ANNOUNCER: Please welcome Chief Operating Officer for Microsoft Kevin Turner.

KEVIN TURNER: Good morning. It's great to be here, and I'm excited and honored to be able to share a little bit about what we're doing in the commercial business space, as well as I want to talk a little bit about competition, and set up our plan to grow share in some of the competitive situations that we have in the company.

This segment, or section, if you will, Bill Veghte is going to follow me with a Windows update. And then we'll break for lunch, and come back Stephen Elop, Bob Muglia, and then the four of us will do a Q&A to really package up, if you will, our commercial business, and our Windows business for you from a scheduling standpoint.

So as we get into the commercial growth and competing to win section, certainly I want to start with a couple of things at a macroeconomic level from a trend standpoint to give you some idea about how do we think about growth in the business space. And I put this chart together to be able to show you a few things.

One, we're going to talk a little bit about population and the shift to population in the emerging markets. And certainly that drives mobility, PCs, servers, services, as well as business growth, and that certainly pushes into our ecosystem, which Steve set up nicely the long-term approach that we've got on innovation which certainly is very important to us. And then you'll hear from the product group presidents throughout the day of the diversified product, services, and our portfolio, if you will, from a solutions standpoint.

I'm going to zero in, if you will, right around the geographic distribution and competing to win. And when you think about a couple of assets that we have that we're really hitting some stride with, one of those is our partner ecosystem. We've got about 645,000 partners in the Microsoft partner ecosystem that are a tremendous strategic asset for us as an organization. They provide all different services, and solutions for customers, and I'll tell you, we do, in my opinion have the most comprehensive partner ecosystem in the technology industry, and it's certainly a huge asset for us as a company, and one that we're going to continue to leverage.

The operational excellence slide side of this business, I shared with you a year ago about the scorecard and getting people rallied around a common definition of success, and we've made really, really good progress from the subsidiaries out in the world all the way back through corporate and the R&D process. And so we're really aligned as an organization from an operational excellence standpoint, and certainly that's through and through our performance review system, and all the way out into the field.

So these are really, as I think about the Microsoft advantage in the marketplace that makes us unique, and distinct, I think is very important.

Now, if we start at the macroeconomic trend level, let's start with population, and where are the people going to be, it's an interesting thing that we keep an eye on. If you just look at this slide you can see a couple of things. One, the continued population growth continues moderately across most areas, and two, there's a tremendous increase in the number of economically active people, specifically in Asia and Africa. And it's a very, very important shift that we watch closely, certainly from a PC standpoint, as well as a technology enablement standpoint, and one that we're going to continue to zero in on.

If you look at it, Europe is mostly staying flat to decreasing, the U.S. is increasing slightly, Latin America, a decent increase, but again, really big opportunities in the Africa and Asia markets. If you take a look at the world economies, and how does that relate to GDP, there's a couple of things we’re really watching in this space, that we think is interesting, as well. Certainly, the historical view with the U.S. being at the top, the U.S. will shrink slightly as a percent, we believe, of the world's GDP, but really some amazing changes begin to happen. China is really taking on more and more of the GDP and eating away at the percentages, as is India. India and China are both, for us, we're really seeing a lot of up-tick in that, and I'll share with you some of the results in what we call the BRIC countries in a moment.

Then if you really take a far out view and say, what does 2050 look like from an estimation standpoint, it is very interesting that Japan falls completely off that chart, and certainly China skyrockets to the top. So these are a couple of things that we look at from a long-term view standpoint.

Now, PC consumption, which is one of our big drivers as an organization, is also very important. And when we look at PC consumption certainly the global PC consumption, as you can see there, continues to grow, 13 percent last year, if you look at it, in our fiscal year, 9 percent growth in mature markets, over 20 percent in emerging markets, what a big opportunity for us as we continue to go forward. And certainly the U.S. as a percent of the total, that number continues to shrink, which is something we want to make sure that we keep an eye on.

When I think about how do we think about this PC consumption, I think it's interesting to look at it in a couple of ways. The '90s was really about one PC per household. And then when you take a look at the decade from 2000 on, it's really about one PC per person. And then when you think about beyond that, it's really about multiple devices per person. So that's how we think about, from a worldwide PC consumption standpoint, and that shift into emerging markets, as you can see here they've picked up around two points of share, as it relates to the percent of total over the last three years. And certainly we think that that will only accelerate.

Another key driver for us that we keep a close eye on is in the server area. And one of the analyst reports from one of the people in this room recently said that the number one thing that CIOs are going to spend money on this next year are going to be virtualization, and server consolidation. And we actually agree with that trend. We think that's going to be a red-hot opportunity, and I'll talk a little bit more about virtualization, as will Bob Muglia in a moment. But, certainly we think that data center refreshes are well underway. Green IT and power, and size reductions are so important throughout that we're seeing a lot of up-tick in that particular space, and certainly virtualization is going to be a red-hot area for us as it goes forward.

So as we see this, when we think about the Microsoft business, it's important that you also understand, we're a very balanced and diverse business. And this is one of the more important slides that I think you'll see all day, because it really shows what is the Microsoft business. And when you think about it, from a products and services standpoint, we have five big divisions.

So as Steve talked about, we go from the PC company, or the desktop company, to a company that is very diversified from a product and services standpoint. Then when you think about the customers, you think about selling the large enterprises, selling to small and medium businesses, the consumer aspect, and then OEM is a little bit funny for us, because there's quite a bit of consumer in OEM, there's quite a bit of small business in OEM, and there is some enterprise in that OEM number. But, certainly they're a big customer segment of ours.

Then you think about geography-based, if you look at that the U.S. and Canada is now only 45 percent of our total revenue. And so that's an important distinction for us, and so that we actually think whether it's good times or tough times, we are a business set up to be successful. And in tough times, we're really going to focus on growing our share. That is our entire business and operating plan this next year, is how do we gain share, and I'll talk more about that in a moment.

So when you get in, I wanted to share with you a little bit of the global numbers in the company, and what do we see from a global standpoint. We count it as big six, so we have six large developed countries, and you can see them here, that we really track. This past year they grew over 14 percent, which we think is a very healthy number, as you look at our big developed markets in the world.

When you take that and you pivot it a little differently, and say, okay, how did the Brazil, Russia, India, and China do. Wow, 54 percent growth in our BRIC markets this last year, and we still have a tremendous amount of opportunity, ladies and gentlemen, to continue to make progress in these areas.

I mean, certainly in Brazil, India, and China we have huge opportunities from a piracy standpoint, and we're going to continue to focus on that. But, our business in these markets is very, very healthy, and we're investing a lot in our geographic distribution, as well as all the different theaters and segments we have of our operations to make sure that we can take advantage of this tremendous opportunity going forward.

When you look at it, what are the other emerging markets that we have in the company? We grew these 21 percent, and this is with the BRIC extracted out. And some of the hottest markets we have in the world are in this space. Indonesia, Vietnam, the Czech Republic, Ukraine, Poland, et cetera, very, very good markets for us. Chile in South America, and several other countries down there, quite honestly, very, very strong for us as an organization, and one that we're going to continue, again, to be thoughtful about how do we take the products, and services, and solutions into these markets in a very strategic way. And that's really our focus form a global reach standpoint.

I also wanted to show you, in 87 countries around the world this past year we grew over double-digits, 87 countries. And so we think this is a pretty awesome example of the business opportunity that we have globally, again, reminding you of the broad, and diverse business that we have, as well as the geographic distribution, both being very strategic to us, particularly in tough economic times.

But I also thought you'd like to know that we had over 45 countries that grew over 25 percent, which is an incredible number for us as an organization, and points to the big opportunity that we have in the world as we continue to grow our business. And so, again, these are just some numbers for you to be able to get a feeling and a sampling of just how globally diverse we are as an organization. We have offices in 109 countries, and Windows certainly is available in over 96 languages around the world. So when you think about a billion people every single day using our software in some way, shape or form, the opportunity we have to go reach the other five billion people in the world, we think that is a tremendous growth lever for us. And so that's why this geographic distribution is so important.

Now as I pivot a little bit, and talk to you about competing to win, there are some very specific things that I want to show you from an operating standpoint that we're going to stay focused on. So when we think about our competitors in the commercial business space, this is the bucket that we put them into. Certainly, these are the main competitors, and we have several other competitors that I didn't put on this slide, but these are the ones, certainly, that I want to make sure that you know that we're getting into some competitive situations in a big way.

Let's first talk about winning the database. One of the things that we got recently, we think was a real gift, was that Oracle decided to raise all of their prices 15 to 20 percent. Now, if you look at this, this is list price against list price, and certainly we know they have a discounting structure, as do we, although I don't believe ours is as severe as theirs. But when you look at this from data warehousing to online transaction processing to BI, when you look at the price differential we now have in the database, it is an incredible opportunity for us to get in there and continue to win share with SQL. And we've got a new release of SQL Server coming out, that's a big opportunity for us to continue to compete and one that we're putting right in the crosshairs. And as economic IT budgets tighten up, certainly all CIOs and all business decision-makers, and IT decision-makers want to save money, and so this is a big area for us.

Certainly competing against Linux and open source, we've had some real success in this area particularly in the last couple of years. When you look at this past year, when we think about growing our shipments three times faster than the Linux and open source market, that is a big opportunity from a hardware shipment standpoint, and we're going to continue to show the value. And we're really getting the message out about the fraudulent perception of free in the marketplace as it relates to open source. IT pros and decision-makers are starting to get it, that it's not free, that there's a lot of TCO that goes along with that, and there's also substantial security risks that go along with it. And so we're really making some traction in this area, and we're going to continue to hit the gas and go more and more aggressive as it relates to winning share.

Virtualization, now this is an area where we are the underdog, we're the little guy in this particular competitive situation. Certainly there's a dominant competitor out there, but I want to show you with what we in the marketplace, and then one product that we're bringing out in the September timeframe of what is the Microsoft value proposition in virtualization going to look like. Again, this is list prices. Now, it's a big obviously 60,000 to 20,000 is a big delta, and certainly a good place to start from a competitive standpoint. But when this multihypervisor management tool comes out in the September timeframe, the advantage that we're going to have in the marketplace, this is important for you, the advantage that we're going to have in the marketplace is, for all those customers that own VMware, we're going to have one multihypervisor management solution that allows you to manage that VMware and the Microsoft solution at the same time. One management solution. So we'll allow those customers who have made that investment in another technology competitor's hardware and software, we're going to allow them to manage their environment, and our environment at the same time with a cross-platform management solution. And that's going to be very strategic for us in the marketplace.

So when you look at this, when we really rallied our sellers last week. We had, as Steve mentioned earlier, 13,000 of them together from around the world, this is, we believe, going to be a big bet for us this next year. And certainly I actually think this could be one of the hottest single products that we have in the history of Microsoft. So we're getting in the virtualization business in a big way, and this is where I'm putting the wood behind the arrow, if you will, as it relates to our investments in a go to market standpoint this next year, and you'll hear even more about it from Bob Muglia later on.

Let's talk about replacing IBM Lotus Notes. This past year, we sold in 4.86 million seats of our collaboration solution of SharePoint, Exchange Server, and Office into IBM Lotus Notes accounts.

If you take the last two years, ladies and gentlemen, we've sold in 8 million seats. This next year, I've got a goal for the field that's more than 5 million seats.

SharePoint is the hottest single product in the history of Microsoft, fastest to a billion dollars, and it is an incredible solution from a collaboration standpoint, and gives us a very, very good arsenal as it relates to competing in the commercial business space. And so we have great momentum in this space, and we're going to keep pushing and keep driving.

When you think about Google and the enterprise, there's a couple of things that we've really learned as we pivot to this. The questions we get back from CIOs are, hey, are they really committed for the long term, are they really ready for the enterprise. I mean, they've had some datacenter fires and they've had some latency problems and response time problems and outages -are they really committed to a partner ecosystem outside the advertising channel?

And is there a price, $50 per year per user, and what's the hidden costs around that? Well, you're going to need some third-party services and products, particularly around directory services and those type things, so it's not just the $50 per year, per user in the commercial space.

And certainly there are issues and trials and tribulations around privacy are well documented.

But I'll tell you there's a difference between their story and the commercial business and ours.

We had our Worldwide Partner Conference two weeks ago, and we had held back as an organization about really articulating what is the Microsoft strategy in commercial business for software plus services.

So, we really launched two weeks ago all the different things about, look, we are no longer not the leader in this space. We are the leader in software plus services for business. And we made a formal announcement. We've got big customers like Coca-Cola, Nokia and others that are signed up to really go after the Microsoft model in the commercial space for software plus services.

Now let me give you one important distinction that I want you to take away on our compete. The difference between our solution and Google's solution and Salesforce.com's solution in the commercial marketplace is very simple: Their strategy is, hey, let us host it, or there's no software as a service. Our strategy is, we have three different distinct business models. We have one which is our traditional model, the way we sell products today, if the customer wants to host it, they certainly -we will continue to enable that. And we actually believe for most companies there are certain pieces of data, certain customers or end users, or certain applications, or all three that they're going to want to centrally manage.

The next opportunity we have is, we've engaged and really enlisted our big partner ecosystem to come to the table. So we're actually making it available for partners to host, and you can see the products on there, from SQL Server to Windows Server to Exchange Server, et cetera. And we've engaged and enlisted our partners to be a key resource in this software plus services area for business.

The third alternative is, we have some big customers that have come to Microsoft and said, hey, Microsoft, we want you to host it. These are the areas that are in your sweet spot, you should be good at these things, and so we're building the datacenters, building the capability, and certainly we are hosting, as I said, for some very large customers in the marketplace today, and we're going to have three distinct business models. And the key is that when we talk to a customer, our business proposition is about choice. You decide. I actually think in most companies they're going to have a hybrid of two or all three of these specific opportunities in the marketplace, and that's why I believe that's an incredible competitive advantage for us as we go forward.

And so when you think about winning in FY '09, ladies and gentlemen, for us it's all about growing share. Sam Walton told me a long time ago, he said, "Kevin, in tough economic times there are two types of companies." And I said, "Yes, Mr. Walton, what would that be?"

And he said, "Well, the first company are those companies that decide to participate in tough economies, and tough economic times." He said, "And for sure they absolutely, it will become a self-fulfilling prophecy for them, and it will come true." He said, "But there there's another type of company, a rare company, a distinct company that says, hey, I'm not going to participate in a tough economy, or tough economic times, and when you choose to make a decision to not participate, you will invariably grow share." Because he told me that for sure one thing is for sure, when you have a challenging economy, you, your share will not stay the same, you will either grow share or lose share, but the certainty is it won't stay the same.

And so what we've geared our operating plans in this area around is, how do we get out and compete effectively, factually, respectfully and all those things, but aggressively. We want to be intelligently aggressive as it relates to growing our share in FY '09, and that's what you're going to see from this past year and into the next year.

And so as I set up our Windows opportunity, and before your lunch break, I would like to bring out Bill Veghte, our senior vice president of the Windows Group, to give you an update on Windows. But, again, the take-away from me is, we're going to win share in FY '09. Come on out, Bill.

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