Remarks by Bill Gates
Microsoft Corporation
NCTA '98
May 4,1998
Atlanta, Georgia

MR. GATES: Good morning. It's a great pleasure to be here. I know the cable industry is a very, very healthy industry. The reason I know that is, when I went to my hotel room last night, I had more junk in there than any hotel room I've ever been in. It took me over five minutes just to take all that stuff off the bed. And I'm pleased to see people are still coming up with fantastic ideas for new cable channels.

The message I have today is a very positive message about the incredible opportunity ahead for the cable industry. By taking the latest in hardware and software technology, the cable industry will lead the way to providing information age services in all the homes throughout the world.

And most technologies in the past have taken a long time to catch on. You had someone would who grow up where the technology wasn't very popular, their children would see it as fairly popular, and their grandchildren would take it for granted. So, all the technologies I'm showing here, TV, telephone, automobile, took over 60 years before they achieved very high usage. We see two new technologies, the PC and the Internet, that are moving up at a much faster rate.

And the magic is when you can take everything that's great about the PC, particularly all the software that's built for it in a compatible way, take everything about the Internet, including the standards, and combine that with rebuilt, high-speed, two-way cable systems. The price of the PC continues to fall. Just a year ago, we broke the $1,000 barrier. Now, we even see machines out for under $800. And there's no doubt those prices will go below $600, even eventually below $400, at the same time that the PC becomes more powerful and easier to use.

And so, that technology is a base that can be used to connect up to cable and provide services that people never would have dreamed of in the past. The rise of the Internet is very important here. By getting to critical mass the number of people connected up to rich interactive information, the Internet is creating a wealth of things that people want to reach out to. In fact, I talk about people living an Internet lifestyle where, whenever they want to turn for information to organize a trip, find out what stock prices are, or trade in stocks, they will turn to their PC connected to the Internet through their cable connection.

Well, it's been fantastic to see the world at large recognize the opportunity the cable industry has. We're very pleased to be a partner, a passive partner, but someone who has made a bet on this industry, and I would say even with the valuations having moved up as much as they have, there's still incredible opportunity for an increase here as people see concretely what can be delivered.

Now, there are still a lot of cynics out there. There are people who looked at the predictions about 500 channels. There's people who looked at the predictions about interactive TV, and they saw that those predictions were premature. The costs were too high. The Internet wasn't there. The PC technology had not advanced. And so people were disappointed.

This time, however, the pieces are there, and all the cable industry needs to do is continue to rebuild the plant -- I'm very pleased at the rate that's going at -- and partner up with a few technology companies that can provide some of the pieces to make this a reality. In fact, by next year, I think the cynics will have to give up their cynicism, because they'll actually see the systems in place.

By early '99 we should be rolling out hundreds of thousands, even millions of set-top boxes that combine PC technology with these Internet connections. Now, the information that people will deal with will be in many different places. You'll have a pocket-sized device that you can take with you. You'll have your pager or telephone. You'll have your intelligent set-top box. And you'll continue to have PCs that you keep in your den, or that you have as portable devices, or that you use at work. Now, through all these devices you'll want to get at the same information. And the value of having that information online will continue to increase.

It's really stunning, if you go out on the Internet, to see all of the things you can find out there. You can see what's going on in Congress. In fact, whenever you go and browse a news site, if you've provided your zip code, it automatically appends onto any news stories about the Congress, specific information about how your representative voted. There's even a link that's included now, where if you disagree with what they did, or if you want to provide feedback, you simply click, and you can provide electronic mail to your representative. And so we're going to get interactive democracy, letting people participate in new ways.

Electronic commerce across the Internet is also exploding. Companies like Amazon.com are achieving very high valuations, as people see the incredible growth there. Whether it's finding books, finding records, booking travel, all of these things, the interfaces continue to improve. And I think that a substantial part of all of those activities will be done over the Internet. And therefore, give the cable industry a chance to participate, participate in the transaction fees, and participate in owning the companies that are going to make this happen.

When you have the Internet today, it's often over a phone line. And so you have to wait for it to dial up. You'll often get a busy signal. And once you're connected, it's very slow. And so if you're considering, hey, what's a great restaurant, what are the latest movies, it's simply too much effort to go over and use the Internet. You'll probably instead go and pick up your local newspaper, or pick up your entertainment guide. So it means that cable is not in the center of that activity. However, with the kind of connections that cable is providing, it's always there, you don't have to wait for the dial up, and the speed is really incredible. The idea of simply walking over and asking for any of this information becomes very straightforward.

It's kind of amazing all the things that are out on the Internet. In fact, there's a lot out there about Microsoft, a lot out there about me. Some of it's very nice, you know, people who don't know me saying things that are too nice, and some people saying things that aren't so nice. In fact, I found this recently, this is actually a mug shot of me at age 21. And what had happened here is I was down in Albuquerque working on personal computers, and I got a speeding ticket, and I had forgotten to take my license with me. And sure enough, this is the kind of neat stuff you can find out on the Internet.

Well, a central issue here is that computers are becoming pervasive. We've got some work to do to make them easier to use. And that is Microsoft's top priority. I'm always amazed, you can't pick up a magazine nowadays without reading about computers and the Internet. You can't even watch TV without seeing it in almost every show. In fact, I took a sample of some of the amazing ways that people are talking about computers nowadays. So let's go ahead and take a look at that.

(Video shown.)

MR. GATES:Well, we still have work to do to make it so people don't have to think about the technology. And this is where cable's opportunity really comes in. People have in their homes many, many devices that will all be connected together, and then connected through cable out to the entire Internet. The variety of these devices, I think, will amaze people. In fact, things like flat-screen technology are going to redefine the way we think of interacting with information.

There are some great standards that are coming along, that are making this all possible. Microsoft has more people involved in Internet standards committees than any other company, and we're very pleased that things like video standards, security standards, are advancing to meet the requirements of the new applications.

The cable industry is taking these standards and deciding which of them need to be added to, or modified, to fit in the cable environment. So efforts like open cable, document-sis, packet cable, are all things that Microsoft is involved in and believes are very, very important. And we'll support those with all the software that we provide the industry.

The beauty of what's going on here is that the very rapid improvement in these devices, driven by Moore's law, which says that every two years the power of microprocessor-based equipment more than doubles, all the benefits of that will accrue to the cable industry as it connects people up. And so whether it's devices that you provide or devices that are bought at retail, as you connect up your access control, you'll be able to have revenue from the services of connecting those devices.

So the pieces come together, the incredible chip improvement, the interface that people are familiar with, and an incredible amount of software. The success of Windows has been partly the technology it provides, but perhaps more important is the way that we've worked with the software industry, to create literally hundreds of thousands of applications. Whether it's games, or personal finance, or children's learning, the list goes on, and on, and on. And those applications will also be able to run in the advanced set-top box.

In fact, people will expect to be able to move their information back and forth, so that if they schedule an appointment on the set-top box, if they buy some tickets, they'll want to see that information on their PC and vice versa. So the applications will be shared, and the information will be shared. In fact, these devices, over time, will learn about your preferences, not just your favorite Web sites, but also the kind of news story that you find interesting, the kind of shows that you'd like to see. And so instead of you having to reach out and find things, information will be brought to your attention. And you won't have to care whether you specified that preference on your PC or by interacting with the set-top box.

So integration will be very, very important. Now, the magic of all these ingredients are that, as the volumes go up, the prices continue to go down. The cost of even the most state-of-the-art software is a very small percentage of the hardware costs of these systems. And the hardware has gotten so powerful that you'll be able to see set-top boxes with all of these incredible capabilities, certainly at under $300 and, eventually, over a period of years, even at less than $200. So the magic of chips and the magic of software will allow these things to integrate in, and fit into the world of the PC and the Internet.

One of the exciting products that Microsoft is involved in is Web TV. Today it's connecting over the phone line. It's got over 300,000 users and we expect that to grow in the next year very, very rapidly. It's been interesting to watch these users, and see what they do, because in a sense this is the first device that's bringing the Internet and TV together. These users are staying online over twice as long as people who have PCS connected to the Internet. So the simplicity, the familiarity, the fact that it's there in the living room and has the simple remote control interface, that's allowed them to get more value out of what's going on. And so it's easy to access the information and have great control.

What we're talking about doing is taking the one really bad part of this, which is the difficulty of using the phone line, and getting rid of that by connecting Web TV up to cable. This is a product where every year we'll be coming out with a much more advanced version, and even during the year we'll be downloading software to enable new features. We manage the software so it's always up to date. The user doesn't have to think about it.

In order to give us a quick look at this year's Web TV Plus, I'd like to ask Steve Guggenheimer, as a product manager for this product, to come out and show us what's possible.

Good morning, Steve.

MR. GUGGENHEIMER:Good morning, Bill, how are you?

I'd like to take just a couple of minutes and review some of the technologies that are available in the set-top box form factor today, so people can get an idea of what's available. I want to go ahead and get where I can reach and head to the home. Now, the first thing you talked about was information access, and there's really, as you said, two ways of bringing information access to consumers. We can try to make them learn everything there is about a PC with a mouse and a keyboard, and try to learn how to launch a browser and all of that. But, as you saw from the Richard Simmons video, that doesn't always go over well.

The other way to do it is to actually bring the information to them in the environment they're used to. That means sitting on a couch, using your remote control, and in that way going out to get information and having it brought to us. What you'll notice is if I'm interested, for example, in exploring the Web, I simply navigate using the remote control for the "explore" area and go. Now, there's two things that make this work. There's a chip inside of this box that technically makes it so that all Web sites look good on a TV. It makes the fonts larger, it makes it so it only scrolls vertically, it deals with images. It also makes it so, again, I can use the remote control, and you'll notice the yellow box, I simply move four arrow keys to navigate, and click go when I want to go to a particular site. So it brings the Internet and information into the environment that people are used to, as opposed to trying to go the other way.

The other aspect of what makes this work is the services. It's providing the content aggregation. It's providing email services, and all the things necessary so a consumer has a good experience when they're heading out for information. Now, that's simple Internet access. The next thing I want to do real quick is show you mail. Obviously, mail is the number one application on the Internet. And when you think again about mail, the way we think about mail is to use a keyboard and type out a nice long piece of mail and send it off. If we think about bringing mail, actually, though into the realm of the home, and the living room, it might make sense to start trying to bring in the video technologies, and making those just a natural extension of sending information.

So what I did for you is I've actually started a mail. I know that when I'm on the road my kids like to hear from me, and I send them mail, and I thought maybe Jennifer would like to hear from you. Now, I've typed in a little bit of a message, and I could go in and type the rest. But, I wanted to show you some new capability that's available with Web TV plus, it's coming as an upgrade that we announce later this year. And what I'm going to do is I'm going to add a picture. So if you'll just hang out there for a second, I have a standard video camera here, and I'm going to go ahead and turn it on, if I can find my "on" button. I'm going to grab my remote real quick. Always need a remote. So we're blowing this up, and you'll notice when I want to add a picture, I simply go down to "freeze," and we'll get you to wave, go ahead and wave. There we go. We'll freeze that, perfect. So we'll head back now, and we'll simply add the picture to that piece of email.

So now again, we're starting to see the merging of the capabilities. We're bringing the natural interface of what a consumer would expect in their video camera, and if we scroll up we see the message, and we're adding that to the normal way of doing mail. So, again, were trying to bring information and information capabilities into the living room, in a way that makes sense for consumers.

MR. GATES:Since she's two she'll probably appreciate the photo even more than the email message.

MR. GUGGENHEIMER:Exactly.

Now, let's switch over. And I want to head over to the other side. I clicked one too many times. Now, that's all about information access and bringing information. Let's take this to the next step and take that information capability, or the ability to mix data and bring it onto the television, and talk about how we can combine that with video to provide new choice and control for the consumer.

Here you'll notice that I've switched over to TV, and if want to watch TV I can simply sit back and watch TV. But, if I'd like a little more information, I can go back to the television home area, and here you can see I have more services available. With Web TV Plus what we did is we added a tuner card and a hard drive. With the tuner card, when the video comes in we digitize it, and now we can use that same chip that does all the graphics work to mix video and data together, and provide more of an interactive experience.

So, for example, if I want to know what's on television today, I simply go to TV listings, and I can go get the times for today. And here I now have an online electronic programming guide. All the shows are there. If I'm interested in what's on now I can switch through the channels. If I want to, I can go out into the future and see what's on a little bit later today.

Now, suppose I'm interested in recording this particular show. Okay. And I want to get it for later. Well, normally I would get out the VCR remote control and go and plug it all in. But, again, with Web TV if I click on this, I can go ahead and set it up to record this show later on. And now we're using the set-top box as something to control the other devices in the home. So your discussion of starting to make cable and the set top box the central device, this is the beginning of that. In fact, when I'm done, I've set this up to the TV planner, and now it will go off and record it for me.

One last thing to show you. We talked a little bit here about mixing together video and data. What I'd like to do, get back into our live show, is start to talk about how we do that in terms of interactivity. Notice when the show comes up there's an I in the upper-right corner?

MR. GATES:Great.

MR. GUGGENHEIMER:If I click on that, I can go ahead and head out and get more information. What's happening is you're discussion about bringing data along with video, we've actually combined the two here, and at this show we announced a bunch of momentum for interactive programming, mixing video and data together and, in fact, E Entertainment is one of the partners that announced they're going to start creating interactive programming.

So how does this work? Same type of navigation. If I'm interested in the movie facts -- if I'm interested, for example, in movie facts for the different movies that are on, you'll notice the video goes down. I can get some more information on Lost In Space, okay, cast and crew. And if I'm interested in going out potentially tonight and watching this movie, maybe I'll just go buy tickets right online here. So while I'm watching the show I get more information. And you'll notice that because the device is intelligent, it has my zip code, it was entered before, it knows the date, and so if I click on Lost In Space, it takes me to a local theater here, it tells me the times that are available, and if I wanted to I could go out and actually purchase the ticket.

So this is starting to bring the push of traditional television, mix it with the pull of the Web, and create a truly interactive experience for the consumers.

MR. GATES:It's great to see the integration. Thanks, Steve.

(Applause)

MR. GATES:Well, Microsoft's key product is its Windows operating system, and this was created for the personal computer and the hardware that's present there. In order to fit into the set-top box environment, we decided to create a special version of Windows called Windows CE. And, in fact, this will be used in lots of small devices. Today it's out in little hand-held computers. They're seven or eight hundred dollars. They have neat colored screens, and they're selling so well the manufacturers can't keep up with the demand for those things. You'll also see it in devices without keyboards. Little screens that you simply use a pen with handwriting recognition to enter information. And those are even smaller than the hand-held PC. They're called palm-sized PCs.

We've also showed the concept of taking that kind of intelligence and putting it in the car. And, in this case, in order to let you keep your eyes on the road, we actually start to build in speech recognition so that you can say what address you want to go to, or say who you want to call on your phone, and the Windows CE device connects you up. In fact, by exchanging information with your PC, it has your address book, and your schedule already there, and so you never need to specify that information. It's a seamless environment. The information you create at work, the information you create at home, anything you want to access in your car all brought together through networks.

The Windows CE is a very important product for us. It is a subset of the Windows API. And so we will get most of those hundreds of thousands of applications moved down onto Windows CE. And in the same way that drove the popularity of Windows in the PC space, it will drive the popularity here.

It's been great to see the reaction of software developers to this. They're ready to go. In fact, they keep saying to us, hey, when are we going to get millions of those set-top boxes out there, because they love the set-top box environment. It allows the software to be downloaded across the cable. And so the customer doesn't have to go out and go to a store at all. You can buy it immediately. If you're not sure you want to buy it, you can run the demo software and see what it's like. And a lot of the software applications can use the cable connection to create a multi-user experience. Things like multi-user games through the cable that I think will be very, very popular.

So, Windows CE is a key technology that Microsoft is providing. Of course, on top of that, you need special applications. You need the programming guide. You need the Internet telephony. You need video conferencing capability. You need the ability to add peripheral things like printers, where you can print out coupons, and even the ability to do home control, to use the cable system to manage all the display devices in the house. And so Microsoft is building on Windows CE and doing this in an integrated fashion.

One thing to be clear on, though, is that our brand does not show through. As a technology provider, we are simply providing the software that makes this possible. And it's up to the cable operator, it's your customer, you're the only one who decides exactly what comes up on those screens, and how you want to present things. And so the opportunity to create an exciting home page, to get the right branding, and to integrate it into the TV experience is very important. As you look at your Internet opportunities, in no way should you think of that as a separate business from what you've done in the TV state. Those two things are one business. It's not just the guide or the interactive programming, the total experience needs to come together. And so it all has to be thought through on behalf of the customer as one rich set of services. Even things like communication, where you want to be talking with a friend while you're watching a show, or talking to them while you're playing that multi-player game, that telephony comes in, and it's part of the experience as well.

And so the set-top box will have chips that make it as powerful as today's personal computer. The microprocessors to do this are now inexpensive enough that that's very straightforward. Anything you do, the files, messages, will be common both in terms of the data, the information, and the applications themselves. And one of the scenarios here is work at home. If you have a PC, great, you can take that spreadsheet you were working on, you can take that collaborative thing you were doing. You could even do a meeting with someone where you're sharing video and working on a document together. But even through the TV set, if it's running Windows CE, those same things will absolutely be possible. And so, you shouldn't think of the TV set device as really being a low-end device. The power that's coming along will make it every bit as powerful.

Now, with Windows CE, we've had to be more flexible in terms of what hardware we support. Windows itself runs on Intel and Intel compatible chips. Windows CE runs on all the different microprocessors I've listed here and I won't read them all out. I've listed here all the different manufacturers who build chips that we attach to. And so, as you're working with your set-top box suppliers, whether it's MIPS, or ARM, PowerPC, SH from Hitachi, any of those chips will be suitable. Now, for the more powerful devices you connect up, where it really starts to be part of that PC family, the Intel chip will definitely be attractive. But at the low end, we'll see lots of different chips.

I mentioned that the home will be connected. There's some standards now, including this IEEE-1394 that are going to allow you to have your video sources and your audio sources all on a common home network. What that means is that instead of having small little buttons and controls on all your devices in the home, you can go to your TV set and use that as a way of asking for things to be done. For example, if you want to record a TV show, it's just a nice interaction with the TV, and you don't have buttons on the VCR at all. And so home control will become possible with these standards.

It's great to see DVD catching on. It's great to see the universal serial buses letting people hook up digital cameras. That's just one application in the home, but it is so neat to think that you'll be able to take a picture and immediately send it off to any of your relatives and your friends simply by connecting up either the video camera or the still camera to that set-top box.

I've been focused on the device in the home, and it is definitely important, and in fact it's high volume so we have to really drive the economies of scale there. But, the system that makes this all work requires a lot more than a set-top box. It requires computers at the head end that gateway through to the Internet, and that provide the management that keep the software up to date, that provide new software features, that let people download the software, that provide the customer service and content aggregation. The systems that give you the ability to easily decide where you want to put advertising in, and how you want to brand all of these things the customer is looking at. And so we have to make sure that these system elements are ready early next year along with the other pieces.

Now, the beauty of this is that the same kind of servers that are driving corporate information systems can be used here. In the case of Microsoft, those are systems that are driven by what we call Windows NT. The very high end of Windows, which was designed for 24-hour, 100 percent reliability. We have key partners in these areas, people like Compaq, who build the high-end servers, including servers for video streaming capability, and then a number of partners who worked for many years with the cable industry. I won't go through all of them, but our strategy has always been very partnership-oriented.

Our work has focused on one thing, which is building high-volume, low-cost software building blocks. We see ourselves as staying focused on that because there is so much opportunity there. But that means we need to bring in these other people who understand the different areas. One of the partners I've got listed here is Cable Data, and we sat down with them and talked about a vision of using interactivity to change the way people think about billing and choosing services. And I'm very pleased to have Bob McKenzie, who is the vice president of strategic marketing in Cable Data here, and I'd like to ask him to come on out and show us what they're doing with their Cyber CSR.

MR. McKENZIE:Thank you, Bill.

MR. GATES:Good morning, Bob.

MR. McKENZIE:Good morning, Bill. Thank you very much.

(Applause)

MR. McKENZIE:Thank you, Bill. I just want to tell you what a pleasure it is to share some of the exciting things that are going on between Cable Data and Microsoft, he two engineering firms that are working together to co-create the future.

We talked a lot about the future, and the power of the future, and some of the applications of bringing that actually into the home, and actually to someone's living room and their couch. The nice thing about it is, it's not all the future, some of it is available today and actually existing right now. And that's what I really want to demo and go through.

What we've done here, and if you can imagine you're sitting at home watching television, and you decide you want to preview a movie, you want to check your account status, or even open new services to add to your services that you have from the cable provider. You now have the power of that right at your television through Web TV. What we've done is, we've taken our Cyber CSR technology, and it's really an extended reach product. And what I mean by extended reach is, it creates a new touch point to consumers. A touch point being a distribution channel where a consumer can actually interact with the cable provider, and order additional services, Pay-Per-View movies, et cetera.

So, I've asked Craig Hanson from our technical staff to take us through a demo of what we call Web CSR.

MR. HANSON:What Web CSR is, is exactly that extension, where you have the opportunity to interact with the cable provider in multiple services. And it's very simple to start off. You just select TV entertainment, and from TV entertainment you can see the variety of different services that would be available: movies, your accounts, additional services.

Let's look at the typical pay-per-view movie ordering page. From here, you have a variety of different options, reviewing the movies, looking at the start times, the costs associated with the movies, and what we've found is, some cable providers are actually putting previews of the movies there. You can imagine the power of that, transforming a point of influence into a point of sale.

Let's select G.I. Jane and order that movie now. In order to order the movie, you simply select the time, select to order the movie, confirm your selection, and that's all there is to it. The movie will be added to the account and will play on the television. Once we've ordered that movie, now let's review the account, see the account status. You can see here all of the services are contained in this page. You see the account balance. In this case, there's a 30-day past due of $5.00.

MR. GATES:I'll have to get to work on that.

MR. HANSON:Well, we can actually question it. In order to question, you can select contact us, and you're contacting the cable provider directly through email and querying about the account status or a movie that's ordered. And you even notice there, it's up to date. This is real-time action, real-time access to the ordering system. You see the G.I. Jane order right there at the bottom.

MR. GATES:I'll be able to pay this without any paperwork at all. I can simply authorize the payment, and it's done?

MR. HANSON:Absolutely. And you've cleared your account right on the spot. And we can see from this screen also, you have an appointment that's pending on your account. So, let's look at the appointment. From the appointment confirmation screen, you see when the service is scheduled to be installed, the time, and also the services. Here you see you're going to be checking your cable converter box, installing a cable modem, and they're going to help you configure your Web browser.

Also there you see the service technician in this case is Craig Hanson. You see the ID as well as the picture of the technician. You can imagine the power of that, and the security associated with that. If a different technician is assigned to the job, it's automatically updated, and the consumer knows that at the click of a mouse.

Now, let's look at some of the services because this isn't all of the power of Web CSR. From here, consumers have the option to upgrade their services, select prepackages, or even enhance TV services. Why don't we order the sports package. In order to order simply click the order button, and automatically the account is updated, and within seconds the feature is turned onto the television set, and the consumer now has the sports package available.

So, I think what you've seen here is the power of Web CSR. And really expanding the touch points for the cable operator, the opportunities for consumers to do business with them. Really driving additional growth opportunities for them. Taking what was a call into a call center to a customer service representative, and taking it into a fraction a cent hit on the Internet, and doing that in a way that you're increasing the services offered to customers, and increasing that level of customer satisfaction.

It's a powerful application, and because of applications and tools like Windows NT as well as Microsoft Internet services, we've brought that power between Cable Data and Microsoft to the consumers and to the cable industry. We're certainly proud of it, and I want to thank you for giving us the opportunity to show the demonstration.

MR. GATES:Well, that's excellent. It's been fantastic working with you. Thanks.

MR. McKENZIE:Thank you, Bill. Appreciate it.

(Applause

MR. GATES:Well, there's impulse buying brought to the ultimate with new technology. Also, this whole idea of getting rid of paperwork, making it so that people can pay all their bills automatically, that's something that I think will become common sense as people are moving out and working with the Internet as part of their everyday activities.

Microsoft in working with a lot of partners, there's some great milestones taking place. We've been investing R&D in this area for over five years. You know, those days when everybody talked about interactive TV, we kept all that work going on building the software to be ready for the opportunity that exists right now. Just to note some of recent milestones. Cisco is a key partner of ours, they're providing communications equipment to connect up PC cable modems and they're, of course, endorsing the cable industry standards, and we've worked together to make sure our software and their hardware makes a turnkey, so you can just put the equipment in and you're up and running.

We do have an over five million unit order for Windows CE in the set-top box. That's with TCI Cable Systems, and set-top box engineered by General Instrument. We've moved one notch forward in that. AT the CEs Show, we announced that we had a memorandum of understanding. Now we've moved to a final contract on that. In some cases, that's not a big deal, but in this case I thought it was a piece of work that I'd congratulate our team on, because it really gets us down to the point where not it's just about engineering. Now it's just getting it all done and that's going very, very well.

Also, during the demo you saw interactive programming, this idea that when you're watching a show, if you want to buy merchandise related to the show, if you want to join the fan club, if you want to get more information, you can simply click and you're connected to the right Website. That is very exciting, and we've got people in the programming industry who are signing up, and we're giving them tools to make that easier and easier.

Now, from a financial point of view, perhaps the biggest thing here is not so much the programmers as it is the advertisers. The idea that you know the information about your customers, and so you can target them with special offers, and let them interact, and immediately say they're interested and want to get more things. I think that's going to make the value of cable advertising rise very, very dramatically. And it's great that some good experimentation is taking place in this area. But that is a huge, huge new field.

Now let's look at little further into the future. Everything I've talked about today, everything I've shown today is here and now. With the rebuilt systems, it's all stuff that you could have up and running within the next year. And we'd love to work with you on that. But in the next three to five years, what software can provide in these set-top boxes will improve way beyond what's out there now.

Microsoft invests over $2.6 billion a year in research and development. And a major focus of that is what we call natural interface. This has been a dream of computer science forever. The idea is to allow computers to understand what we're saying so we just talk to the computer, or to have the computer have a little camera and recognize who's there, who's sitting down, what gestures they're making. Well, with the right software, this will all be possible. In fact, there havde been many breakthroughs in the last two years. Part of it is using the more powerful hardware. Part of it is the software algorithms.

Twenty years ago, people were optimistic they were on the verge of a breakthrough, but what they discovered was that to do this, the computer has to be very intelligent. To recognize speech, you can't just take the wave form, you actually have to understand the context of the conversation. Our speech recognition group calls itself the "wreck a nice beach" group because the words "wreck a nice beach" and "recognize speech", their wave form is almost exactly the same.

And yet, if you walked up to a computer and say, do you recognize speech, and it printed out on the screen, do you wreck a nice beach, you would laugh. You'd look and say, that's the stupidest thing I've ever seen. Well, human beings are able to disambiguate because they understand who's talking, what the subject is, and that kind of learning is what we've had to build into the computer.

And it really is on the verge of becoming mainstream. Today, some people are using this to dictate to their computers, so it's voice synthesis, speech recognition, and visual recognition.

In fact, I'd like to ask Steve to come back out again and give us a little demo of what this is going to look like as we're able to take natural interface technologies and build them into the set-top box.

MR. GUGGENHEIMER:Thanks, Bill. Why don't we pick up where we left off before with interactive programming, as the first start.

MR. GATES:Wow, that looks great.

MR. GUGGENHEIMER:It's a little bit of a change. What we're doing here is actually a digital signal. So, now we've moved from the analog capabilities we showed you before, now we're using a digital infrastructure. So, as we all know, all of the cable industry, or a large part of it, will move over, over time, to a digital infrastructure. So here we have a high-depth signal, this is a 480 progressive signal. It takes up about 11 megabits of the stream and we're showing it on one of the nice available new TVs. The nice thing about this particular signal level is, this is something that can be done basically factor as the existing Web TV set-top box. So, we could actually offer digital capabilities at a reasonable price for the consumer.

In terms of interactivity, we now have the ability to continue on with interactivity and have the same graphics quality level as we do video/audio level. And so, if we move into here, you can see, I can get some more information on the sea, for example, and one of the things, if I'm interested, is, I can go down to preserve, and I can get a second video. The video that we're using is about an 11-megabit stream. So, depending on how much bandwidth we have, we could actually get a second video signal in there. So, again, depending on how we use our bandwidth, we have more opportunities for business, and more capabilities.

Let me go down and show you another example, just to stimulate thinking in this particular area. We'll go back to our tool bar. Let's say I want to become a member, normally when we think of memberships, we think of a subscription to another channel. In this case, what if we became a member to have more services, and if you don't mind I'll go ahead and have you pay for those. So, I'll flip down, and we'll submit this.

And once it's submitted when we return what you'll notice is that our tool bar has expanded. So now, for $9.95 a season I've got more information. I have got world zones, they're keeping track of the acreage of rainforest, and some live events. So, here's another model of how we might use data and video together, in this case, a new form of subscription services. So, again, a shift as we move from the analog infrastructure to the digital, we have more capabilities in terms of video quality as well as what we might do with interactive programming.

With that, I want to step over here. Now let's pick up your discussion of devices getting more intelligent and being able to work directly with us. We've got the game on here, so let's go ahead. Petey. Petey. Hi, Petey.

What we'll do is, we'll send Petey away. Petey is a little helper here we can have help us with the TV. Let me go ahead and bring him back again. Hi, Petey. Petey. Hi, Petey.

Petey doesn't like the acoustics n this room very well, which is why I have this mike on. We'll give Petey one more try. Hi, Petey. Petey is an uncooperative bird. Hi, Petey. You have to speak nicely to him. Hi, Petey.

We'll give him one more try. Petey is a little shy in front of a large audience. Petey.

COMPUTER: (Inaudible.)

MR. GUGGENHEIMER:Tell me what's on tonight?

COMPUTER: (Inaudible.)

MR. GUGGENHEIMER:By myself.

COMPUTER: (Inaudible.)

MR. GUGGENHEIMER:Since I'm stuck in the hotel tonight, we'll see what Petey comes up with for tonight's program.

MR. GATES:He's looking.

MR. GUGGENHEIMER:It's an exhaustive search with all the new cable channels.

COMPUTER: (Inaudible.)

MR. GUGGENHEIMER:Oh-oh, I'm not sure what that was.

COMPUTER: (Inaudible.)

MR. GUGGENHEIMER:Record Martha Stewart, and give me something else to do in the meantime.

COMPUTER: (Inaudible.)

MR. GUGGENHEIMER:What Petey has brought up is actually a game from Acclaim Entertainment, and this is a new game. This game was actually released today. It's called Forsaken. That's something that is available on PC hardware today, and could easily be moved over to advanced set-top boxes as we move forward.

I just want to show you an idea of the graphics and sound capability that would be enabled, so we'll just go through a quick demo.

MR. GATES:So a set-top box, in the next year, will be able to have this kind of graphics capability?

MR. GUGGENHEIMER:This type of graphics and sound capability. You'll hear very high-end sound, very high-end graphics, it's truly the step above. And it's an interesting service to think about providing your customers with not just games, but potentially playing games with other people over your infrastructure as the back end. So the game technology itself is definitely a step forward.

And then back to Petey, as an intelligent device, you saw earlier that we used one remote control instead of two remote controls. In this case, we're using no remote controls. Petey can hear me, Petey can see me, and Petey is an intelligent device, so he knows who I am, and based on my profile over time, he knows what programs to record. He knows whether I'm watching TV by myself or with my family to do different things. So, he's an intelligent learning person who can work with me to make this a better experience.

MR. GATES:Well, thanks for giving us a glimpse of the future.

MR. GUGGENHEIMER:Thanks, Bill.

(Applause

MR. GATES:The key point there is that you'll be able to work with an agent that you choose. Steve chose Petey, but you could pick anything that you like. And it remembers everything it's done with you. And it's not just navigating TV shows. It's alerting you to messages, and helping you to navigate the Internet. Today on the Internet, we type in long URLs. Now, that won't work in the future, because URLs are getting too complex. When you're in the movies sometimes you see in the trailers they'll show a long URL, and people laugh because they think, I'm supposed to memorize those 60 characters and go home and type that in. Well, the way it will be is that you'll just say to your agent, hey, I saw a movie that had certain things in it. Is that out now, what are the reviews, is it available? And so, you'll navigate through a natural language interface. And the rich software to do that will be able to run in the set-top box as the chip power comes along. This is not a vision that's 10 or 20 years in the future. This is something that absolutely in the next three to five years will be the way you think about working with your TV set and getting all the information that the cable world will provide.

So, there are some incredible opportunities here. We're going to invest literally billions in driving Windows CE to be the same type of standard on these devices as it is on the PC. The hardware is going to be far, far better, partly by mixing and matching things that come out of that high volume PC space. And so, the cable industry is at the center of all of this, enabling the services. You are the gateway out to the residences to do this. I'd encourage you to keep making the investment in the rebuild. In the near term, there's no one else who can provide these things. Eventually, with DSL, with wireless technology, there will be other ways for the information to come in. If you get out in front, get the right customer loyalty, the right customer profile, you have the chance to be the one who really drives all of this and leads the way to these new services. So, we're very excited about the opportunity to work with you.

Thank you.

(Applause

MODERATOR: Thank you very much. This will be available as an infomercial starting a week from Tuesday.

We have time for a couple of questions, some of which are going to come from you, we hope. When you see people who look like they have direct broadcast satellites on their heads, they have the microphones. So, we'll just have a couple with us while we wait for you.

First of all, you know, I think, that a lot of this audience regards you with a mix of admiration and awe, and a little wariness. They're not quite sure what the end game is. A gentleman by the name of John Malone, of whom you've heard, I suspect, told his shareholders last fall, Bill Gates would like to be the only technology supplier for this whole evolution. We all would be very foolish to allow this to happen.

So, do you wish that?

MR. GATES: Well, Microsoft definitely wants to be a technologies provider. But, the key to the success of the PC industry has been opening up the interfaces and letting everyone participate, whether it's on the hardware side, or on the software side. And it's only by doing that, that we'll be able to achieve the incredible potential of these new set-top boxes. The platform software we provide is not a substantial part of the expense of this. Even if you take what needs to done on the server and in the set-top box, we are an enabler. And so I think the cable industry should understand that all the customers are theirs. The way the interface appears, it's theirs, the way they choose to roll this out, it's all theirs. So they're in the driver's seat. And the profits of this really are going to accrue to the cable industry, and I think it would be great if they take advantage of everything that the software industry can provide.

MODERATOR: Well, there's a gentleman from Payne Webber who heard the often used analogy of the toll booth, with I guess you and your colleagues as the toll-gate collector. And his reference to Microsoft was, he says, no, no, it's much more insidious than a toll booth, because you could go around a toll gate. It would be like a company that earned a 5 percent royalty every time somebody said type. And I think he was talking about the dominance of Microsoft in the PCS. But, there is no sense, then, that the cable industry has to worry that at some point down the line Microsoft is going to be more than just the enabler, that they're going to be making decisions about what entertainment one has access to, what information or anything like that?

MR. GATES:Well, that's one of those things, it's hard to keep a straight face when somebody says that. I mean, the cable industry, you know, it's their customer, they decide what appears and, you know, they pick whatever technology they want. You know, with Windows CE we provide incredible guarantees about what the price will be in the future, how the APIs will be open, how it will support the open cable standards. And so there's no need for paranoia. In fact, you know, the cable industry is a competent industry, and that makes them a pleasure to work with.

MODERATOR: A couple of years ago at conventions like this one would hear a big debate, one wire or two. And the assertion by some people on the television side of things was that people make distinctions, when they want to be interactive they go to their computer. But, when they sit 10 feet or more from a large screen TV, they're tired, they just want the entertainment. Is it your assumption that this distinction is, sooner or later, I guess sooner, going to be eradicated?

MR. GATES:Well, there's one distinction that will go away. There won't be a need for multiple wires. Across your cable you will be able to do video, Internet, voice, all of those things. You will have a variety of devices connected up. You won't go to your living room and on your large TV decide to edit your work memo, or do your homework. You'll probably go into your den, or the kid goes up to their bedroom and has a smaller screen that they sit closer to and that has high resolution. But, when it comes to choosing TV shows, playing multi-player games, certainly you're going to have very substantial amounts of interactivity, even down in the living room, which is where you would normally think of it as the TV set. So one wire, but quite a variety of devices hooked up to that, all sharing information and having the compatibility of a common platform.

MODERATOR: One more, and then we're going to turn to the audience, assuming we can see them. The Justice Department has taken an interest in Microsoft. You may have heard this. And my question is, if they are looking at you warily now, because of the dominance that you have in the PC, isn't the entrance of Microsoft into the television field, even if it's just as an enabler, just going to whet their appetite to give you a lot more scrutiny and regard you with a lot more wariness?

MR. GATES:Well, I'm not sure how you get above 100 percent wariness, to be honest.

(Applause

MR. GATES:The fact -- we've increased R&D greater than 20 percent a year every year, because of the new opportunities. Part of that has been creating the Windows CE group, but the biggest part of it is defining that natural interface work. And that's our big leadership. Another big part is how we work with software developers. And the fact that we're going out into new fields, and making the technology available, that's a great thing for consumers. And, you know, the software we provide is lower priced than software has ever been. That's the magic of volume. The scale economics that the cable industry is so familiar with, in many things, applies to software very, very well.

And so by providing that, not only to the cable in the United States, but also the cable industry worldwide, we'll be able to constantly increase that R&D, and yet have it, as a percentage of the set-top box, or the server cost, be very, very modest.

MODERATOR: You know what, Larry King would never forgive me for not asking you? What do you watch? What do you watch on television?

MR. GATES:Well, I've got a house now that has some very nice high-resolution displays. And I've done some neat things with them, where I can sequence still images, so that passively you can see art, you can see famous people, whatever you choose. And different days I'll pick different things. That's all the kind of thing that could come across through the cable, as people are getting these better and better screens.

MODERATOR: But, do you watch television?

MR. GATES:Absolutely, I watched the Sonics game this weekend. I -- the thing about me, I don't watch TV that much. So then when I get in that hotel room, it's so fascinating, I find myself, you know, a few hours later, I think, geez, I'd better get some sleep.

MODERATOR: Yes, it could really impinge your career if you get too much television.

Okay. Let's turn to the audience, I don't know if we can see them, but -- here we go. Like the old Carol Burnett Show. Does somebody have a question? This would be faster with a cable modem.

QUESTION: I heard something to the effect that Windows CE adds enough memory requirement to set tops that it increases the price between $100 and a couple-hundred dollars. Will CE be re-engineered, and still retain a lot of its functionalities, and not require so much memory?

MR. GATES:Well, that is not the case. Windows CE runs in very low memory. You can have set-top boxes less than $300 that run Windows CE. About 2 megs of RAM is adequate to run Windows CE. So it's the smallest operating system that's out there. And you might be amazed that some of these digital boxes, despite their immense capabilities, are not going to cost dramatically more than you've been paying for what you've gotten that hasn't had those things in the past.

So Windows CE does not lead to an expensive box. It was designed to allow for a very high-volume, low-cost box. And we never would have been able to succeed in getting TCI to buy 5 million units if it drove up the hardware price.

QUESTION: (Inaudible.)

MR. GATES:Microsoft is not in the communications business. The only investment that Microsoft itself has is the Comcast investment. And that is a passive investment. I mean, Comcast is a great partner, and you're going to see some exciting things come out of that work that we hope will be a showcase for the entire cable industry. With GTE, Microsoft -- what we've done is, we've connected some of our employees up with DSL. But, there's no investment there.

The fact is, that if there are cases where somebody looks to us and says they want to build out broadband connections, we'll always look at that. But our role is as a software provider. If you take Teledesic, I'm personally an investor there, not Microsoft. And people should understand that Teledesic is in no way something that affects the cable industry. What Teledesic is doing is developing high-speed, two-way connections to rural areas. It will never be economic to run the fiber out to those areas. In areas where you have density, which is where you find cable, it will always be more economic to run the fiber. It won't make sense to have this two-way ground station.

The advantage that cable has over satellite is the interactivity. And it's not going to be inexpensive for satellite to try and get two-way hook-ups. In fact, for the geostationary satellite, that's very difficult. For Teledesic, it's aimed at business users in rural areas, letting them connect up and have high-speed Internet. So it's perfectly complementary to the terrestrial infrastructure. Microsoft, you know, our main goal is to take this software that allows the scenario you're seeing, and to work with people who have got that high-speed connection, and today, the leadership opportunity is absolutely with the cable industry.

MODERATOR: I think this is the last question, because we are running a little late. We want to get to the next section and the exhibits. Over here.

QUESTION: You're a new parent. I'm curious to hear what developments you're planning and you hope to see for children, education and entertainment programming?

MR. GATES:Well, probably the coolest thing about the Internet and having these interactive devices is what it's going to mean for education. The ability to let teachers find neat material, and share with other teachers, to get all the great stuff that the Library of Congress is putting on line. To let parents connect up to the school site, and see what the homework assignment was, see what's going on in class, and participate in that. You really are going to have what I think of as a connected learning community.

Now, one piece of it is that it's so exciting, so valuable, that we do have to start worrying about the fact that some kids will have this connection in their homes, and other kids will not. And that's why individually I've created a foundation that's going to provide an Internet connection in every library in the country. So any kid that can reach their library can go in and interact with the Internet.

The educational use of this is really explosive. If you believe, as I do, that kids have incredible potential, incredible curiosity, if you can give them a way to get their questions answered, try new things, and even find other kids who have the same questions, I think they're going to realize more of that potential. So the Internet connected through cable here, is something that, you know, I think my kids will get a lot out of. And that's part of what makes this a fun business to be in.

MODERATOR: Before we leave, every major American industry sooner or later got so big that the government itself stepped in and said, we are going to impose some limits, restrictions on you. It happened to steel, the railroads, the automobile industry, it happened to broadcasters, it even happened to cable.

MR. GATES: Even cable.

MODERATOR: Even cable. They know this full well. Is there something that you can do, either as Microsoft or in a partnership with cable, some way to behave that will say, we don't -- we want to keep our innovation going, government's going to stay in our way, but we understand you have public interests at stake, and here's how we're going to meet them?

MR. GATES: Well, I think there's incredible opportunities here, things like connecting up schools and libraries, at very low cost. The beauty of what's going on here is that because the software allows you to provide more services, you'll be able to increase profitability, without having to drive the price of the current services. And whenever the government looks at an industry and says, wow, customers like what they're doing, customers are excited about these new things, and the only way the investments and the infrastructure are going to take place is if we let these people move in an unfettered way, then assuming the political process works, which it generally does, they will let that industry do what they want.

You know, the key to me is that Microsoft and the entire PC industry happened here in America, because this country encourages entrepreneurial activities. Likewise, the cable industry is another great example of the kind of things that happen in America, and not as much in other countries. And so the principle of allowing innovative new products, and encouraging even successful companies through those products, that is very strong here in this country. So in the long run these government issues are not going to hold back the cable industry, or the PC industry. I feel very confident of that. And we ought to get on about our business, and use the great new work as an opportunity to show regulators that they don't need to hold us back.

MODERATOR: We'd like to stay longer, but Bill has promised to show me how to save to the A drive, so thank you very much and have a great convention.