendous strategic advantage in that space. This concept of seamless software-plus-service experience has relevance to all of our software, including and especially Windows and Office.

We believe in a future, again, in many ways analogous to Xbox LIVE, in which Windows Live acts as a strategic extension to both Windows on the PC and Windows Mobile on the phone. You can think of this as the connected OS, Windows beyond the level of a single device or PC. How the OS connects to services and how it synchronizes with other devices are key. Your PC's config settings, your apps and their settings, your files and folders, are transparently synchronized across a mesh of PCs and other devices by Windows.

By removing the psychological burden of managing many devices, by making these devices feel more like smart appliances, by removing the worry about setting up a new or additional PC or laptop that you might purchase, I believe we'll ultimately see a significant opportunity for growth because of multiple PCs.

A similar opportunity exists for Office. You can think of this as connected productivity, productivity beyond the level of a single device, again, in many ways analogous to Xbox Live. We believe in a future in which Office Live acts as a strategic extension to both Office on the PC and Office Mobile on the phone.

The Office team is working on software plus services that seamlessly enables individuals to take advantage of the rich interaction capabilities of the PC and the spontaneity of the phone and the ubiquity of the Web. This will take Office and Office's relevance well beyond the PC into scenarios that just wouldn't have been possible without the software-plus-services approach.

So that was the first principle, the need to deliver value beyond the level of a single device. The second principle is that we need to deliver the power of choice for the enterprise. Stephen Elop talked about this earlier.

Most major enterprises today find themselves in the early stages of a two-stage infrastructure transition. The first stage is the consolidation of many dedicated application servers into a fewer number of larger application servers using virtualization to combine those workloads into a single high-scale box.

The second stage they're heading into is the shift toward leveraging utility computing services, a new kind of system designed for massive scale-outs, running on large redundant arrays of inexpensive commodity servers in the cloud. Both of these trends, consolidation and utility computing, are motivated by the same two things: First, to make the best use of expensive IT personnel; and second, to increase the agility of IT -agility in deployment, agility in management, deploying and scaling IT systems in just minutes or hours that might have taken in the past weeks or months to get up and running.

Earlier you heard Stephen and others talk about online services, Exchange Online, SharePoint Online, CRM Online. These are the high-level service analogs to on-premises server offerings. And to power these services at scale, we're bringing some of our most capable server assets to the cloud beyond those key building blocks, like SQL Server and BizTalk.

These online services run in Microsoft's own datacenters, and they take advantage of the new and highly efficient platform investments that we've made over the course of the past two years, investments that leverage a decade of experience running Internet services for hundreds of millions of consumers worldwide in MSN.

Our software-plus-services approach is to give enterprises the power of choice in selecting on-premises servers or services in the cloud or, in most cases, a mix of both, as appropriate for the needs of their business.

And so the second principle, the power of choice, puts us in a tremendous position as all major enterprises worldwide over the next few years progressively move to embrace the cloud in one way or another.

The third principle that I've been talking for several years now with people in the organization is one that targets developers, and it's one that I refer to as the trend toward small pieces loosely joined in how you build programs.

When I talked about my first two principles, software that spans multiple devices and software that spans from the enterprise into the cloud, you might have gathered that the nature of software development is also being transformed in moving toward a world of software plus services. Craig talked about this a little also.

Software on the front end is being transformed from being a single program running on a PC to seamless solutions that are in multiple parts: the PC, the browser and the phone.

Software on the back end is also being transformed from being a single program running on an enterprise server that scales in a scale-up manner to programs that are spread out across hundreds or even thousands of PCs running in a cloud-based datacenter that appears like one datacenter to the programmer, but is actually spread across the world.

So, what does this principle mean for Microsoft's business perspective? Well, many business ISVs and many VARs will be looking to move their applications and solutions to the cloud just like we have. For them, like us, this technology shift towards services represents a significant opportunity, a chance for them to deliver to their enterprise customers the power of choice within their own application or solution.

And so Microsoft's opportunity in this space is perfectly aligned with that of our partners to provide them with the platforms and the tools to make this transition, leveraging our experience as well as our substantial economies of scale in embracing the cloud.

And so, in summary, these three key principles -going beyond the level of a single device, the power of choice to the enterprise and a new way of delivering solutions for developers -these three principles will manifest themselves in all our offerings across all the markets that we serve.

Last year here at FAM, I said that we'd be releasing a good deal of this work over the course of FY '08, and we have. As I said, I'm very happy, very pleased, that Exchange Online, SharePoint Online, SQL Server Data Services, Office Live, Windows Live, came out progressively over the course of FY '08. And FY '08 was a tremendous start.

FY '09 will round out the story with some significant announcements, significant efforts that have been under way now that represent the investments we've been making for the past couple of years.

As I said earlier, a lot of what I do is pattern-matching. And the reason I'm optimistic about this approach and our investments that we've made over the past few years in software plus services is that I've seen this script played out before. Every major technology inflection point over the years, at least as long as I've been in this business, has yielded new opportunities for those who are able, willing and well-positioned to act on those opportunities -opportunities at the platform level, opportunities at the application level, and also opportunities at the integrated solution level.

Infrastructure shifts like this don't happen overnight. They take years to pan out. And I'm confident that the investments we made, starting nearly three years ago, investments that have just begun to emerge during FY '08, are laying a really solid foundation for growth moving forward for Microsoft, as well as our partners.

And I really don't have a whole lot more to say. I think I'd prefer more interactive dialogue if you do have questions. So let's open it up for a few questions right now.

COLLEEN HEALY: We'll open it up for questions for Ray. I'll just wait for the paddle to get to you so that we can hear it on the webcast. We'll start with paddle number two, please.

QUESTION: Thank you. Bill Wyman at ISI.

My question goes to complexity and the speed of response. I think your first services disruption memo was almost three years ago; I think October 2005.

RAY OZZIE: Right.

QUESTION: So can you tell us, at what point do you think the services platform, or at least something that's essentially usable to end customers, is going to be in some way finished or, you know, the customers and the business will see the impact? If you had told me that Google would have had a set of programmable APIs out before Microsoft to developer community, I don't think many people would have believed that. So tell me about complexity and speed of Microsoft's response.

RAY OZZIE: Okay. In many cases, the problems that we set out to solve -when we look at a trend on the outside, whether it be a trend in something that Google is doing or Apple is doing or some startup is doing, the way that I approach it is not necessarily to just react to a specific point trend. So the moment that Google Docs and Spreadsheets comes out, I don't rush to advise that we immediately come out with some response that looks exactly the same at it. I look at what our customers are doing within the markets that we serve and I say, "What can we learn from that, and what is the best way to apply our resources to that specific problem?"

From a platform infrastructure problem that you had brought up at the beginning, I will say that the problem that we are trying to solve is of a broader scope and is different than what you have seen our competitors come out with. Amazon has done a terrific job. They've done just a really, really good job at doing what they've done. I think we've all learned a lot from it.

What we -you know, when I look internally, we essentially have two problems. We have a number of internal properties, you know, that we've been selling as enterprise servers, and we wanted to make sure we created a services infrastructure that is usable by our search assets, by other high-scale online assets that serve hundreds of millions of people, and that serve our business customers who have an SLA requirement that's fairly substantial.

We wanted to do it in a way that the programming model was leverageable so that you had common aspects of that programming model when a developer was writing code in the enterprise or in the cloud. We think that that's going to be very valuable to the developers that we ultimately serve.

So the answer to when, I'm not going to make any specific product announcements today, but as I said, over the course of FY '09 you're going to see the entire strategy rounded out, and I think you'll be pretty pleased with what you see.

COLLEEN HEALY: All right. Number two, please.

QUESTION: Ray, it's Rick Sherlund. A year or so ago, we talked about whether this is incremental and additive or whether it's cannibalistic, as your existing business, and it wasn't obvious what the answer to that was. I'm curious now if you have a better answer for us. And also, you know, I hear a lot about these datacenters that you're kind of quietly building. It sounds like it's a pretty large number of very, very large datacenters.

Is this the infrastructure that you need to start turning on this ability for cloud computing to address the needs of the market? And it would seem that this is just a real enormous inflection point for Microsoft and the industry. I don't see that many companies that we think of as platform companies gearing up with the capacity in datacenters, the tools, the platforms for hosting not only your own applications, to hold yourself out to be able to host in an enterprise fashion a whole new generation of applications for the market, and whether that's just a very big inflection point for Microsoft in addressing new opportunities.

RAY OZZIE: I think it is a very, very significant transformation. The simplest way that I would explain it to my neighbor who isn't in the industry is that, you know, there's a computer on the desktop. We understand that. There's that computer in the datacenter, you know, that you walk by in your company. But there's a new computer that is available up in the cloud, and it is going to be transformational in terms of how people write and build solutions once they can assume that they can leverage that resource up there. It is going to be very powerful.

It's a big opportunity. I can't quantify that opportunity, you know, in margin and dollars and cents, but it is going to be a very significant thing broadly for not just Web developers but for enterprise developers and, you know, a new age of VARs and so on.

And, yes, the datacenters that we invest in, we are now at a point where we are forward -you know, we are looking forward as to -you know, it's the same datacenters that host Search and our MSN apps and our Windows Live apps, Office Live apps. And this platform infrastructure is also -this new platform infrastructure is also going out there.

We do careful staged investments. You have to have different -as you're expanding, you have to have different projects in different phases because there are different -you know, we have to have the footprint to be able to build at the right rate when the demand emerges. You don't want to overbuild too much in advance of the demand. But we're preparing for a fairly significant transformation.

In terms of how will it impact the business, I can't give you a lot more answers in that front. And I think that people like Stephen Elop could give you a much better answer for how he's framing it, you know, from the Office perspective and so on.

I think, at a macro level, I think it's going to -the way that our strategy is at an aggregate basis related to this power of choice, we're shaping our offerings in such a way that it gives those enterprises the ability to have the flexibility to go way one or another. So I don't see that having a negative. It may have a positive impact.

On the unmanaged side, on the individual side, again, there are some -there are different dynamics. We may be able to have broader reach. That broader reach may represent opportunity, where people in areas of the world where there's piracy right now, that may represent an upside opportunity and so on. But again, I cannot -I don't know enough data to actually quantify that right now.

COLLEEN HEALY: Paddle three, please.

QUESTION: I guess this is a little bit of a follow-up to Rick's question. So, you know, without getting into too much detail whether or not it's going to be upside to the numbers, can you at least talk a little bit about what kinds of models you're looking at? Obviously in the hosting environment there's a wide variety; you know, per SIP, subscription, et cetera. Maybe if you could give us a sense for how you're framing the business cases.

And then, secondarily, in some of the earlier conversations, the concept has come up that Microsoft doesn't always have a technology problem; sometimes they have a marketing and branding problem. How do you convince the market and the customers that you're going to be moving into the cloud, that Microsoft should be the platform play versus a Google and/or an Amazon?

RAY OZZIE: I think, on the -I'll answer them, again, in reverse order. I think, on that front, if we solve a problem for these folks, it will prove itself out in a positive way. Web developers -you can just look out there right now -are extremely pragmatic. They're very, very pragmatic. If something works for them and solves a problem, they're just going to use it.

And, you know, the onus is on us to prove, to show through what we deliver, that it's very, very valuable. And, you know, brand will -if there is a brand perception, for example, within the open-source community about Microsoft, they'll be a bit perplexed when they find out -when they see that the best way to run what they're trying to do is on our infrastructure. And I think that will improve. That will improve brand perception in that realm.

In terms of business models at an aggregate level, I think the high-level model that I would use is in the enterprise space. The costs of the service will be buried and embedded within the higher-level pricing of the offering. They're not going to see how many megabytes or, you know, megabits per second they got billed for. They will get a certain SLA level that's embedded in a higher-level offering, most likely.

You know, at the opposite end of the spectrum, on the consumer side, we have designed our infrastructure to support our large consumer properties. And therefore the cost must be low enough to support an ad-based model for those properties. So on the unmanaged side, that's probably the dominant business model in that realm.

For developers, though, for individual developers or for VARs, they will have a pay-as-you-go model in terms of, you know, how they will pay for how much of that infrastructure they consume. And again, at a high level, from a high-level perspective, margins will increase as you go up the stack in terms of value. So I would expect that the lowest-level computation or storage or whatever infrastructure is going to have lower margins than something at the level of a building block, like a SQL in the cloud, which will have lower margins than something at the application level and so on.

COLLEEN HEALY: Thank you so much. And thank you so much for all of your great questions, and sorry we didn't get to them all. We'll have another session at the end of the day and during the reception. So thank you so much, Ray. Thank you.

END

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