Silicon Valley Speaker Series: Windows Embedded: The Next Generation of Smart, Connected, Small-Footprint Devices

Editor's note: Formerly code-named Media2Go, Windows Mobile software for Portable Media Center is the official name for its next-generation personal media software. Microsoft has also discontinued use of the code name "Palladium." The new components being developed for the Microsoft Windows Operating System are now referred to as the Next-Generation Secure Computing Base for Windows.

CARTER MASLAN: Good afternoon. I'm Carter Maslan. I'm with Microsoft in the Silicon Valley campus here, and thanks for joining us for our October session of the Silicon Valley Speaker Series.

Today we've got Scott Horn, who's Director of Marketing for the Embedded Devices Group, and he's going to discuss the trends in embedded systems and the future of smart connected devices for industries such as consumer, commercial, mobile and networking electronics.

Scott has led and worked on a number of desktop and embedded tool products and developed software professionally on a number of embedded and computing platforms in the telecommunication industry. The products ranged from Microsoft Office Developer Edition to tools for Windows CE to product development for developer tools for many Windows and Windows CE device efforts, including the handheld PC, the Pocket PC, the Auto PC and many others.

Scott earned a bachelor's of science in Information and Computer Science from Georgia Tech and an MBA from the Wharton School at the University of Pennsylvania.

So it's my great pleasure to introduce Scott Horn. (Applause.)

SCOTT HORN: Thanks, Carter, appreciate it.

Good morning. It's nice to see everybody here. I see a few familiar faces. So, as Carter mentioned, we're the Embedded Devices Group. We're the nice folks who bring you Windows CE, Windows XP Embedded.

I always love audience participation. Before I jump in, how many people here are actually involved in building devices of one sort or another, just a show of hands? OK. How many people aren't doing it but are kind of interested in thinking about it? OK, good.

So what I'm going to talk about today is I'm going to discuss some of the trends we're seeing, talk about our technology strategy, discuss our business model and I'll talk specifically about some of the things we're doing around a certain class of devices that are a great example of where we're going and where we think the device space is going.

Just to put it in context, the Embedded Devices Group, as I mentioned, does Windows CE, Windows XP Embedded. We are part of the mobile and embedded devices division. That division includes Pocket PC, smartphone, Windows Automotive, and then within our group we have responsibility not only for the embedded systems platform but also for things like the Media2Go portable media player, retail point of sale systems, thin clients, residential gateways, phones. We keep coming up with new things to go do every day. So we are part of Windows as well, so it gives us a lot of opportunity to work with the folks on the PC operating system.

So what we're seeing over the last few years is a real sea change in the way the embedded market goes and, in fact, we tend to think about it less and less as embedded systems and more and more about devices. What we're seeing on a high level is that the complexity of these devices is dramatically increasing, and that's across a wide range of industries: consumer electronics, industrial systems, building automation systems, all kinds of devices. What we're really seeing is that as these devices need to do things like do wireless networking, security, advanced multimedia, both capture and playback, and also as they need to do things like have a great experience with the PC or a server, the complexity of these devices is increasing and that's having a couple of impacts.

One is that we're seeing that the adoption of 32-bit and above processors is dramatically increasing. What you see here is some figures from VDC, Venture Development Corp., discussing what percentage of the overall embedded systems market will be 32-bit and above.

Now, we think this is a good, good thing, given that we chose to focus on 32-bit and above only. We feel that those processors have the computing power to actually run the operating system and do all of the things I just discussed.

So this is good. This says, from our standpoint, the market we can participate in is growing. It also indicates that, again, these devices are getting more powerful; in fact, it's interesting when you look at what a Pocket PC has today in terms of computing power relative to the PC of ten years ago, or even of five years ago, it's pretty dramatic. I mean, you can get a 400 megahertz -- sorry, I'll get a little techie here for a minute. You can get a 400 megahertz Pocket PC today and that's, what, 20 times the power of what you could get ten years ago as a PC? So, it's pretty dramatic.

The other thing we're seeing is, given the complexity of these devices, we're seeing a real shift from companies that previously developed products in house using in-house software to increasing usage of commercial, off-the-shelf operating systems.

And we're seeing two reasons for this. One is that, as the complexity increases, companies increasingly don't want to be on that technology curve. It's really expensive. I could tell you, being part of a company that does operating systems for a business, it's a pretty expensive business.

The second thing is that companies are increasingly getting feedback from their customers that their customers buy their products based on what those products do for them from an application and service experience standpoint. Customers don't buy a portable media player or stereo equipment or a factory floor system based on how good the networking stack is or how real time the kernel is. They just expect that stuff to work. It's the overall experience.

And it's kind of interesting, because I had an "Aha" experience around this. About 24 months ago, the number two company in the world that does building controls, somebody called Johnson Controls, called us up and said, 'We're interested in using CE and XP Embedded.' And they had traditionally done in-house systems. And I asked them, I said, 'Why the sudden shift?' And they said, 'You know, we just got our latest hardware reference board from our supplier. We realize we'd have to spend all this time porting over our software, getting the drivers to work, getting the networking to work and we suddenly stepped back and we said, wait a second, our customers pay us to manage buildings well. They want their buildings to run. They want the heating, the ventilation, security, the electrical just to work. They don't care about the networking stack. They don't care about the kernel.' And they switched.

And we're seeing that happening across a broad range of industries, where increasingly the embedded device manufacturer says, 'I want to focus on what differentiates my product in the marketplace. I don't want to do this other stuff. I'd rather use off-the-shelf and have somebody else investing the engineering resources in it.'

Now, from a device perspective, we're seeing a few things here -- so that's the overall industry perspective. From a device perspective, we are seeing devices become smarter. And what we mean by that is people interact with them in a much richer fashion. So you look at the phone experience, where you take the traditional analog stationary phone of the past that just did voice, and now that phone is mobile, it does voice and data, it potentially has applications that run on it, and you're interacting with it in a variety of ways, including using it with other devices.

We're also seeing devices become more connected. We started discussing this about three years ago, four years ago, when we first really got serious about the embedded space, and this is more true today than it was even then. We don't see anymore the days of the device that just sits in the corner by itself, doesn't talk to anything. Whether it's talking to the Web, other devices, PCs, servers, increasingly that's a requirement, and that again drives that complexity, as well as the positive experience for the customers that buy these products.

And then the biggest shift we're seeing. Particularly in consumer electronics, we're seeing this shift, quick shift, towards digital. A few years ago, it was consumers translating audio to digital, but now we're seeing increasingly things like content, like pictures, music and even television are often captured digitally. And what's happening now is in all the discussions we have with consumer electronics companies, they're increasingly seeing the demand from their customers to leverage these digital formats, which often are PC formats.

So almost every consumer electronics company we meet with today talks to us about, 'How do I work with the PC?' And that's something we're spending a lot of time thinking about, and we've got a few examples we have here we can show, as well as many others. We're seeing this on a broad basis, but particularly in consumer electronics.

So this is where we see both the industry and the devices going.

Now, in terms of our strategy, our technology strategy, we have three key bets. Number one is that we believe in having a consistent, single platform for in the case of CE and also another one in XP Embedded that enables embedded device manufacturers to do a wide variety of things. We don't believe in having a platform for industrial automation, a platform for medical, a platform for consumer electronics.

And the reason we don't believe in that is because we think it's really hard to predict what the needs for a particular space are going to be. In fact, what we're seeing is we're seeing technology needs jump spaces. So, for example, we put user profiles, which is something that's been available in the desktop and the consumer space for years, we put that into a version of Windows CE several years ago, based on feedback from our industrial automation customers who had the need to actually switch user log-ons on the fly on factory floors that were running 24 hours a day.

Later on, you'll see an example of a technology actually kind of jumping into another space and being used in an unexpected way.

So, we truly believe in providing a platform, a rich platform that does multimedia, security, networking, browsing, but providing it in a componentized fashion so that device manufacturers can pick and choose whatever they want. And, in fact, Windows CE and Windows XP Embedded are designed to do a bunch of different things. There are no user interface standards. There are no requirements around them. We deliver them as components that companies can pick and choose whatever they'd like.

The second key point, not a surprise, given what I just said a moment ago, is that we fundamentally believe that devices need to be integrated. And it's not just integration at the wired or wireless protocol level; it's in a much richer fashion. If I'm working with factory floor systems, can I get the data off the robotics devices or the factory lines into the back office so that the business management of the company, of the manufacturer, can actually get real-time data on how the factory floor is doing?

If I'm working with a bunch of devices, if I have a bunch of devices in my home, can I easily manage that collection of the devices, can I update them, can I do things with them?

The same thing at retail point of sale systems. We're increasingly seeing that companies want the ability to capture data at the point of purchase, aggregate that in a central fashion and make decisions about in-store, regional as well as national demand. And we're seeing more and more of this. So again, it's not just physical connectivity; it's actually information connectivity as well.

And then the last point is probably what differentiates us the most in this market, is that we fundamentally believe that device manufacturers increasingly will need and will want to differentiate their products based on the basis of an application and service experience.

That's what I said a moment ago about consumer electronics, building automation. These are customers that are saying increasingly, 'We have to invest our scarce engineering resources where our customers are willing to pay extra value for our products.'

And this statement, seemingly simple, has lots of implications. When you're looking at a device platform, for example, if you believe in this point, well, you should be asking what is the application service creation story for this platform. In our case, what we've done is we've made an end-to-end platform and tool investment where we've said we're going to enable six million Visual Studio developers who are using Visual Basic and Visual C++, C#, et cetera, we're going to enable that entire community to write applications and services for Windows CE- and Windows XP Embedded-based products, using the same development environment, the same programming model.

So we've created this end-to-end tool chain where you can create a device and then you can easily, using Visual Studio, write applications and services for that device, whether you do it internally within your own company or whether you want to create a platform that enables third party applications.

Now, in terms of business models -- so that's the strategy. Our business model is built around the strategy. Our fundamental goal is to get a lot of devices out there, a lot of interesting, compelling, exciting devices. That means lots of different devices, that means one of those particular devices.

So we have a business model that we believe aligns us with the device manufacturers around that goal. Number one is if you're going to have a platform you want to enable as many people, as many companies as possible to participate on that platform. So we have widely available, very inexpensive -- in fact, they're the most inexpensive tools in the industry, development tools. They're one price, everything we have, and again none of that this platform for this step, or for that. Everything we have, you can build anything you want, as much as you want and, in fact, we make these available online as well.

The second part is that we are not in the service, the systems integration business. Systems integration is about companies that help embedded device manufacturers integrate their hardware and software and help them get to market. We bet on our partners for this. We have a great partner network. We supply them source code, as I'll talk about. And we've chosen on our own basis not to be in the services business because we believe that our customers -- and they've given us this feedback -- that our customers fundamentally need to get to market quickly. And if you think about services as a revenue stream, in some ways if you're in the services business, your goal is not to have them go to market quickly. You want to keep that service engagement going, you want to do as much as you can. We've decided that the best alignment we can have with our customers is not to be in the services business.

And then the last part is what we characterize as the shared success revenue model. The vast majority of our revenue stream in this business is around runtime royalties. What that means is that we don't make any revenue until the product actually goes to market and only if it's really successful, which is exactly what our customers want. They want to get to market quickly, they want their product to be exciting to their customers and they want to sell a lot of them. And we have exactly the same goals, and the feedback we get on this from our customers is very positive.

So we have two products in the family and this is about as technical as I get here. I took out the technical view. I'm happy to answer questions afterwards, which we do have a Q & A. We have two products in the family. One is Windows XP Embedded. The other is Windows CE .NET. Now, Windows XP Embedded is a componentized version of the Windows XP Professional desktop operating system, about 10,000 components. Nine thousand of those are drivers, so it's the same drivers you get when you use Windows XP at home or at work, and you plug in a hardware peripheral, a keyboard, a mouse, a new monitor and XP just detects what you have and says, 'Great, I've got the driver.' Now, all those drivers have been tested, they've been written by the hardware manufacturer and they've been tested.

So one of the benefits here is that if you're building a device that looks a lot like a PC but not exactly, but it looks like a PC in terms of using the PC processor architecture, using PC hardware. You have a desire to leverage the PC technologies, the latest technologies from the desktop operating system, Windows XP Embedded is an excellent choice for that. We include all those components, we include all those technologies. We also provide a toolset that enables people to pick and choose what they want out of that component set and then they can extend that by adding their own components as well, replacing our components, adding their own.

And again, no standard user interface, no requirements of what devices look like. In fact, there is an amazing variety of devices built out there in XP Embedded as well as CE .NET.

So XP Embedded is about building devices where a company says I'd like to build something that leverages the economies, the cost economies around widely available PC hardware.

Windows CE .NET, on the other hand, is for building -- really the sweet spot there is for mobile and small footprint devices. So these potentially could be things that kind of look like a PC, but what we find is that companies tend to use it for portable devices and devices that are on other architectures, other processor architectures, devices that require hard real time. Hard real time essentially says the software guarantees a response when you do something to the system in a certain amount of time. In areas like robotics, clearly it's kind of important. If you're painting a car, you want the robot to listen when you tell it. So we added things like hard real time and we also have a number of technologies around power management, wireless and also PC synchronization.

So that's the two products in the family.

Now, in terms of some of the recent changes we've made, we've done a number of things recently around the product, and a lot of these are very exciting, a lot of these are in response to what we're hearing from customers and partners.

Now, in the embedded systems space, often software access is the key thing. And people often ask us, 'Wow, you do source access for Windows CE, why do you do that?' Well, the interesting thing is that, given the difference in these devices, I mean, you see a couple here, this is a sewing machine built on Windows CE .NET. This is actually a home security robot sold in Japan by Fujitsu. It actually moves around a little bit. Oh, maybe not. Not powered, okay.

So these are devices that are built on CE .NET, and what you see here is that there isn't a need for application compatibility like there is in the desktop. If you buy a Windows PC an you buy a Windows application, your expectation -- actually you not only expect, you demand, the application just runs. So there needs to be consistency around the platform.

In the case of devices like this, people don't take their sewing machine application or run it on their robot, run it on their PDA, run it on their stereo equipment, so there's a lot more flexibility because there's a lot less of the need for application compatibility.

The other thing about embedded systems is that often the developer is creating a device on completely custom hardware. It actually makes for some interesting support situations where we have a customer calls us up and he needs help with a product. We've never even seen the hardware, and in some cases that hardware is the only one of its type in the world, maybe a prototype, so it does make support rather interesting and exciting.

So what we've done with Windows CE is we've created two levels of programs. First, we have something called the "premium source program," and this is the so-called Windows CE Shared Source Premium License, and what it does is it enables device manufacturers, CPU vendors and some of our integrator partners to have access to all the Windows CE source code we can provide, so that's everything we've written or everything we have rights to, because we do have third party contributions to Windows CE.

And what we do in the case of device manufacturers is we enable them to make changes to that source code and ship it in their products. So companies like Mitsubishi and NEC and Toshiba and Casio, Samsung, LG Electronics, these companies actually have source licenses to Windows CE where they can change the source code to help them differentiate their products and, in fact, we already have companies today shipping products based on changes they've made to Windows CE.

We also in the case of CPU vendors go further and give them access to the compiler source code as well, and we invite a number of them to actually have engineering space in Redmond co-located with the Windows CE team, and we're getting their detailed feedback on how to optimize Windows CE for their architectures. So it's pretty much a who's who of CPU vendors who actually have offices up in Redmond. They have their own version of the source code, they're making changes to it and then we're working with them collaboratively.

Now, the great thing about that is, as we improve the operating system platform based on their feedback, that benefits everybody who uses Windows CE -- companies, you know, the Samsungs, the Siemens, the Sonys, all those, and also it benefits anybody who buys a Windows CE product based on the platforms based on CE, Pocket PC, smartphone and so forth. That's premium source.

I'll take questions at the end. There will be a question and answer period.

The second program we have is we do have a program for widespread community source access. We are a big believer in having a great developer community. Given the complexity of the space, enabling people to help themselves, help others is a thing we do. So we have a program called the Windows CE Shared Source Program where we put much of the operating system, the Windows CE operating system in the box, so to speak, and we make it available for free download. So anybody can go up there, download the source code. It's a one-page license. You can change that source code, share it with others as long as you're doing it for noncommercial purposes. So if you're a professor, a student, you just have an idea, we'll let you go up there, grab the source code, includes the kernel, includes the device drivers, includes networking stacks. Now, with the latest version it includes the user interface code. You can go up there, change it, share it with others.

The other thing we did with the 4.2 release, which is the latest version of CE we released just earlier this year back in June is we also expanded our definition of noncommercial. So with the Shared Source Program we enabled people to share source with others. We heard a request from the community and the community said what we'd like to do is actually create device images, the software that lets you run the device, and we'd like the ability to share that with others.

So what we did is we've expanded with Windows CE .NET 4.2 the licensing so now you can go up and get any version of Windows CE, including the free versions, create a device runtime image and share that with as many people as you'd like as long as you're not charging for it or you're not bundling it with something you're charging for, such as hardware. So again we're continuing to expand in the community.

The other area where we get lots of questions about, given some of the spaces I've mentioned, like industrial automation, robotics systems, consumer electronics, is about reliability and we think we have a pretty good platform. We're very excited about it. We do publish a lot of reliability figures from our testing.

But we've also come to realize based on partner feedback that reliability is a system condition. The software is a key impact driver but it's also the software/hardware integration, how reliable is the hardware.

So in response to requests from customers and partners, we recently announced a third part certification program for hardware and CPUs. Companies can go to the NSTL testing laboratories, get it tested and then we have a whole design center online where anybody can go up there, they have a Web page and you can go up there and see which pieces of hardware are certified, which CPUs, which processors are certified.

The other thing we did earlier this year is we also announced the first and still only program in the industry for long-term support. So one of the things we announced is we stood up and said for up to seven years, with option for up to ten years from the release of any version of CE or Windows XP Embedded we will support those operating systems. And again we're the only ones ever to stand up and say, "Hey, we'll be here to support you that many years later." And if you think about the needs of these systems, these systems I've mentioned are deployed and out in the field for many, many years.

The other area that's causing a lot of discussion in the industry lately is really around costs. We've gotten two big pieces of feedback from customers. One is that we have a set of customers who already use our products today: Samsung, Siemens and others, who in their cases they're doing multiple products on Windows CE, they're doing multiple versions. And what they came to us and said is, "We really like" -- in some of the cases they said we love CE -- "we really like it, we like the tools, we like the platform, we like the long-term support, but we have some products in our product line that don't require everything Windows CE does, don't require multimedia, don't require user interface, don't require browsing. So, Microsoft, if you could provide us a lower cost option for a subset, a licensable subset of the platform, we'd be very interested in using that across a broader product line."

So what we did when we announced 4.2 is we created a new very low-cost license called the Core License. It's available through any of our channel partners worldwide. You can walk into a channel partner, and for an estimated retail price of $3, I say estimated retail we can't really set channel pricing, but for around $3, you can walk in and say, I want to buy one unit of Windows per product. And since our business model is around single price, it runs on royalty, it goes down dramatically in volume, you can imagine that for $3 it gets down there pretty quickly. It's a steep volume curve.

What we're finding is that this is opening up entirely new markets for us. We have people, particularly in Japan, some electronics companies knocking on our door. We've got companies in more of the consumer product space around things like Gateway coming to us and saying, wow, I want to take a look at this. In fact, a couple of weeks ago, about three weeks ago, the Microsoft Hardware Group shipped a new wireless access router product that is based on CE.NET 4.2, that's $99. You can go buy it on Amazon. In fact, we'll be raffling one of those off today.

So, that was the first thing, provide us a lower cost option, and we did that. We also enabled people to get our evaluation version, our evaluation edition for the first time via the Web. Traditionally these things have been so large that required a DVD, because of all the different processes for it. What we did about a month-and-a-half ago is, we made the evaluation edition, which are identical to the full product in every way, but they're time limited. You've got 120 days to do whatever you want, create images, add components, but just only for 120 days. What we did is, we made those available for free download on the Web. Now those are available, in addition to being available for the cost of the CD and the shipping and handling.

And then the last part, which seems to provoke a lot of interest, is that the second piece of feedback we got from customers was, help us think about engineering cost, help us think about the total cost of building an embedded device and bringing it to market. The thing is about the industry that there are a couple of unique characteristics I probably should touch on at the beginning in the industry. Number one is that the device cycle, the device creation cycle is approximately 18 to 24 months. So, it takes, on average, up to two years and often it's more, sometimes it's less, up to two years to actually build a product once you start on it. That's pretty expensive. The second thing is that there aren't really corporate standards yet around device platforms. What you see as a consequence of that is that decisions around which software platform to use for a device are often at the project group level.

The consequence at that point is that also what you find is that there is very poor information around making cost tradeoffs. In fact, most companies have no formal framework whatsoever for really thinking about cost. So, we had a request from a number of companies, and they came to us and said, help us establish some sort of framework for thinking about total cost development. Not only the run-time cost, but development tool cost, how much does it cost to actually build or buy things that are part of one platform but not part of another? How much does it cost to maintain and support a platform? And so on.

And what we did is, we worked with a company called Embedded Market Forecasters, it's a company that now has been around 20-plus years specializing in embedded systems, and we funded a study where they went off and did the research themselves, and they compared the experiences of embedded device manufacturers using Windows CE, Windows XP Embedded, and Linux. And what they found, as you can see here, is that companies using CE and XP Embedded had a lower total cost of development, it was actually 75 percent, than companies using Linux. There are a lot of reasons around that. They also found that companies using CE and XP Embedded got to market over 40 percent faster on average. Now, the white paper itself is free, it's available on EMF, Embedded Market Forecasters, Web site. If you're interested afterwards, I'm happy to provide more information afterwards.

Now, I kind of want to switch gears a little bit. One of the questions we also get is, what is Microsoft's device strategy? And I'll discuss that over the next few moments. The first thing is, all the devices are based on a consistent set of operating system platforms, XP Embedded and CE.NET. We also make investments to enable Visual Studio to target these devices. And there you'll see we invest in an ecosystem, that's partners, that's developers, that's training, a whole set of things we do.

And then, from a Microsoft perspective, we have a number of different strategies for entering markets depending on what the market opportunity is. So, starting at the left, in the case of a Pocket PC or smartphone, that's a situation where we see an opportunity to create an application platform. And what we do is, we invest in a big way in creating a platform that has third party applications, that has an ecosystem around it, not necessarily the device, because it's an opportunity that is driven by application. And in that case, the business model is very similar to the PC business model, where you need application compatibility. There's differentiation around that, but you need application compatibility. And in that situation, we do a lot of work not only with manufacturers, but software developers, consumers, line of business developers, enterprise customers.

If you move one segment to the right there, those are situations like Smart Displays and Media2Go, where we see an opportunity to catalyze an exciting user experience leveraging some of the technology applets we have.

How many people have heard of Smart Displays? A few hands. How many people have heard of Media2Go? OK. The Smart Displays are this idea of taking the PC experience within a home, and making it portable. You can have a detachable monitor that you can detach and walk around the house. You have a Web pad. Media2Go is a new device we introduced last year and will be bringing to market over the next year. It's called Media2Go, a portable media player that enables consumers to take all of their Windows XP digital media, pictures, music and recorded video, take it with them on a portable device with a very nice color screen, very nice playback, great storage, great synchronization with the PC. Those are both examples of things that are not application platforms, but it's a user scenario that we can catalyze. In that case, we do at some level demand generation, but a lot of the work is with partners.

Then, as you move to the right, the rest of those spaces are all spaces where we essentially partner with device manufacturers. We go in, we understand their needs, we assemble the necessary collection of hardware and software partners to create a great solution that we can collectively bring to market. And what we do in those cases is, we offer a brand, Windows Powered, but it's voluntary to the partner. They don't have to use it if they don't wish. And here you see some of the other businesses that we're heavily engaged in. Automotive has actually a separate group within division, IP-based set-top boxes are a big focus, actually an area where we're seeing quite a bit of growth right now. We have a number of exciting deployments in Asia and Europe.

Gateways, I talked about the Microsoft Hardware Gateway. These are wireless access points, DSL routers, cable modems. We're seeing a lot of energy around that. Digital products, both digital media receivers and portable products. Then, Voice over IP (VOIP) phones, which we'll show you in a few moments, as well as retail point of sale being a big business, one that was mentioned in the earnings release from Microsoft yesterday, as well as thin clients. And then, of course, we have a broad swath of building automation, industrial automation, and medical systems.

So, again, the net take away is it's all based on an operating system platform, and depending on the needs of the device category and the opportunity, we will make different levels of investment.

What I want to do is actually show an example of where we think software can add value to a device, because the key thing with all those categories to the right is, we focus on categories where software can really add value to the experience. We don't go in otherwise, we think it's just something that's kind of a commodity category. Voice over IP is one of those categories, and Voice over IP is something that's attracting increasing interest. It's this idea of combining voice and data over an IP connection, you actually use the Internet to make phone calls, and especially combining things like video and voice.

What we're seeing today is, we've talked to a lot of enterprise customers, we've talked to telco companies, and there are three key challenges. One is that deploying client server solutions around voice is very challenging. Many of the telecommunications pieces of equipment to do voice have proprietary protocols, so only their servers work with their Voice over IP phones. So, we're hearing a lot about that. People want the ability to mix and match. We're also seeing increasingly that enterprise customers, where it's easily deployed first primarily in the enterprise, they have this need to not only have voice and data, but they also want the ability to combine it with applications, line of business applications, such as inventory management, sales force automation. And how do they do that? And then, the last point is that, as the complexity of these devices increase, you have to update them, you add applications to them, IT groups within companies have to manage these devices, and how do they do that is a challenge.

So, with CE.NET 4.2, we introduced a solution as part of 4.2 that enables a really compelling Voice over IP phone experience. Number one is, we provide the CE platform itself, we invested in things like calling middleware so you can do call transfer, call forwarding, call logging. We also provided integration with our Real-Time Communication Server products. We're also put in a bunch of technologies such as the .NET Compact Framework that enable companies to easily create applications and deploy them. And then, finally, we have a whole set of technologies that are part of Windows CE already for managing these devices remotely.

So, all these things combined make voice very exciting. So, what I would like to do at this point is show you this one. I'll bring up Balz Wyss who is a product manager in Embedded Group.

Let's take a look at what you've got.

BALZ WYSS: OK. I'm very excited to show you a couple of cool scenarios, and devices. And as Scott mentioned, Windows CE is very flexible and customizable, and you'll find it in various devices -- various voice devices that is -- as well as other device categories, and you see some of them right in front of you.

Let me first real quickly explain the set up before we actually show you the device. On the right side, we have a regular XP laptop with Windows Messenger, you can see it on the screen over there. That's the type of device you probably have at your office, or probably at home as well. On the left side, what you see on this screen, this is a Windows CE 4.2 Web pad from ViewSonic with our voice solution on top of it. They're both connected to a Gateway from our hardware group also running on Windows CE.NET 4.2. And then, below the table, we have Windows Server 2003, on top of that Live Communications Server, which is call control and call handling to actually make these calls between the devices. We also have some simple data collection devices which we'll show you a little bit later. And this phone is also Windows CE 4.2, just to show you how advanced, sophisticated voice phones can look. But, again, it doesn't have to be the form factor phone, it can be any type of form factor. Voice for Microsoft is a very horizontal platform, not bound to the phone as a form factor.

Now, what we're going to show you is a chocolate company scenario. Scott is the salesman, and Scott has just received an e-mail with an order for some Belgian chocolate.

SCOTT HORN: So, what I want to do is, as the sales manager for the company is, I want to check and see if we have it in stock. So, what I will do is, I'm on my laptop, as Balz mentioned, and I'll go over here, and I'm going to click on the warehouse using Instant Messenger, and I will start talking.

BALZ WYSS: All right. On this side, I'm at the warehouse, and I see Scott is calling because I have Caller ID, and I will answer it because it's our sales guy.

Hey, Scott, how are you?

SCOTT HORN: Hey, Balz, how are you doing?

BALZ WYSS: I'm fine. Thank you.

SCOTT HORN: So, I've just taken a big order for Belgian chocolate. The customer says they really want some high end chocolate. I want to make sure we actually have that available in the warehouse, because they're very excited about getting it quickly.

BALZ WYSS: Well, let me put you really quickly on hold, and I will check our inventory. How's that?

SCOTT HORN: Sounds good.

BALZ WYSS: OK. I put Scott on hold, I press the inventory button, it launches a .NET Compact Framework application, makes an immediate hookup to an SQL Server, and brings me back the current inventory. I'm not sure whether you see this here. Unfortunately, we don't have any Belgian chocolate anymore, that's the top line, it's already sold. But we have some Swiss chocolate, at least according to the inventory. So, let me check and see. I'll pick one of these items. It looks tasty, doesn't it? OK, so that one is Swiss chocolate. I put this on hold for Scott, and I'll ask him whether that's okay with him, reserve this, confirm this, okay. I go back to the dial application and resume the call.

Hey, Scott. Are you still there?

SCOTT HORN: Yes, been hanging out.

BALZ WYSS: OK. I checked our inventory here at the warehouse, and it looks like we do not have any Belgian chocolate. However, there's some really tasty Swiss chocolate, will that work for your customer?

SCOTT HORN: I don't know, is Swiss chocolate as good as Belgian chocolate?

BALZ WYSS: Obviously, come on.

SCOTT HORN: It's high end chocolate, right?

BALZ WYSS: Absolutely.

SCOTT HORN: OK.

BALZ WYSS: All right. I put this on hold for you, and I'll present it to you in the next couple of days.

SCOTT HORN: Great. Thanks.

BALZ WYSS: I'm going to hang up here now, and in the next scenario we're going to show, we're going to switch places. We're actually going to go to the store. So Scott, in the meantime, sold the Swiss chocolate to a retail company called ABC, and he's now the store manager of this retail company.

SCOTT HORN: So, I'm officially walking the shelves of the store, and I notice that when I get to one of the aisles that all the chocolate is gone. So, this is a product from Symbol, and Symbol is the leading barcode scanning company out there, and what they will do is, this uses power management, this uses the mobility, as well as WIFI 802.11. What I will do is actually scan, check it out, and I've got a little application here that says, well, there may be some more in the back. Symbol actually added push to talk walkie-talkie capabilities, so I'm able to talk to my inventory manager in the back room and say, hi, Balz.

BALZ WYSS: Hey, Scott, how are you?

SCOTT HORN: Pretty well. Hey, I'm out here checking around, I noticed we're out of Swiss chocolate, I was just wondering, would we happen to have another pallet in the back room?

BALZ WYSS: Let me check. I think there's some Swiss chocolate here, I'll bring it right out, which aisle are you in?

SCOTT HORN: I'm over in aisle five, it would be great if you could have the folks back there bring it out, and get it restocked.

BALZ WYSS: I'm right there.

SCOTT HORN: Fantastic.

So what you hopefully see here thanks a lot, Balz.

BALZ WYSS: You're welcome.

SCOTT HORN: So what you'll hopefully get a sense of here is, this is just a small example of how you can use Windows CE in a bunch of different devices. Now, the interesting thing here is you see the experience, the end to end experience, VOIP is an enabling technology where you're involving the server, with VOIP communication server, you're involving the PC, you're taking advantage of not only voice but data, in the case of the inventory application, you're taking advantage of presence information. I can use Windows Messenger here. That's one point.

The second point goes back to what I said earlier. This is a scenario where you're seeing VOIP move from a phone form factor into another kind of device. So it's this idea of technology needs converging across different spaces. That's the benefit of having a consistent platform that's enabled.

Not quite there yet. There we go. So one of the other areas I just thought I'd mention, you're seeing kind of the enterprise scenario here. Another area where we're seeing lots of excitement is really in the home networking space. Kind of all the starbursts, it's kind of a busy slide, but all the star bursts are places where we have shipping designs today in Windows CE, Windows XP Embedded.

So we're seeing we've actually got broadband gateways, residential gateways. We're seeing portable media players being built. We're investing in this space, as well. Smart Displays, which are these Web tag attachable monitors. Another couple of areas, we're seeing digital media receivers, this idea of having a stereo component that can go out and access all the music or pictures on your home PC network and play it through your stereo system or possibly on a TV. We have in the U.S., RCA is shipping digital TVs with Windows CE in them today. The reason they're doing that is they want connectivity back to the PC, they want the opportunity to actually play PC media on the TV. And then we're seeing even kitchen devices being built with Windows CE today, as well as portable devices and automotive devices.

So what we're starting to see is this emerging ecosystem within in the home about how all these devices work together, and we're investing a lot of our time and thinking about how to make that much easier. In the case of the gateway products from Microsoft, what we're able to do is use software, with the same hardware costs, to improve the experience. So that setting it up is much easier, and you can do new, exciting things with it that you're not able to do with other offerings.

A key thing to touch on: I mentioned ecosystems. A key thing here is we bet on partners, we bet on the developer community. We have the largest partner program in the industry. We have over 2,000 partners worldwide. In fact, I just got back a couple of weeks ago from kind of touring in Asia and Europe, meeting all the partners, and business is going well. We do source programs, as we mentioned. We also, just to kind of put the proof point on the excitement around the source code programs we've done, the community programs, we've had over 180,000 downloads of source code. And to put it into context, you download the source code with the development tool, the development tool download is about 500 megabytes. So you've kind of got to want it if you're downloading it. We don't think there's people casually downloading 500 megs for fun.

Another big area which I haven't talked as much about is we are doing a lot of work with academia worldwide. We're seeing that being a real exciting area, as we think about how to advance the state of the art around devices and device integration. We're finding academia is a rich source of thinking for us. We're funding projects worldwide around robotics, advanced wireless networking, multimedia, security, all these areas, and we're starting to see some of these things make their way back into the platform. For example, our IPv6 solution, which is a telecom standard, we did that in partnership with a university in the UK.

Then, as I mentioned, we have a very worldwide and thriving developer community. In fact, I invite the developers in the audience to check it out, we have online newsgroups that are very active. In fact, there are people from our development teams in those newsgroups daily. The architect for Windows CE is in there. The person who leads the Windows XP Embedded effort is in there. We do regular online live chats. We have developer conferences, six of those around the world, right. We're gearing up to do another one this spring.

Then I guess the biggest proof point I could put on this is really around the fact that we have an amazing set of companies shipping products on Windows CE and Windows XP Embedded today. When you look at these areas, consumer electronics, we've got relationships with companies, networking devices like gateways and routers, mobile devices, and then commercial devices, including point of sale, industrial automation, thin clients. In many cases, these companies are shipping version two, version three, or even version four of some of these devices.

In the interest of time, I'll just kind of close on this. We're pretty excited about the opportunity. We think as devices get smarter, as devices get more interconnected, as they're more powerful in terms of the processing, they can do very, very exciting things. And we're seeing the enabling technologies, whether it's processing power, broadband, wireless, all coming into play. This is creating very exciting opportunities. What we're seeing is our business is growing as a result. We're seeing a shift towards companies wanting to work with our platforms, and there's a lot of reasons for that. We feel like we have a great technology portfolio, not just tools, but platform assets. We feel like if somebody looks at the entire development cost of building a device, that it is very compelling to work on CE or XP Embedded. Then, there's the business model alignment. I mentioned that earlier. We believe that device manufacturers want to get to market quickly, want an exciting, compelling device, and they want it to sell quickly, and a lot of them, and we have the same exact goals.

With that I'll turn it over for Q & A. I appreciate your time. Thank you very much. I hope you'll try the platform, it's very easy to get, and I encourage you to do so.

So I think we've got mikes in the audience, and then we're going to do a raffle. Debbie, you can hold that up if you've go the box. We're going to raffle off one of the complete end-to-end kits, you can't even get these in stores. You can get each product separately, but we put them in a box together for giveaways. You get both the router and the card, and I should mention this does 802.11a, b and g. It also does inbound secure VPN, too. Gee, I figured there would be people who would be excited about VPN, too.

OK. Cool, if you have a question, please hold up your hand, I'll try to answer them all.

QUESTION: Hi, can I get some examples of Windows XP Embedded devices?

SCOTT HORN: Absolutely, we see XP Embedded being used in a bunch of spaces. Retail point of sale is a big one. In fact, in the earnings release yesterday, John Connors, the CFO of Microsoft, mentioned on the Mobile Embedded Devices P & L that XP Embedded in point of sale was actually a real highlight. We see it being used in building automation. We see it being used in industrial automation. Higher end set-top boxes, and then two other areas that are kind of interesting and surprising to people are medical systems. In fact, pretty much the leaders in CMT, ultrasound, CAT scan systems are using XP Embedded, because it requires advanced graphics, visualization.

The other area that's kind of funny that just kind of popped up in the last two years is casino gaming. We have companies like Value, who is building slot machines. If you think about it, it kind of makes sense. I'm assuming most people in California go to Vegas, so how many people have been to Vegas? It's right next door. You don't want to admit it, do you? So if you go to Vegas and you walk the floor, there's rows and rows of slot machines, and traditionally if you want to update those slot machines, you've got to rip them out and replace them. And what companies are saying is, 'Well, why don't we actually replace the software and leave the box there.' What they're doing is actually deploying applications remotely, updating them, and it also lets them look at interesting things like, at this time of day the usage is heavy. If we run this kind of application we actually get an increased turn on the machine, so if we have 30 machines, we should run 20 of these kind of apps at this time of day. So casino games is another big area, both U.S. and worldwide.

QUESTION: (Off mike.)

SCOTT HORN: XP Embedded is only Intel X86, Intel, Via, AMD, others.

QUESTION: (Off mike.)

SCOTT HORN: Well, a few benefits. The question is, what's the benefit of XP Embedded versus straight XP? Two things: one, XP Embedded is componentized, it has features that we call embedded enabling features. So, for example, it can boot from Flash, you can boot from CD. We also have things that enable you to cache up-write, so you're not writing to a hard disk. XP is built for having a hard disk, it's the operating system. So we actually let you cache write somewhere else. We also have features that let you not have a display. So, XP Pro on the desktop expects you have a display there to respond to things. With XP Embedded, you don't have to have a display. And then there's the tool chain as well, the tools that let you assemble it.

QUESTION: That segues into my question. It seems like every other week we're hearing about security on various Microsoft products. Your example of the slot machines in Vegas, how secure would that be, is security built in enough so that you can

SCOTT HORN: Good question. I figured I'd get that one today. So, we feel like it is. We do a few things. The first thing to realize is that, because you're assembling components, versus having the entire operating system, the surface area that's exposed is much less. So that's inherently one thing right there. Sometimes, some of these devices are actually locked down. If you look at something like a thin client, locked down. A few things we do, with the Service Pack 1 release of XP Embedded, we added features to enable remote updating of devices. We actually added two features, this was driven by point of sale. One is we actually enable you to run XP Embedded without local storage. So if you want, you can boot entirely from a server. The other feature is we enable you to remotely deploy updates or patches. So what we do is when the desktop team has a security fix that we think is applicable to XP -- because they're not all applicable -- when it's applicable, we'll actually package that up and provide that to customers, as well. So we're doing that, and then there's inherently some things we do with the operating system, itself.

For example, the XP Embedded team and the CE team participated in the security push. There's a whole set of features around things like everything from encrypting the device image, locking it down in a variety of ways. So we feel like we've got a pretty good handle on that. Could we get better? Absolutely.

QUESTION: (Off mike.)

SCOTT HORN: Are these always smaller resolution or --

QUESTION: Market share.

SCOTT HORN: Market share, okay.

QUESTION: No, no, no, no. I meant display resolutions.

SCOTT HORN: Display resolution, okay.

QUESTION: Pocket PC supports high-end 320x240 and Palm OS space device supports 480x320. Is it hardware or software related?

SCOTT HORN: To be honest with you, I'm not an expert, I don't work in the Pocket PC business. Can everybody hear the question? OK.

I actually couldn't tell you. I'm happy to, if you stop by afterwards we can try to get you a contact within the Pocket PC team.

QUESTION: And in more broad context, how would you compare operating system from Microsoft with the competing operating systems?

SCOTT HORN: Which one?

QUESTION: Probably Palm and embedded versions of Linux.

SCOTT HORN: OK. Well, with Palm we actually don't within -- so the Pocket PC team absolutely looks at Palm. I don't look at Palm at all. My team spends zero time on Palm. Palm is only a PDA operating system. They don't do anything else besides PDAs, so we don't see them anywhere else. So that's just the reality.

In terms of embedded Linux, well, it's an interesting one. I put up a total cost development data. I think the thing with Linux is, some people like Linux. There are going to be some people who encourage it. I think the thing about Linux is really to look at what you're getting, quite frankly.

So the challenge we have -- actually I'll just speak from our standpoint -- the challenge we have is somebody looks at potentially our platform and another platform and just kind of doesn't really look at the features, doesn't look at the capabilities. And they say, 'Well, it's apples to apples, let's look at costs.'

And what the total cost of development study really shows is that you've actually got to dig in a little bit, spend some time looking at it, particularly if you're making a two-year commit on building something. So, for example, does the platform have real-time integration, does it have Digital Rights Management, does it have browsing, does it have multimedia, all these things. And then if it doesn't have it, well, what does it cost you to either make it yourself or to go buy it from somebody. And keep in mind it could be multiple somebodys.

So, I guess the thing there is rather than like saying, this is that, this is that, what we encourage people to do is just take a realistic look at what you get in the platform. It comes down to making a part versus my decision. That's really the way to look at it. If you want to be in the operating system business, we see some companies choose to do that. I will say we see a lot of companies start down that path, and then they come talk to us. That path can get pretty painful.

Is that fair?

QUESTION: You talked about multimedia capture and playback. On mobile devices, what is the Windows Media format strategy, given that there are very much higher performance standards out there like MPEG4, 3G, PPMR, things like that?

SCOTT HORN: So the question was around Windows Media versus other standards. So actually one thing I'd suggest -- well, we actually have the data on Windows Media 9 in comparison with those other standards you mentioned. And Windows Media 9, Windows Media 9 stands pretty good.

QUESTION: (Off mike).

SCOTT HORN: Yep, both. And actually if you follow up and give me a card after, I can actually have somebody follow up with you. So there's been extensive third party testing.

But in terms of the way we think about it, so Windows Media 9 is something we support on CE, we're adding it to XP Embedded in an upcoming service pack. It does video and audio. And we also as a company make the codec available on a variety of operating systems. So you potentially could use another operating system and license the codec. There is a charge for that, you've got to license it. So you can get the codec. Then you have to actually do all the integration. We don't provide the player for other systems.

Now, what I didn't show is, in the upcoming release, we think there's a lot more we can do. Image capture is an area where we're seeing lots of interest, and we're taking a really hard look at that. We're thinking about how could we do a better job encoding multiple digital formats, playback. We're also seeing interest for things like 3D graphics as well. So we're looking at doing some of the direct 3D mobile technologies for the next release of Windows CE, which will be out in '04.

QUESTION: Hi. Could you talk about what kind of processors you can get Windows CE on and talk about your DSP support also?

SCOTT HORN: Sure. So I'm assuming everybody could hear the question. Stop me if otherwise.

So we currently support four major families of processor architectures: ARM, MIPS, Super H and X86. Now, we support multiple variance of those within those families and with Windows CE, we support about 350-plus different -- I'd say about 350 plus CPUs -- and there's a whole list on our Web site, because as I mentioned we have that testing program.

So pretty much what we require is a 32-bit processor. It has to have an MMU, because it is a multiprocessing operating system. MMU is a Memory Management Unit. You need that to actually run the multiprocessing.

And then the last thing is with DSPs, we don't have specific support for DSPs today. We do have technologies that enable Windows CE to run on the CPU and work with DSP. So we've done some work there with companies like TI and Intel with ADI has done some work as well to make that work.

QUESTION: Hi. When does the Windows CE Group decide to go with like less of a component strategy where you actually have components or a platform builder and then go with kind of like a full solution like you've gone with the Media2Go solution?

SCOTT HORN: I don't see us ever doing that. See, that's funny, we do a design review and it's one of those things we try to do with customers. We can only have so many people come, so we have like 250 people come to Redmond in December, and we gave them these wireless voting devices and we just invite them in, we say, 'OK, here's the option: Should we focus 100 percent on componentization, 0 percent on performance, 20/80, et cetera?' And the feedback we get strongly is keep focusing on componentization.

We kind of try to bridge the best of both worlds though, because we have people who want to build stuff like this that need componentization. We also have companies that are building things like VOIP phones, and what we do is we provide both the components and we provide pre-build configurations of components. So one area where we will invest going forward is potentially doing more configuration. For example, if you go into -- so I asked earlier and there wasn't a lot of people. How many people actually use Windows CE? OK.

So if you go into Windows CE, for those who haven't, you go in and it's like you would expect of a Microsoft product, you say File, New. You get a wizard that says what would you like to build and then it walks you through and you can either choose one of the prebuilt configurations we have, that we have things for thin clients or set-top box. You can either choose that or you can start just with some components. We let you pick the processor you want you use. You can essentially actually use a third party or hardware package. And we'll continue to invest in the configurations but almost the overwhelming feedback we get from customers is don't walk away from componentization.

QUESTION: Yes, when do you think Microsoft will start supporting JPEG 2000 based image and video compression?

SCOTT HORN: Wow. You know, I don't even know. I'm not sure. I'd have to actually hook you up with somebody.

QUESTION: (Off mike). The increase on 32-bit processors: What's your market share on those processors, on 32-bit processors relative to the competition?

SCOTT HORN: Yeah, we actually don't break out our -- because of SEC regulations, we don't break out things like that. What I would do is point you to IDC and VDC. They've done third party studies. I didn't mention it here, but they actually have us listed as number one in the embedded systems market, both of them. But we just can't legally break out data outside the financials.

QUESTION: A lot of these products are run on batteries. What are your plans for power management on these devices?

SCOTT HORN: Ah, well we actually do have power management already. So Windows CE has had power management since the initial version. In fact, I showed the Pocket PCs. In fact, we've done a lot of work around power management, both at the system level, at the UI, and we also enable the device manufacturers. If they want to go further and customize even further, they can pretty much rewrite the software layer that works between software and hardware.

QUESTION: (Off mike).

SCOTT HORN: I'm sorry. I didn't hear anything.

QUESTION: (Off mike).

SCOTT HORN: Yeah, as I just said, you can actually extend power management if you want to use specific hardware, you can customize sleep modes. There's a whole set of things you can do. It's completely customizable.

QUESTION: (Off mike).

SCOTT HORN: I'm sorry, I couldn't hear.

QUESTION: Can you comment on the "Palladium" initiative as it applies to embedded?

SCOTT HORN: The which initiative?

QUESTION: The "Palladium?"

SCOTT HORN: The "Palladium" initiative. Oh, thanks. You should answer the JPEG question.

So on "Palladium," we will definitely, of course, do "Palladium" as part of XP Embedded when that comes into the operating system. For Windows CE we are looking at what we want to do from "Palladium." We are having a big discussion around that. The challenge is some of the challenges around that are a lot of "Palladium" is implemented even at the silicon level. So since we have a lot more variability, given I answered a few moments ago about number of processors we support, we are having a lot of conversations.

The other area we're having conversations is companies like ARM and MIPS, who both have initiatives around security at the silicon level.

STAFF: We have time for one more question, if anyone has one.

QUESTION: Could you speak a little more on the detail about the tools available and how you determine the programmer productivity?

SCOTT HORN: In terms of tools, well, Windows CE and Windows XP Embedded actually have part of it is a development environment. The tool for CE is called Platform Builder. As I said, it has File, New. We have complete support for debugging, hardware level debugging, source level debugging, kernel level debugging. In fact, the kernel/source is in the product. You can actually debug the kernel and source if you want.

We also make both products extensible so you can add third party components, you can add third part hardware, you can add pretty much anything you want.

And then what we do in the CE case, because it requires some special stuff, is with Windows CE we enable you, at the same time you create a device image, to create a Software Development Kit that you can compress, put on a Web site somewhere, give out to as many people as you want, zero cost. And when they take that SDK and execute it, because it's an executable, what they get is they get an environment very much like the Pocket PC emulation environment that the device manufacturer can customize with their UI, their APIs, and then somebody installing that will see that emulation environment show up in Visual Studio and then they can write applications against it. And on the Visual Studio side, we support Visual C++, C# .NET, Visual Basic .NET and we also have companies coming out with third party development tools as well.

One of the nice things about the .NET Framework is it is multiple programming language supported, so on the desktops there's 20-plus languages. We're starting to see a lot of that come to C based devices. Not all of them will because some don't make sense. It's hard to see doing COBOL on a handheld device, but we'll see.

OK, cool, so thanks, appreciate the questions. I'll hang around afterwards. (Applause.)

Thank you.

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