WINDOWS TCO SUMMIT

Thursday, June 19, 1997

Tokyo, Japan

PRESENTATION

Thank you. Good afternoon. It's a great pleasure to be here to talk about Microsoft's top priority, which is reducing total cost of ownership. Microsoft is a company that moves very rapidly, and we set priorities based on what our customers are asking for.

Last year, our customers asked us to focus on the Internet to make sure that all of our products incorporated Internet standards and that we led the way in showing them how to get business benefits out of the Internet. Now it's incredibly successful. In fact, I think we really surprised people with our ability to focus in and get things done in a short period of time. And we have gone from having no web server to now Windows NT as the most popular web server. And our Internet Explorer is gaining share at a rapid pace.

Our customers have an additional requirement, and that is to make a lot simpler to manage these large networks of Windows PCs. There are many aspects to this, and so we have spent a lot of time talking with customers, finding out what their costs are; not just the desktop costs, but understanding the data center costs, the communications costs, the applications development costs, the hardware costs and the support costs. Each of these is very significant, and we wanted to make sure not to come up with the solution that reduces one cost at the expense of increasing another. For example, by moving computing from the desktop to the center, you increase both data center costs and communications costs, and you can end up worse off than you started. So we knew that something had to be done. And we knew that software was the key to improving this.

The Windows family today is very, very broad. At the very low end we have Windows CE, that's used in hand-held computers that connect up through the wireless network. We have recently introduced another very low-end member of the Windows Family, the Windows Terminal, which I will talk about today. It is the only thin client in the world because it doesn't require rich software to run on the client.

Another key topic today is the Net PC. This is Microsoft's work with the leaders in the PC business to design the hardware that retains the responsiveness and compatibility of the PC, while being very easy to administer.

Of course, up at the high end we have PC based servers, and the growth of this business is nothing short of phenomenal. Windows NT and PC technology servers are both growing the market and taking substantial share away from previous systems. The chips are getting faster, and because Intel is really driving at a fantastic pace, we are using more chips for multiprocessor systems, going up from a standard four processor to eight processor approach now, and further, we are taking these systems and clustering them together. This is the last technique that has been available on large mainframes that wasn't available for PC technology. And by putting all these systems together, we get more performance than you need for even the world's most demanding applications.

In fact, this was the theme of the Microsoft's Scalability Day that was held a few weeks ago back in New York City. What we showed was that by using PC technology, you could handle over a billion transactions a day, and that's four times more transactions than any company in the world needs. We also showed a single PC with over a terabyte of storage, which is more information than even the entire World Wide Web has today.

And so, in terms of performance, the pieces are there now for new applications to be written for the PC with no question about running fast enough. But people are very anxious as they design these systems about making it simple. One of the great dilemmas they have always had is whether to store information on the central computers or store them on the desktop computers. There are advantages with both approaches, and the breakthrough that I will be announcing today will allow people to have the best of both worlds without any compromise whatsoever.

Some people have talked about another approach, the NC. The NC means many different things to many different people. But one thing that's quite clear is that the predominant system even in the most optimistic forecast for the NC, the predominant system will be the Windows based PCs. And in fact, even these so-called NCs, most of them will have the ability to connect as Windows terminals. So the slice that is actually not supporting Windows is very, very small, and most of that comes from the terminal replacement market.

Now, we would like an even greater percentage of these systems to be Windows based than the 98 percent you have seen in this chart. And that's what really drives some of the initiatives I will be talking about.

Another key point is that by reducing cost of ownership we can allow people to get more value out of their personal computers, and make it clear that every knowledge worker should have a personal computer. When an organization decides to use electronic mail and the Internet and productivity software, and connect everyone together, only then can the business step back and really decide how to use a digital approach for information flow in their company. And we want to make that an easy decision by making it very low cost.

Business is moving so rapidly today; it's so competitive, that having this digital approach, eliminating paper forms and allowing people to collaborate at a distance, we think it's absolutely imperative for aiding modern business. So, the topic we are addressing today, TCO, is a very important topic for companies of all sizes, not just large organizations.

The great progress we have made here comes both in the area of software and hardware. Thirty-two-bit Windows was the significant advance in reducing cost of ownership. Another advance is what we call the Zero Administration Kit, which all of you today will receive a beta copy of and we will have the final version of it with the Japanese support available at the end of next month. A demonstration later will show how this kit, running on today's Windows NT, really simplifies what a user has to look at and allows the administrator total control of what goes on the desktop.

The full implementation of all the great ideas we have had in cost of ownership will come with Windows NT 5.0. That's not to say that all the systems have to run Windows NT 5. You only have to have one server with Windows NT 5 to get the benefits I will talk about, and it will continue to work with machines running Windows 95 or Windows NT 4.0.

We want to make sure that people never have to visit the desktop PC, that in terms of updating the software or helping diagnose exactly what's going on, you can do that centrally. And so you have all your expertise able to reach out and see what the user is doing using the network, rather than going there in person.

On the hardware side, this is the Windows terminal and the Net PC. And both of these are very, very important initiatives.

The Zero Administration Kit is a free product. Anybody using Windows today will be able to get it on a CD or across the Internet. In fact, the data that you will be getting today is already up there on the Internet. It simply supplements what people already have. And like all the things I will talk about today, it's totally compatible. This works with all the Windows applications in the marketplace today and the ones that will be developed in the future.

It prevents the user from doing anything the administrator doesn't want them to do. And users come in different categories, users who you only want to run a browser, users who you only want to limit to a few applications, and it makes it very very simple to set this up. In fact, you will see in the demonstration it's just a simple drag and drop operation.

Task station is what we call the mode where you only come on the one application and application station is where you get multiple applications but are still restricted to stay within those applications.

So, Windows NT 5 is a critical product for us, and it's where the most important step is available. Windows NT 5 is going into beta later this year, and will be out into the marketplace sometime in the first half of 1998.

So, what is the big breakthrough? I talked about the dilemma of storing files on your PC or storing them on the server. If you store them on the server, they are always backed up, and the administrator can see what's going on and help with that. Also, if you go to somebody else's PC and you log in because the information is on the server, you can always have access. If you buy a new PC, and you want to get at all the documents and preferences that you created, you just plug in that new machine, log on, and it's all right there for you. So, those benefits of central storage are quite large. But the benefits of local storage, storage on the PC, are also very large. So, for example, you can have quick responsiveness only if the information is stored locally. You can have portability; where you take the machine with you; you can take it to the customer, or take home with you, or use it while you are travelling, only if you have this local storage. And so, speed and flexibility are very, very important. Today's knowledge workers do a variety of tasks, and to make them effective in their job, you have to empower them and not just give them a very fixed way of seeing information. And so, the PC has become critical, and people who have used the PC won't want to go back and give that up.

So, what can we do about this dilemma? Many people have debated which is best, but neither one will keep everyone happy. The answer that will give us the best of both worlds is to cache - to have the system state be in both places, but do that without the user having to ever think about it, so that if the information is updated on the server, like a new software patch, it moves on to their PC automatically. If they update a file on their PC, as soon as they are connected to the server, those changes will move up to the server. And so, this is exactly what we do in Windows NT 5. We keep the information in both places. And so, users can roam to other PCs. They can easily replace PCs. They can work when the network is down. They get very high performance, because 99 percent of the time, they will access the information locally and not overload the network. So, it's all the benefits of the PC also with all the benefits of centralized computing. And that's why we refer to this as a breakthrough.

Let's move on and talk about reducing TCO with hardware. Very light users today are not using a PC. They are using a terminal. But when you develop applications including data entry applications, you would like to have the same approach you use for your more demanding knowledge workers. And so people are wondering what's going to happen to those terminals. Is there some way to get something that's still cheap, but lets us write applications for those people that work very well. And so, for terminal users, we now have the Windows terminal. We do not put a full browser on this Windows terminal, because the promise is that the browser is the fastest growing application the world has ever seen, and so no matter how much memory you put on a machine, if you have a browser running there, you are going to run out of resources. With a thin client, a truly thin client, the RAM issue never comes up, because you don't have local execution. That's why this is the only truly thin client. The cost is very low, because all you are doing is essentially a video protocol.

Now, one of the great things here is that when you have a PC that is, say, three or four years old, and you feel it's no longer powerful enough to run the new applications, you can take that PC and use it as a Windows terminal. So you extend the life of that machine for many more years by giving it to the light user who would have had a terminal in the past. This terminal approach is based on technology created by Microsoft and also the technology that we licensed from Citrix in an announcement about a month ago. We will be shipping this product even before Windows NT 5 comes out, and will be shipping the support with Windows NT server that allows you to connect up light users in this way.

The most important new hardware approach is the Net PC and it's very important that we are clear that the Net PC is just a form of the PC; it is totally and absolutely compatible. When you see it, you will be surprised; it's nice and small, it's very attractively priced, it's got a sealed case design. But these machines are fully capable of running Windows 95 and Windows NT. We have gotten rid of some of the old features of the PC, the old ISA Bus. We have made it very easy to automatically boot, even booting across the network. And so there is no compatibility issue with these machines. You can mix and match them from different vendors or with PCs of other types. And they are much easier to manage and control, because of the bus, because of the remote booting, and because of the easy management that's available here.

When we talk about cost of ownership, it's interesting to compare what the cost of other computers are. Personal computers are actually the best in this, because they are the least complex and the knowledge of the PC is more widespread. If we look at cost of ownership of a UNIX-based system, because of its heritage, that's a very engineer-annoying device. It is more complicated, and so, cost of ownership is much higher.

The other amazing thing is that with the incredible performance coming out of these Intel chips, it's not only lower in cost of ownership to use the PC, like a professional workstation, but you also get higher performance as well. I am showing a comparison here of a PC to a Sun Workstation, and you can see the performance differences are pretty substantial.

Another approach is the NC I mentioned earlier. Although some people think that stands for Network Computer, that's not really what it stands for, because every computer is connected to the network. Every PC in business, every mainframe, every Unix system is connected to the network. What's unique about the NC is this: the fact that it's not compatible. And it's a very different model than the PC model. The PC model users can mix and match, because the system software is the same. In the case of the NC, that's not the case. Here, there is a lot of software on machines. So, even though it overloads the network, and causes you to buy expensive servers, as well as asking you to rewrite all your applications, you don't get a very simple device. You give up portability, you overload the servers, and you don't have the printing and expandability that everybody has gotten used to with the PC. So, it's poor coexistence, not only with the PC, but with other network computers as well.

Now, if we take all of this and put it together, we can see that there is an opportunity for cost to be substantially lower. There are many different models of cost of ownership. This uses the Gartner approach, but there are others as well. And it shows you going from a 16-bit system, where you don't have firm policies about standards, all the way down to an Windows NT-5 system with the Net PC, and you see almost a 48 percent reduction here. Moving to 32-bit helps a great deal. Moving to what they call tight management, where you have rigid standards, which means a standard electronic mail package, a standard office productivity package, a few standard configurations of the PC you buy, and you use the remote management tools, all of those are critical in what's called "tight management." And then, Windows NT 5 and the Net PC simply add to that to make sure that you are getting a really incredible reduction in cost there.

Now, this reduction that I am showing here, let's review what it does to the other costs. It does not increase communications costs. In fact, as people use the Internet more and more, we can help them bring those costs down. It does not increase the data center costs, because we don't ask people to move the applications that are used to run on the PC up to run on the very expensive large computers. It does not increase applications development costs. It doesn't force you to switch to only using one computer language. Certainly you can use C, Visual Basic, or Java, COBOL or Power Soft, or any of the dozens of languages that people have found suitable for their applications. So there is no starting over, and your application development is based on your needs when you want to build those applications. Support costs go down, because you will never visit in the individual machine. And the patches are getting out to those machines without any intervention whatsoever.

Likewise the hardware costs are somewhat reduced, because of the standards and because of the simplicity of the Net PC and the great work that has been done there. And so, if we take this across all the PC users, and in particular, if we add to it the incredible growth with the PC industry with virtually every knowledge worker having these machines in the future and more and more schools and libraries having these machines as well, we can see that the total benefit of the work that we are doing with our partners is very, very large. In fact, even machines in homes will eventually benefit from this because over time they will be connected in a high speed way that will allow the same sort of replication of the state, the same sort of remote management and software updating will be able to work over ISDN or ADSL or cable modems for users in the home as well. And so, the entire market will be enhanced by the investments that are being made here.

I want to make clear that when we talk about the advantage of the PC model, it's not just that we have this large installed base. The percentage of these machines that use Windows is growing and growing. Products like OS/2 or the various flavors of Unix are seeing a declining market share.

But the benefit of the PC model is not just the numbers. It's the very structure of the model. It's the high volume standard servers, it's the high volume applications. Applications developers are very focused on going after the volume market, and so more and more they are devoting their attention to Windows NT, and all of those choices are really very helpful to customers and the newer applications will come into this as well.

A lot of these applications are intranet type applications for information sharing inside the company. A lot of these applications go outside the boundary of the company and replace paperwork that would have been necessary historically.

Another great thing about the PC model is the amount of support that is out there. We are continuing to invest in this. We've got more and more training centers. Again, the partners are critical here. There's over 100,000 certified professionals in over 10,000 companies that take the PC building blocks and put them together to make solutions that really meet customers' particular needs.

There's a vision here of the role of the PC and that's to create for a company what we call a "digital nervous system". When we say "nervous system" we're talking about the entire way a company manages its information, and we're saying that by moving information management more and more onto the PCs, there's an opportunity for very great efficiencies in dealing with standard processes like sales analysis or budgeting. And there are also great efficiencies in dealing with surprises like a competitor's new product or a customer who wants something to be done differently.

Using the digital approach, all the information can be brought together in one place. People who are far apart can collaborate together, and you can even connect your customer through the Internet, and so this vision talks about a far more central role for the PC in making companies competitive than we've ever had before.

There are already today some wonderful examples of companies who are doing this quite well, and one of the roles that Microsoft has is to take the examples that people are doing the digital nervous system very, very well and let other people

know about that so they, too, can share in the benefits.

So the cost of ownership initiatives that are being addressed today they are a major issue and the progress again, just like the Internet, is even faster than I think people would have expected.

One of the reasons we made great progress is that we've had a wide range of partners who have been giving us input on this, meeting with their customers, helping us understand what needs to go on, and we're very pleased to have so many of them here today, and we have time for several of them to get up and share their perspective on this issue.

I'm particularly pleased to have NTT participating today and so please join me in welcoming Mr. Miyazu, who is the President of NTT. Thank you.

In summary, the TCO strategy for Microsoft has many elements - the advances in the software, including what we have today, and the coming of Windows NT 5, the work that we're doing with other software vendors and, very importantly, the relationship with the hardware manufacturers.

Partnership is a key part of this, and we have a great number of partners specifically here in Japan. There are 28 key companies listed here, all of whom have been very, very supportive of the work we're doing.

In fact, that work is very concrete, and you see here some examples of the NetPC hardware which will become available in the market this year, and so it's a real pleasure to have these eight companies here with their key executives to present their work.