Bill Gates Keynote
Stanford University
Palo Alto, CA
January 27, 1998

ANNOUNCER: Ladies and gentlemen, welcome and thank you for joining us to this very special event and the speakers here is we invite business leaders to share their insights and their views of the future on the industry with us. Today, with our core sponsors, the Public Management Initiative on Technology and Social Change, we're proud to welcome William Gates, Chairman and founder of Microsoft. Mr. Gates has been on our wish list for a long time. Peter Drucker said that the best way to predict the future is to create it and we believe Mr. Gates is doing exactly that. And today we are fortunate to finally have him with us.

We have asked Mr. Gates to give some opening remarks on macro issues like where technology is headed. After that, you are invited to line up in front of the microphones. We will dedicate most of the time of today to a Q&A session that will end exactly at 1:00.

Now, to formally introduce our speaker, and lead the rest of the session, please help me welcome the Dean of the Business School, Michael Spence.

MICHAEL SPENCE: Thank you ladies and gentlemen and good afternoon. On behalf of the entire Stanford community, I want to say a very warm welcome to our speaker today, Bill Gates. It's a privilege to have you back at Stanford. Bill Gates is the founder, chairman and CEO of Microsoft Corporation, the leading software company in the world. Born and raised in Seattle, he attended Harvard University and left to found Microsoft with Paul Allen and to develop the operating system for the new IBM PC. In those days, there were mainframes and minicomputers and the newly introduced desktops, also called microcomputers, hence the name Microsoft. Today 'micro' in reference to this company seems an extreme misnomer and 'soft' is at least debatable.

Bill Gates and his friend and colleague, Steve Ballmer, were students in a graduate economic theory course I taught in the late 1970s at Harvard. They were the only undergraduates in the course and both got A's. In a recent interview with the two of them, I was relieved that the course did not suffer too much damage.

Today, the roles are reversed and we are all, in very many ways, students of his. Bill Gates is not only the leader of one of the most successful companies in this century, he and a few other pioneers in the building of the digital information age have created a set of industries and a revolution that have influenced the way we live and work and learn. It's a tremendous honor to present Bill Gates.

BILL GATES: Well, it's great to be here. And as they said, I want to use most of the time to answer questions that people have, but I thought I'd talk a little bit up front about the amazing business that I've had a chance to be in and some of the incredible things that are going to be happening in that business.

We're really just at the beginning of the Information Age. Now, why do we call this the Information Age? Well, the thing that's going to separate successful organizations from unsuccessful ones is the way they deal with information-the way they share that information, the way they make decisions, they way they use the tools of the Information Age to help them design products, work with customers and do all the things that are crucial in a business of any kind.

Now, I got started on this at a pretty young age. I'm always reluctant to talk about my background, since I'm a dropout and come to a group like this … I'm not recommending that people drop out. I think going to school's a good thing. I certainly enjoyed it … taking classes like EC 2010 that Dean Spence taught. The neat thing about that class was that Steve Ballmer and I-and Steve's now the number two person at Microsoft-we fell so far behind that, during what was called 'reading period,' we had to work all night to try and figure out what the heck was going on and we kept thinking that we had a big advantage because we were math students.We understood math and these poor economic guys, they didn't really understand math at all. So we thought we must have a big advantage, but whenever we took the practice quizzes, we weren't doing too well. We just worked and worked and really--Steve and I--that was a key part of getting to be close friends. And so it's kind of interesting that, when I got the company started, there was clearly a lot of potential.

We were the first microcomputer software company, but we were having a very hard time deciding how to manage the company. I kept hiring these great engineers, and they didn't know how to manage and customers kept coming to us and saying, oh, could you do this, could you do that, and we didn't really know how to separate the good opportunities and the bad opportunities and so I decided that the only person I knew who really had sort of the management touch and could come in and help me was this guy, Steve Ballmer.

But the problem was that he'd started at Stanford Business School and his parents' dream was that he would graduate from Stanford Business School. In fact, he won a couple scholarships and he used to sit in the front row of the class and raise his hand all the time…a very different guy than I am. And so I thought, well, jeez, I gotta get Steve to come help me out run the company. And it was pretty tricky…there was a big negotiation and his salary package had two parts: one was his salary and the other was the part of the company that he'd end up owning. We agreed on the part of the company he'd own very easily-that he'd get, like, 7% of it. But Steve wanted to be paid $50,000, so we argued about that a long time. Of course, that ended up being kind of a rounding error in the equation when it was all said and done.

So Microsoft is very lucky to have a lot of great Stanford alums working for the company. In fact, three of the people on the Executive Committee are Stanford graduates and we have several hundred people who've come from Stanford and every year continue to try and bring in people who want to help us push things forward.

The business is an exciting business because it's going to reshape not only how companies work, but also the way that people learn, the way that people buy things and the way that people entertain themselves.The technologies involved here are really a superset of every communications technology that's come along in the past--TV, radio, newspaper-all of those things will be replaced with something that is far more effective. And the very mechanism of capitalism-matching buyers and sellers-will be changed by having this wealth of information that's out there. And I think being involved in creating the building blocks that will allow this to happen is the most interesting thing that you can do.

Now, when we started the company, that wasn't obvious. Computers were very expensive, they were used in the back room, and it was only through the miracle of Moore's Law, the exponential improvement in the chip capabilities, that we could even see that this new approach would take place. The great insight that Microsoft was founded on was that, not only would software be important, but that these new chips would lead to a complete reorganization of the business and companies would be more specialized. It seems strange that, when you have an advance like that, that you have actually more fragmentation-companies that try to do it all are the ones that get passed by. And most of the computer companies didn't see the change coming and went through some very tough years trying to get their cost structure down and change to this new PC orientation.

It's kind of a milestone, I'd say, that Digital Equipment just got bought by Compaq Computer. I got called Sunday night. It's a very good development for Microsoft, because it's a partner who's strong in services combining with a partner who's strong in products. But when I grew up, the really cool computers were computers from Digital Equipment and they were, you know, sort of THE computer company. They were smaller than IBM, but they really believed in computers that had timesharing, computers that were easy to program, and so that's where I had all of my early software experiences. And several times, when I was a little bored with school, I'd go back and interview for jobs at Digital just to kind of have them give me a little boost and say, yeah, we'd love to hire you here. I actually never went to work there. They used to have these helicopters-they'd pick you up at the Boston Airport and fly you out to their headquarters.

So anyway, Digital was this amazing company and was doing the cool things, but they should have been the company that led the PC revolution. Now they had driven things down to low cost, but somehow they got it in their minds that minicomputers were the last step and didn't make that change to the PC and so they had a particularly tough time and a particularly slow time making this transition, despite all the great people there and all that great technology.

Now that kind of development is very instructive for people working in this business. The history of our business is the history of people who miss the new trends and a new company comes along. So unlike most businesses, where you can predict who will be the leader in 10 years or 20 years, in our business, you can't. Now, who will be the leader in soft drinks 20 years from now? Well, that'll be Coca Cola. As my friend Warren Buffett likes to say, it's a business so good that even bad management couldn't change what's going to happen there. Now , they happen to have very good management-don't get me wrong-but the fundamentals of the business are the key factor there. In our business, you're really riding the wave. You've got to find where those changes are, and so the business cannot survive bad management. The company that's in THE very best position in our industry-if they were doing bad work over a period of…two or three years, they would be completely eliminated within five or six years.

Now, I would claim that Microsoft is in the best position of any technology company, but in no sense is it a guaranteed position. And that's part of what makes things fun. You know, we come into work every day knowing that we can destroy the company…and that we better keep our wits about us, make the long-term investments in research that are going to make a big difference and really drive things forward.

Another great thing about software is that people are so intensely interested in using it-they have so much feedback about what's right, what's wrong, that if we just tapped into that feedback and let them guide us, we really can't go wrong. That's why we have these beta tests now on products where we get hundreds of thousands of people using the products.

The economics of the software business are very unusual because the cost structure doesn't fit the sort of normal manufacturing model where you just sort of take the demand curve, supply curve, intersect it and there you go-there's what the equilibrium looks like. We have virtually all fixed cost and almost no marginal cost. Today, the majority of our software is sold without any physical product moving at all. We just sign a license agreement with a big company, say, General Electric and boom! They have the rights to our software. There's no boxes involved in that at all. Even the small portion of our products that are sold to consumers that are still sold in boxes-that's now a CD, so our cost of goods sold has gone from about 20% four years ago down to about, oh, 6% now because of the way the licensing programs blend in. So it's almost an unimportant part of the business. In fact, we took all the people we had working in manufacturing and we outsourced that part of the company completely. We take anything that's not core and send it outside, so we're really down now to the key of our business which is supporting the products, building the products and testing the products.

When you get large-scale engineering projects, testing is a very, very big part of what goes on.We have as many people who test our products inside Microsoft as we do people who build the products. I sometimes joke that, you know, we only have the people there to build the products so they can create the bugs so the testers have something to do. It's really just a big testing organization with those other guys tacked on.

Now, if you think of the software industry, it's actually a fairly small part of the economy. It's a fun part of the economy. Microsoft is about 4% of the software business. Employment is about 600,000 here in the United States-that's about double eight years ago.This is an industry that the U.S. dominates like no other business. I mean, there's nothing even close to this. The other companies outside the United States that do well at software products feel a need to move their operations to the United States. So SAP, which was the biggest non-U.S. company, although they still do a lot in Germany, their center of gravity is definitely shifted in this direction. They have a huge operation down here in this area that's doing a lot of their very technical work. But if you just look at the software industry, that tends to understate the importance of software in the economy and what's going on. If you look at companies you wouldn't think of as software companies, like, say, a car company-they're using software tools to completely change the design process and the logistics process. One of our best customers is Boeing, and Boeing went through a big transition of designing airplanes where they'd actually have to cut parts and see if they'd fit together and try things out that way to now having complete digital models of the airplane. And they share those digital models with all of their suppliers. They can do a full analysis, do simulations on what that design looks like-and so it's a very different process. So using that software well has been very key to their business.

Now, I'm painting a very optimistic picture here. I'd be the first to admit that the software industry hasn't made things as simple as they should. Even though the price of the PC has come down a lot, even though it's a much better machine, it's still very opaque. We have some error messages that even we don't understand. And why should people get these obscure error messages?

We made a little video that shows some of the dilemmas that people have when they're trying to use this new, high-technology gear. It's a short little video, but I think it gives you a sense that we do have a bit of a problem to solve. So let's go ahead and take a look at that.

(Video.)

It was a lot of work to do to make this all come together in an easy fashion. A big part of it's going to be getting everything hooked up to the Internet-not just PCs, but also TVs and a proliferation of smaller devices that we think will be pretty important. This is an example of a product that's just come out, it's called a Palm PC and you can stick it in your pocket…

These displays now are getting to be very high resolution, nice color capability, and you're getting the wireless connections and so you can have pretty rich software applications and data synchronization with any of your other devices. So we've got palm PCs, hand-held PCs. I've got an auto PC that we've worked with several of the auto companies on. That's one of our first products to use speech recognition, so you can still pay attention to your driving while you're asking for radio tunes or traffic reports or the latest e-mail messages being read to you with that auto PC.

In that TV area, there's going to be a very intelligent set top box and that's where we bought Web TV and we're working with the cable companies and announced that there's a design for tens of millions of these new boxes will get out in the next three or four years. So Internet access, interactive programming, interactive advertising--all the rich things that you can get through the Internet--will be available through the TV.

Now, the Internet was an interesting development for Microsoft because, although we'd always expected the computers to be connected together and we were sort of waiting for it to happen, it caught us by surprise that…just, all of a sudden, growing out of the university environment, these protocols became a standard. And so we really had to exercise a lot of management leadership to say, wow…how do we get the whole culture of the company turned around to focus on this and so we had a lot of retreats, we set everybody up so they could use the Internet, we really let lots of ideas flow…and it was kind of crazy for a few months there while we said, hey, there's a crisis here. Let's have everybody think about it, everybody work with it, and then we got together and came up with some pretty clear plans and went out and announced in late 1995 that we were hard core. We were going to get the stuff done and move into a strong position and that's really a fun development because it's been pervasive in all the products.

That same type of focus now is important for us in two new areas. We're continuing to do all the Internet things, but the new things are scalability, which means taking PC technology and moving it up to take on the tasks that only mainframes--or very, very expensive UNIX systems--have been doing to-date. And the other is simplicity--that I talked about. How can we change the interface so you don't see all that complexity that's underneath the system?

There's no doubt that, over this next decade, the whole way you think of these devices will be very different. The quality of the screens-you will be reading off of one of these devices…the ability to talk to the machine or have the machine hear what you're saying. If the machine could hear what you're saying right now, it'd understand how much you hate those error messages. But in the future, it will be able to take all that input, even being able to see your expression, how you're responding to things, what gestures you're making, and make that part of the interaction. So this will become pervasive in every day life.

The software that does understand natural language, that can remember what you're interested in, that can do that kind of visual analysis and connect you up with the things you care about-that's fairly complicated software. And so it means that there's really an opportunity to take Windows in a direction that we haven't done before. And so that's why I say we're just at the beginning of something that's not only a fun business but is going to have a pretty broad and amazing impact.

Thank you.

SPEAKER: Mr. Gates, in the book that you wrote about a year and a half ago, you mentioned that Internet penetration outside of the U.S. and Scandinavia has been pretty slow and I was just wondering if you could sort of talk a bit about that from an economic development perspective. What sort of trends do you see taking place in the developing world and in Asia and what implications do they have, not only for your business but for the way the world interacts?

BILL GATES: Well, the PC phenomena is a global phenomenon. Of the 80 million PCs sold a year, 30 million are sold here in the United States, so it's by far the biggest market and in terms of home penetration of the PC, this market has come along faster than any other market. It's about 40% of the homes and in the next couple of years it'll go over 50%.

Now that's not to say that other countries aren't coming along. The lag between us and other countries is actually fairly small on most of these things. The PC standard is identical everywhere, which is great because it drives the volume of parts. We've had to adapt our software so that we can handle all of the world's languages…and it's kind of an interesting thing--being able to handle Arabic that sometimes goes this way and sometimes goes this way, being able to handle alphabets with over 60,000 characters--and have that be part of the standard product that we ship so that we can have one binary that goes worldwide. I have no doubt that the Internet will happen everywhere in the world.

It'll happen first in business because the imperative for business to be in touch, to work efficiently with customers, is very, very strong. And you'll even peak the global economy that's been pushed forward in goods by having low cost transportation and you'll now extend that to services. You will be able to go out to the Internet and say, I want to get some software work done and companies in India and Russia will be able to put up their capabilities, their bid for doing that work and you'll be able to use the Internet as a way of not only finding them but working together with them. And so it will push forward the efficiency that world trade brings.

Now, getting Internet connections into homes, getting those to be high speed, that's a problem even in this country. It's been very slow for the phone companies and the cable companies and we're doing everything we can to push that forward.There's a few countries that are ahead of us-Australia has done more installation, Singapore is way ahead of us, Sweden's way ahead of us-because they've taken their communications regulations and just made sure that those investments get made. So in terms of a big market--yes, the experiments will be done here but there's a lot to be learned elsewhere. The kind of basic technology we build will be the same for all of these markets. And in some ways it's actually kind of nice that the markets don't all develop at once because we wouldn't have the capacity, really, to help all the customers out if they all emerged in every country at the same time.

SPEAKER: You mentioned that, in riding the wave, it's pretty fun to go into work every day knowing that you can destroy the business. My first question is, what's it like going to work every day knowing that the Justice Department is trying to destroy your business and, secondly, will any of the features planned for Windows 98 have to be abandoned or compromised due to the Justice Department?

BILL GATES: Well, one of the privileges of success in this country is government scrutiny and that's okay. I mean, we have a very sexy industry. If you worked at the Department of Justice, which would you rather investigate-bread or software? And so they enjoy learning about these things and, every time they think they figure it out, it just moves ahead a little bit and so there's more for them to spend time on. This industry is the most competitive part of the economy, whether it's prices coming down, creating jobs, new companies coming into business, and so there's a certain irony in what's going on here.

Our, I guess you could call it, 'dispute' with the Department of Justice is about over whether we need to cripple our products or not. That is, can we take a feature that was once available separate from the operating system, like a browser or a graphical interface or any of the other things we've done, and then integrate that into the operating system so that users don't have to go out and buy those separate pieces and they have one, unified product that creates a simple user interface.

To us, the principle is so clear that we really don't worry about it much. We have to do a better job of articulating what's going on here to the public at large and to politicians, but for all of our software developers…I've said to them, hey, don't think about it. Just go ahead and do the great software. It's very similar to a situation that we had for five years. There was a lawsuit where Apple sued us and said, basically, that we shouldn't ship Windows or any Windows applications and our developers would say to us, well, are you worried? and I'd say, no, no, no. It's fine, this will be fine. And they'd say, well, why are we still developing software for the Macintosh? and I'd say, well, we're nice guys. It's okay. Just keep doing it, this won't be a problem. And so we have pretty much the same thing here with the Department of Justice. But the public awareness of the technology business and the Internet and what's going on there is so much broader today that it's a bit more of a communications challenge to explain what the innovation is like and what kind of things that we need to do to be able to move forward.

So with Windows 98, we're not changing anything we do there. Worst case, they'll ask us to create a crippled product as well as the normal product and that would be too bad. That would really hold us back, so we're quite confident that won't happen.

SPEAKER: In the last year and a half, you've attracted an amazing amount of brain trust into Microsoft, but it's not been in the traditional software development area. It's been more of a…what looks like a rebirth of the old AT&T/Bell Labs, where you have multidisciplinary researchers coming here. I wonder if you could comment on that and also tell us what role it's playing in Microsoft's future or is it more just something for the public good like Bell Labs was?

BILL GATES: Well, we don't consider our research, even though it has broad societal benefits, as being some purely altruistic thing. We're making those investments in research because we believe that they will allow us to make better software products. Now, in some cases, we fund things that are fairly unusual. We've hired some very world class theoretical mathematicians to think about models of computation and complexity. The likelihood that that will ever come in and help our products is pretty low. Even so, you can multiply a low probability by a big benefit if it happens as, hey, that's great! It's fun to have those people there. They are incredibly bright people.

A lot of our research is very direct--our natural language research, our vision research-there's no doubt that can apply to products. And so the problem that a lot of companies have had-Xerox, AT&T-where they didn't get their product group and their research group to work together and have just a spectrum of work, some of which was very risky and some of which is less risky, and have people moving back and forth between those groups sharing ideas and thinking about when things are ready to be applied. We really don't have that same problem. When we hire people into our research group, one of the questions we ask them is, would you enjoy having your ideas get into high volume products? And a little bit we select for the people who think that would be a very neat thing.

We don't give them schedules, we don't give them deadlines, we let them go off and do what they want and that is the fastest growing investment that we're making. It's not a financial constraint that holds us back doing it even faster, it's simply finding the great people. And we have diversified a little bit, opening up a research center down in this area, research center in Cambridge and we'll have a couple of others around the world just to make sure we can bring in the very best people, no matter where they're located.

SPEAKER: Yes, Mr. Gates, I was wondering what your visions were for the future of Microsoft in the next five years and is there a threat of competitors, especially things like Netscape being sold for free right now, and what is your vision of the competitive advantage of Microsoft in the next five years?

BILL GATES: There's competition out there-lots of competition. You know, you've got Sun, who thinks the PC is an evil thing, you've got IBM, who still likes to sell high priced computers, you've got any number of companies. I have to say honestly that, if we slow down and don't do a good job, the companies that are most likely to replace us are companies whose names you don't know today. Start-up companies who would take a new approach of doing something in a different way, in the same way that Microsoft did when it came into the business. Nobody thought we would be the ones to redefine how computing worked and make it so you could exchange different hardware and still run the same software on those machines--that was just heresy. People would have laughed if you would have said it. It's not clear IBM would have ever worked with us if they'd known that that would be the eventual impact of having standards like our operating systems. So we've got to make sure we're pushing ahead and doing exciting, new things.

As far as browsers go--basically, nobody ever paid for a browser. Did anybody here pay for a browser? [Several people indicate they had.] I'm sorry, you should get a refund. It's a little bit of an accounting trick that they ever allocated money in that direction, because you could always download the thing and they would never come after you and say, hey, the 90 days is up--you should be paying some money for the thing. So the browsers have always been a feature that people have offered with other products that they offer. In their case, it's a lot of server-based software. In our case, it's a client operating system and a server operating system. They're a fine company. They're going to continue to do good work and so we're just going to have to make sure that we're competing with them very effectively.

A lot of their software runs on Windows NT, so it's a bit of a classic situation that you have in the computer industry where you're competing with a company, while at the same time working with them to make sure that they're building on top of your products in a way that will help those products. And so, Windows NT has benefited from software products from Oracle and IBM and Netscape and we think that that's a fantastic thing.

In the next five years, in some ways there aren't going to be that many surprises. Windows will have two very, very major releases-Windows in that time frame. You will start to see speech become a standard part of the interface. You will see the Internet become more mainstream. Our biggest products will still be Windows, Office and Back Office. Some of our Internet-related content business will be growing up, but there's no way in that time frame that, even in the most optimistic view, they could catch up to what have been our mainstream businesses.

The thing I think people underestimate is that, when you have a communications technology like electronic mail and the Web, that has a way of spreading out where, as soon as you get involved, you want to draw other people in. If you use it every day, you want your doctor to be connected up so you can send a question to him, or your accountant so you can schedule something with him or share ideas or…any of the products you want to buy you want to have out there in an easy way. And we are…moving towards that critical mass, and particularly when you combine that with the new devices like this, I think it's still underestimated, which is good new for us because there's a lot of wonderful software that will come along with that popularity.

SPEAKER: In recent years, Microsoft's been making a lot of investments in what I would think of as non-traditional areas in thinking--Web TV acquisition, even Microsoft Barney talking doll. And particularly into some transaction-oriented businesses like Expedia, Investor and CarPoint. You'd mentioned just before that those probably would not catch up to your traditional businesses in the near time frame, but my curiosity is, when do you think that will happen? Do you think they ever will surpass the traditional businesses in terms of importance to Microsoft and, also, how will you keep your focus…especially, as related to before-you said that you tend to outsource a lot of non-key areas?

BILL GATES: When you go into new product areas, you've got to create a product group that's very autonomous and where they've got a focus on that business. And so there's a group, for example, let's take Expedia--that's a travel transaction Website that we do. There's a group of very, very smart people who come in every day and think about Expedia and who their competition is and how they're going to use basic software technology to win in that business. We have found that in all these businesses, the ones where we sort of get back to our roots of using software are the ones that we've done the best in.

Now, like all Internet-related investments, the payoff is not in the near term. You have to believe the Web is going to be very big to jump into this thing at all, because there's so much over-entry, there are so many companies jumping in to do these things and the valuations are very high and…it's only with that faith that five years from now that most adult Americans will be using this thing as part of their regular daily activities, we can say, hey, these are great investments.

I have to say it would be tough for any of them to match our classic businesses-the office business is a five billion dollar a year business, with nice profitability. The Windows business is now a six billion dollar a year business, with nice profitability. In the world of business, those are two of the best five businesses ever invented, you know, right up there with Coke and very, very few other things. I don't think any one of the new things we're doing will reach that level, but they can be huge contributors.

You mentioned our Barney doll business. That's where we took some software, designed a plush doll, outsourced all the manufacturing of that, and in the first year we had a forty million dollar business and that was with only one character--just with Barney. Now, with the improvements in that technology, we'll be able to make that animatronics far more engaging. It interacts with the TV and the computer and we see a lot of potential for that.

We got into the mouse business--another business where we don't actually manufacture anything. We outsource that and we make over fifty million dollars a year in that mouse business. In absolute, that's a great business to be in and it's helped drive some of our software demand. So we need to have a management system that pays very close attention to the big products and yet creates product groups for the other products that can drive forward and do what's right for those businesses. And that has worked very well for us. You know, Microsoft Project-it's a 200 million dollar a year business-very, very profitable--and it benefits from the other businesses, but people like to run that separately.

It's also great for our career development that we take people who are in the mainstream groups, give them a couple years out managing one of those other groups, let them do very broad business things and then they can come in with much greater responsibility back into those mainstream groups, so I enjoy having those other businesses. Some of the businesses will not succeed, some will have to shut down. Some are doing a great job teaching us what Internet people need, and that's influencing our normal products and so it's part of our entrepreneurial spirit. As long as our core skill of software development is at the heart of these tings, we feel good about…

SPEAKER: You have been listed in Slate magazine as one of the 10 most generous American philanthropists in recent times. Why do you think that charitable giving is important and what principles do you apply in giving?

BILL GATES: Well, if you're as lucky as I am, I think it's worthwhile to give the money back for good causes. Now, I have a set of skills that happened through luck and timing to match what's valuable right now. A hundred years ago, who knows? And so there is a certain randomness where things fit together and I think anybody who has that privilege…the best thing for society is not to have them pass it along to their kids or have them spend it, but rather to pick the things that they think can improve society, whether it's in this country or around the world.

At this stage, I've given a little over $500 million to two foundations. One is involved with equipping every library in the country with an Internet connection and a computer connected up on the Internet so that kids or adults or anybody who goes to that library, in the same way they can get to books and have knowledge that way, they'll be able to get all the things on the Internet the same way that a privileged kid can as well. So that's a very exciting thing and that's gone very well.

There's some other causes that I've addressed in my other foundation. It hasn't been a huge percentage of my time. You know, I'm 42 years old and my primary focus is my job, but assuming that my stock in Microsoft is still worth something, that I don't fall all the way off…there'll be quite a bit of money to give away for good causes, because I'm not going to pass it along to my children and so it's there for society. I'm just a steward of it for the period of time that I own part of Microsoft.

SPEAKER: I'm interested with regards to the Gore Commission-what they're to do…I know this has been in place for a long time and what they're trying to do is regulate, if they can, this burgeoning market and with regards to accessibility, availability, program quality, intellectual property. With regards to the Gore Commission, have they consulted with you? Are you….aware of what they're doing? As far as the effect of this on a more global scale--again, with regards to accessibility programming, intellectual rights-do you have anything to say about that? With regards to legislation--they're putting legislation in place and trying to anticipate what they see as--again, with regards to intellectual property…

BILL GATES: Well, there was a group that Nathan Myhrvold, who works for us, was part of. What was it called? It was called together by the government and it was a lot of leaders talking about the information highway and what should government policies be related to the information highway?

And we are spending a lot more time in Washington, D.C. with politicians because there are some very tricky issues. There is the encryption issue…this government has been overly restrictive, we would say. There are copyright issues, there are privacy issues, issues about how the patent system works in various of these areas, free trade issues. And so, although it was nice when Microsoft was small, to not have to be at all distracted by political-type considerations, we are a major player in the information business now and so we've got to be back in D.C. spending time with politicians.

I don't know about the particular commission you're talking about, but we've got to make sure government policies foster what is good about these developments and that they understand what is appropriate in terms of avoiding the abuses-things like what should be done to avoid children having information that you don't want them to get at or, perhaps the most complex is the whole privacy area.

SPEAKER: You've made an investment in Apple Computer and I'm curious what your view is of Apple's role in the future and what role you, Microsoft, might be playing in that development.

BILL GATES: Apple's role in the future is to try to make money. It's a capitalistic enterprise and Apple's made a huge contribution to this business. We backed the Macintosh from the very beginning. We were the only company, besides Apple itself, to have software the day the machine shipped. It was fun to work with Steve Jobs on that project because that really ushered in high volume graphical interface. Xerox invented graphical interface and they-in terms of the engineering work-they deserve the most credit. But if it wasn't for the Macintosh, I don't think it would have happened for quite some time.

So we've got a huge investment in building Macintosh applications and we actually have a higher share of software applications on the Macintosh than we do on Windows and so it's our responsibility to keep improving those applications and work with Apple to work with our mutual customers. And there has sort of been a resurgence of things we're doing with Apple.

The investment was sort of a proof of how serious we are. Economically, it was not a big deal for them or a big deal for us. The big deal is doing Internet Explorer 4.0, doing Office, and working with them to get their focused marketing message out. So, I'd say they are great proof that this is a very competitive business, that even if you do wonderful work, you can't rest on your laurels. You have to constantly renew what it is you're bringing to the marketplace and I'm hopeful that Steve, and the group he's putting together there, will have Apple continuing to make the kind of great contributions they've made in the past.

SPEAKER: Today's event is co-sponsored by the Public Management Initiative, whose theme this year is Technology and Social Change. I'd like to get your ideas on technology and our democracy. In particular, for example, how technology can increase the accountability of our representatives to their constituents, ways that, for example, the public can greater participate in the shaping and guiding of the political agenda.

BILL GATES: Well, I'm very optimistic about that. I think if all the information you get flows through mass media where the articles are fairly short, where it's hard to dive in and get more information, where it's hard to find out who else is interested in that topic, where, if you have a good idea-how would you publish your idea? Well, you could send a letter to the editor, but what are your chances of getting it actually to be seen?

With the Internet, all the information is there. Now, I love the fact I can go out and see, for any bill that's being debated in Congress, I can see what's being said. For any lawsuit, I can go in and see what the filings are and kind of have a direct feeling for how the process works there. MSNBC does a thing where if you'll enter your zip code in, whenever there's an article about a political issue, they'll add to that article, at the end, what your representative may have said about the issue and how they may have voted. And so it can bring it home to you and you can even click and send e-mail to the mailbox of your representatives.

Now, most representatives aren't very good at dealing with electronic mail input. Over the years, they've gotten very good at paper mail coming in, but they haven't applied that same expertise to engaging on electronic mail. So there's some work that they've got to do there to make that more effective.

I think government can be far more transparent. The information will be easy to get to. People organize in new ways and I think, even in some ways, we can move away from sound bytes to knowing things in depth. We can feel like we're not excluded from anything that's going on there. So I think it'll be like every big advance in communications technology-it will be a great improvement in democracy.

SPEAKER: Mr. Gates, educational software is an application that has received a lot of hype in the media but doesn't seem to have achieved a lot of its promise. So I'm wondering if you could talk a little bit about the potential that you see for new technologies in educational settings, and specifically address what conditions you think need to be in place or what do you think needs to happen in order that these become viable businesses?

BILL GATES: There is a category of software called 'kids skills' where you learn spelling, math, reading. And those categories are doing very well. Parents who buy these home computers, very typically if they have kids in the house, they not only buy that software once, but they'll come back again and again and get the up-to-date versions. And it's kind of interesting-they're even using speech recognition now-this is something we're working on-where you can help a kid learn how to pronounce words and kind of draw them in in developing verbal skills. So that's been a pretty good area.

Another big area has been electronic encyclopedias. That is the first category of a print publication that has largely been replaced by the CD-based publication. My friend, Warren Buffett, owns the World Book and I'm always giving him a hard time because we tried to do a deal with World Book and work with them on the CD version, but they were kind of reluctant to get involved in the technology and now World Book sales have fallen pretty dramatically because people know that, you pay less to get a PC with an electronic encyclopedia than you do to get the print-based encyclopedia. So that's been a great category--a very big category.

Now, the textbook publishers are a little traditional and the process that you go through to get textbooks approved is a very slow changing process. The State of Texas is the first to really try and shift that around and make that focus on spending money on software. And in parallel with that, none of it is going to be valuable unless you put a lot of money and energy into getting teachers to be enthusiastic about this and train teachers so that they're thinking about how creatively to apply this in the classroom. Unfortunately, that's likely to be a fairly drawn-out process. But over the next decade, the educational software business will be a very good business. We don't do titles that are just curriculum-based right now, but we're actually looking at whether we can make a contribution there and we do a lot of titles that are dual-use, like the encyclopedia, where there's a teachers' guide. But the biggest market for it is people buying it to use in the home.

SPEAKER: In recent years, it seems that Microsoft has sold users on upgrades of a software by adding more and more features to the old version, especially with applications such as Word or Excel, and with that added functionality comes more clutter and confusion and it seems like that's a paradigm that can't continue forever. I was wondering if Microsoft has a different strategy for selling upgrades in the future.

BILL GATES: People are going to buy upgrades because they're more functional. There are two things we have to do to make that easy, though. The first is: use the Internet so you can just go and get the upgrade on the Internet and that the upgrade tailors itself to your machine. If you have a machine without much disk, when you get the upgrade, only the appropriate bits come down. If you only use certain features of the product, when you buy the upgrade, only those features come down onto your machine. And so using the Internet to essentially customize, according to your needs, what those improvements are-that's very important.

Another point you make that's a very valuable point is, how do you scale the user interface? To the degree we're getting a lot of menus up there, we find a situation now where we can add a feature and put it on the menu and people will call us up and say, 'I wish you had a feature that would compare versions,' and we'll say, 'Yeah, we do'. They say, 'You do? Wow-where is it?' And…you point it out, but they don't necessarily discover it. Well, what's the breakthrough that will allow us to get through that? Again, it's natural language. We've started down this path now with the recent version of Office, where you can type in and English sentence and say, 'I'm trying to do this. I'm trying to accomplish this task.' We take that sentence, we parse it and then we guide you how to get that task done. If you don't get the answer that's satisfactory to you, we have hundreds of thousands of copies that immediately send that back to us across the Internet, so we can see, is our vocabulary not rich enough, is our parser not good enough. So, over time, in the same way that you use natural language to deal with the world and all of its options and features and capabilities, we'll tap into that capability for you to navigate what's available inside the product. So the menus will become a short cut, but the way you'll really find things is by speaking or typing in a sentence that will get you to the full richness of the product. We need a breakthrough there and there are some very good things that are under development.

SPEAKER: If, instead of being the CEO of Microsoft today, if you were one of the many undergrads, perhaps, at Stanford who is coming out and looking at all the opportunities available, what opportunity do you think you would pursue and let's just say, for the sake of argument, that Microsoft is still out there?

BILL GATES: Just for the sake of argument? Well, I think getting involved in the software industry is a great career area. It's one of many, but because of the dynamic nature of this business, because of the new things we're going to be inventing, we'll be at the center of a lot that's exciting. And no matter which part of it you go into, whether it's the engineering, the marketing, the business development, the fact that there are always fresh and new issues means that I hope and I think the software industry will get more than its fair share of very smart people coming in and helping us move forward.

Now, there are many ways to get into the software industry…I think coming into a company like Microsoft is one way to do that. Being involved in a start-up is another way to do that. In the world of software, there will be companies of every possible size, a lot more small ones than big ones, but even medium size companies, depending on what categories they're going after, so the most important thing is to pick something that you enjoy doing, something you think is fun and interesting. For me, I didn't think I'd ever have a company the size that Microsoft is today. I knew I was excited about software and working with other people in that area and, because I enjoy doing that every day, it was something that developed far beyond what my expectations were. So, looking to what you care about and what you love to work on-that's probably the best way to pick where you want to go.

SPEAKER: Yes, I am subscriber on Microsoft Network since its first version. I enjoy it very much, thank you. I have one question. There is a problem with bandwidth over Internet. So do you have some idea to rebuild new Internet or to improve the performance of Internet? Because I think Windows works very slowly if the network is so crowded.

BILL GATES: No, that's a very good point. All the technologies-they're going to let us do neat, new things--bigger disks, faster processors, better memory, flat screen technology. I'm quite confident that all of them are going to move at a very rapid pace except for communications bandwidth. In communications bandwidth, the technology is doing just fine. The fiber guys improve fiber capacity at exponential rates of improvement. There's a breakthrough approach-putting low orbit satellites above the earth-companies like Teledesic, that I'm involved in, and others-where you'll be able to get high speed two-way connection from any place on the globe.

But despite all those neat technologies, the pace of communications bandwidth improvement will be determined by regulatory issues. Particularly trying to get competition for high bandwidth connections into homes, whether in this country or other countries, the problem is not solved. And that's why you see Microsoft pushing the cable industry, investing some in the cable industry, working with the phone companies like DSL, and there are some very good results recently. Cable modems are starting to catch on. This low-cost DSL looks promising. But we're going to have to keep pushing on that, because that really will probably be the critical path-the thing that will hold us back the most. And, as you say, that's going to make it tougher to realize our vision in terms of great software.