MR. GATES: Good morning. E-commerce is a very exciting area. It's hard to pick up a magazine or a newspaper nowadays without reading about some milestone in electronic commerce.

But I would say there's still a big question here about how broad this is going to be. Will it be just for big businesses? Just for start-ups? Or will it really become a way that every business can participate? We've crafted our strategy, a very PC-oriented approach, making it simple for people to get involved. Not forcing them to build complex systems, but really just going up to the Web, and in the simplest case, entering in the information they want to build their site.

And that's more complicated than it might seem. You can't put millions of businesses up if you don't think about the integration with their ERP software, if you don't think about how they're going to manage promotions, or how they're going to track the leads that come in on their Web site. They need for all of this to be integrated in with their other business processes. It can't just be a world apart.

After all, they're going to have customers who come into their physical stores and talk to them, give them information, and later interact with them on the Web. So, having a stovepipe approach with separate systems really isn't going to be adequate. So we want to have very little barrier to entry, but also have it fit into the mainstream way that the business does its work. And we believe that literally millions of businesses will be signing up to this approach in the next several years.

The Microsoft commerce strategy has many key pieces in it. There's the integration side with all these different systems, there's the building block software, which will be either hosted or running in the company site, and then there's this ability to immediately sign up, be present in a catalogue, have a standard way of publishing to a catalogue, whether it's MSN or anyone else anywhere else. And to be able to get promotion without entering into complex arrangements. And BizTalk is the glue that ties this all together.

Over the next few years, you're going to see Microsoft and others taking XML and defining schemas for particular problems. Here with BizTalk, we've applied XML schemas to electronic commerce. We're doing some really amazing work to take all of our tools, our database tools, our development tools, the front-end Microsoft Office tools, and allow them to navigate XML rich data. And this represents a new frontier for the world of computing.

Now, when we talk about interoperability, it won't just move the bits between different systems. We can map the semantic information at the schema level so that the transactions really work in the fullest sense. If you have a buyer who likes to buy in a certain way, and a seller who wants to sell in a certain way, how do you match those things? They're not necessarily going to be running the same applications. All you know is that they connect through the Internet. And these XML schemas are aimed at that problem, and that's why our tools innovation is very focused on this, including the work in databases and languages that are part of our standard products.

The time frame for this is all pretty immediate, so in a sense this is like Internet Day, where we outlined a full strategy that had many elements, was aimed at a very ambitious goal. Here we're being ambitious, very ambitious, again. We have the leading products in many areas already, including Commerce Server itself, but we're seeking to expand the market, not just increase our market share. We want to expand this market by over a factor of 10. So the key elements are out in beta this summer for us to get feedback from partners and developers. That's BizTalk Server, that's Commerce Server, that's the Small Business Commerce Services, and the open marketplace running up on MSN itself.

Now, these deliverables phase out very rapidly here in the months ahead. We're building on a foundation of work we've done with industry groups over a period of many years. And so we think that there will be a very strong acceptance here. And you're hearing XML again and again and again. What's necessary is to take the work at SAP, the work of Microsoft, the work in vertical groups, and pull those together. If that's not done, you can have common objects, like the customer object, or the order object, being so different in these different arenas that it's very hard to connect the systems up. There will be mapping layers that are available, but having the common objects be a similar as possible will make a very big difference, and we're very committed to making that happen.

Though the Internet is the ultimate marketplace, the place to get information, the place to compare prices, the place to find out what other experiences consumers have had, that I think people have in mind, but it's just that there are so many pieces that need to fall into place to make that come together.

The middleman must add value to survive. That's really the way that products are priced, and the way that you add value will be very different in this environment. In some ways it's great news, because you can reach out to more customers than ever before, but so can your competition. And the transparency, the quality of what you're offering and the prices you're offering is so much greater here that I've referred to it as friction free capitalism.

Consumers are really in control of what goes on here. They will have their credit card information, their address information, and that will be available for them to send out to sites. We'll make it so they don't have to ever enter that information multiple times. So the whole notion of one-click shopping will extend to every site on the Internet. But, they get to decide when they send it out, what subset of the information, and we can alert them to which sites are following which privacy guidelines, so that they can make that decision in a fully informed manner.

Now, all of these sites are self-service, using the Internet not just for the transaction, but for tracking the order status, giving the person more advice, and really reducing all the costs associated with the sales cycle. We think everyone can be drawn into this. Certainly the whole PC industry, if you think hardware, communications networks, platforms, service providers, all of them can participate. A big part of the opportunity is the bulk of businesses that are not large enough to build up their own technologies and their own sites. So that's one thing we have to make a lot easier than it's been today.

We see our solution provider partners being very key to this. That's a channel that we've invested in very heavily over the last two years, and we think that that will pay off quite a bit, as we bring electronic commerce to the common customers that we have there. So e-commerce is really a core scenario for Windows, being able to go back and look at what you've bought in the past, being able to catalogue those things, sort through them, add new attributes, all of that will be a built-in capability of the platform.

We'll make sure that this works across the other devices, what we call personal companions, as well. And we'll do that in a way that we avoid you having to enter the same information twice, you won't have to do it on each device. As long as you're authenticating yourself one way, we'll make sure that information is always available. That's part of this philosophy that we have now, that information should be replicated up either to the Internet or to the corporate server. And so that any individual device, you don't have to worry about what information you have on this device, versus this other device. And that spans the whole range of information, but particularly here we're emphasizing the information you use in the e-commerce activity.

A lot of new announcements will be coming up about the XML support in our products. This XML allows us to express information about heterogeneous objects. It's driving the technology in a new direction, which I think is very, very exciting.

So what's going to be the impact? Well, I think it's quite wide-ranging. The whole way that information flows inside companies that sell, inside retailers, will be very different than it is today. The way that's done on paper, the speed of those systems, the way that that information goes back into suppliers, that will finally be a fully digital activity. I talk a lot now about this term digital nervous system, I use that to refer to companies that have decided to have digital information flow in all of their activities, to empower their knowledge workers, to do things more -- far more effectively.

Retailing is a great example where the integration of all the digital information really is where you get the maximum value. We talked about the value chain. Taking EDI, moving it over onto the Internet, in extended XML format, and therefore not only having the batch type approach that you've had in the past, but the flexibility for work flow, and the information that lets you update your product catalogue coming across that electronic link.

Inside the retailer you've got knowledge workers, looking at the pattern of sales, trying to decide how they want to do pricing, trying to look at the profitability of various lines. They've got front-end tools, like Excel, where they want to look at these XML databases and see patterns, and share that with each other, whether it's a knowledge worker that's in the same location, or in a different location.

We also want to extend this down into the physical retail stores. Windows has been immensely successful in the point of sale or cash register arena, with partners like JDA, NCR, and ICL, we've been able to install very state of the art systems in places like J.C. Penney and many other retailers. Now those systems are being hooked back into the knowledge workers in those companies. In the same way you want to hook in the Internet site. You want to have all that information there for analysis, who is visiting what pages, what types of customers are buying what products, and not have it be different just because it's a separate channel.

There's a great example of where we're doing this, and this is in the work we're doing in the car market. We have the leading Web site there, called CarPoint, but we've now extended that to provide new services for the dealer to manage information. That's called DealerPoint, and I'd like to ask Megan Sherman, who is the lead product planner on this effort to come up and show us what we're doing for these retailers, how this information gets back into their overall process.

MS. SHERMAN: Good morning.

MR. GATES: Hi, Megan.

MS. SHERMAN: So what I'd like to do is walk through a scenario using MSN CarPoint to show how a consumer will research a car, and then send a purchase inquiry to a dealer, and then in turn take the dealer's perspective and watch the dealer manage that lead throughout the sales process. Right now I'm on the home page of MSN, and what's nice about this design is it gives me quick access to all the MSN properties, including CarPoint. From the home page at CarPoint I have all the information that I need to make a confident purchase decision. I have a new car buying service, as well as pricing information and reviews, and I also have tools that will enable me to move quickly to the model that I'm interested in researching today. And in this case it will be the Ford Expedition.

CarPoint has now taken me to a detail page that gives me more information about this specific car. I have pricing information, I can compare the expedition with other models, and I can even go in and look at the photo gallery, to have a virtual experience of sitting in the car. This is a 360 degree interior view of the Ford Expedition, and as MSN advertises, we also enable our manufacturing partners to leverage this type of interactive content with their own marketing message and branding, they can build digital brochures that they run within CarPoint, to really enhance their marketing within the network.

Having viewed the inside of the car, and done some more research, at the end of the process I'll actually go through the buying service on CarPoint. And this will enable me to submit a lead to a dealer in my neighborhood. You'll see here that there are two dealers that have been selected for me. Based on information that I would typically have entered earlier, that included my zip code, CarPoint has found two member dealers that are participating in the program. I can submit my request directly, and as a consumer I know that that means I'll get a fair price, in the price quote that I receive from the dealer, and I'll hear back in 48 hours. And what's nice about that is it takes all the hassle out of the process for me as a consumer. I didn't have to leave my office, or leave my home. I could directly use the Internet to send in my request.

So at this point we'll actually change hats. What we'd like to do is look at how that dealer is now going to manage the customer request I just sent in, using CarPoint.

You're looking at the home page of DealerPoint now, and there are a number of tools on this page, again, very similar to the consumer experience. This is everything I need as a dealer to manage the sales process, and manage customer relationships. We'll start by looking at the prospect manager. Now, the prospect manager is the area within DealerPoint that hosts all of my leads. And those are leads not only from the CarPoint service, but from other online services that I participate with, as well as from my own Web site, so this is a very comprehensive solution. You'll notice that Dealer Point is alerting me to the fact that I have three new leads today, as well as providing status icons on the right hand side.

Now the status icons are very important, as well, because we know that the longer it takes a dealer to respond to a consumer, the less likely they are to close the sale. So a dealer who responds in the first eight hours has a 35 percent chance of closing that sale, while one who waits 48 hours, perhaps over a weekend, that close rate drops to about 8 percent. So it's a substantial impact on their ability to sell more cars.

I can open the lead that we just submitted using CarPoint, the top one. And you'll see that it has all the contact information about the consumer. So as a dealer it's very easy for me to now have a record of who I'm working with, so I can have future communications with this customer. I can also open the lead itself. And you'll notice it has all the information that the consumer was accessing in CarPoint. This is a consolidated view that gives the dealer the immediate information they need to determine if this car is available on their lot, or whether they need to get a similar car brought in. It even includes the optional features that this individual customer wants on the Ford Expedition.

Now, I can respond directly to my customer. I don't need to leave the DealerPoint service in order to communicate. I can send an email from within DealerPoint. I'll simply select one of the standard templates that's been provided to me. As a dealer I love this, because there's no typing, I don't have to worry about grammar, I don't have to think about typos, and I can get on with the business of my day, without having to delay getting back to my customer. You'll see that this has been personalized for the customer that I'm communicating with, and I can simply send the mail from here, and this is now being sent directly to that consumer's own machine. You'll also notice that there's a trail at the bottom of this lead. So I know when I received the lead, and then when I responded with my email.

To go back to the home page, I also want to point out to you the dealer results section, on the right hand side. One of the nice things for a manager in the dealership is they have the ability to evaluate the results from the dealership as a whole, as well as an individual sales rep. So I can use this sort of as the virtual whiteboard. In every dealership you go in, there's a whiteboard on the wall that has the sales rep's names and the results. And this is really bringing that to life in a very automated way that makes it much easier for me.

The other tools that are included in DealerPoint that I won't be showing today, but do want to highlight for you, are the ability to upload your inventory of your used car listings, as well as promotions. So what we've really done is put a great management tool in the hands of our dealers, and this is just one of the many examples of how Microsoft is empowering both its customers who are sellers, as well as giving great tools to buyers on the consumer side, to bring the two together and enable e-commerce for everyone.

MR. GATES: If a CarPoint dealer wants to have this capability, do they pay more? How does that work?

MS. SHERMAN: No. Actually, all of the CarPoint member dealers have this service free as part of their participation.

MR. GATES: That's fantastic.

MS. SHERMAN: Great.

MR. GATES: Thanks.

MS. SHERMAN: Thanks very much.

(Applause.)

MR. GATES: It's an interesting question about how e-commerce will reshape business. One of the things I think is clear is that the market for specialized products will be much larger than it has been in the past. Imagine a product or a service that would sell 1000 units a year. Well, there really hasn't been a distribution channel that would be effective for that. And with that sort of volume, you couldn't get a retailer interested, you couldn't use mass advertising, there was really no way to connect to those buyers. Assuming that they're spread all over, and there's no active list, how would you have that business? The answer is that you wouldn't. Now, with the Internet, the ability to enter in what you're looking for means that merchants are finding the global marketplace allows them to have far more volume, where they have unique products. And so specialized products and services will be a high growth business.

Now, to make this work, we need to give these people access to the same tools. We need to make it easy for them to list their offering in the catalogue. That's what BizTalk is all about. We need to make it easy for them to advertise what they're offering. And that's what Link Exchange is all about. These people don't need to get involved in technology, even the things they have to do to manage the leads, we'll make sure those are very simple Web pages that automatically get generated, simply because either they or the person who is hosting their site is using Commerce Server.

A very interesting example of this is a company up in Wisconsin. This is a husband and wife who, as a hobby, started out offering the service of taking old phones and refurbishing them, so that you could have, essentially, a decorator phone. They'll either take a phone that you have and fix it up, or they have an inventory of these old phones.

Now, you can see one of their Web pages here, this is the page that's looking at the art deco phones of the '20s. Now, this is not the world's biggest business, but it's a great business. And this business has grown very dramatically because they're able to provide it over the Internet. Initially, they got 50 leads locally, but it's over the Internet that they're now getting most of their business.

In fact, at first, they were very reluctant to set it up so you could do transactions on the Internet. They've just had a page that listed the information in a form you could download, but now they're looking forward to being able to have the transactions, and the coordination of those things done with the help of the Internet as well.

A lot of products that today are in physical form will actually become digital products. And that makes the Internet particularly exciting because it can be not only the shopping vehicle, the Yellow Pages and the transaction closer, but also the delivery vehicle as well. A great example of that is what is taking place in music. The revolution in music is really starting. We can see that with the popularity of MP3. We can see that with some of these players that are out there. And this is high quality music that is far easier for the consumer to move around, to select what they're interested in, and so I definitely see that as a fast moving activity.

Likewise for software, depending on the size of the software, and depending on the bandwidth you've got, the Internet can be a great delivery vehicle. And we have a lot of our retail partners who are doing a substantial part of their software sales through the Internet with that as the delivery, including Beyond.com, whose screen I've got right there.

Another place where we think digital delivery will become popular is in books themselves. Now, this requires a leap of faith because today we don't have the screens that have read-ability that is comparable to having a book. We don't have the tablet form factor yet being mainstream so that you can carry it with you and adjust your viewing very easily. And we just don't have the resolutions on the screen.

Microsoft is working on standards here, including the ClearType breakthrough that allows the text to appear in a far better way. And we think between our software and the new hardware, this is a market that will explode, so book delivery can be in a digital form.

One form of book that's already happening in is in the audio area. One of our partners, Audible, is doing a lot of business over the Internet, whether it's downloading to PCs, or dedicated devices. If you take a typical book, you look at the price that you'd have to pay to get it on tape, think about the convenience of dealing with that. It costs more and it's more effort. The digital version is less expensive. In some cases, you can pick only the portions that you're interested in. For example, Garrison Keillor, you can buy his monologues at 95 cents a piece, if you want, and get exactly what you're interested in.

So, once these physical goods become digital, you'll have a variety of pricing models. Are you buying for lifetime use on all your devices, are you buying everything that author produces under some kind of package. In many cases, your ability to sample will be free. We're seeing that with the music samples that are up on the Internet today. The quality of those samples hasn't been super high, and so one of the breakthroughs that we've made in audio codecs that we'll be bringing out in the next few months will make those samples dramatically better. So, I think that will be very, very popular. Likewise with books, you'll be able to preview at least the contents page, and perhaps some highlights, to get a sense if it's the book that you're interested in.

Once you have these things in digital form, anyplace you go where you can log in and authenticate yourself up on the Internet, you'll have access to that, so you don't have to take records or books with you, as long as you've got the digital device.

One of the tough issues here that we're working with the industries involved is this: how do you make sure that the intellectual property rights are protected? We want to make sure we do this in a way that you still allow the PC to be the most flexible tool in working with digital content. So that's an important focus for us. We have a lot of top engineers thinking through the challenges there.

Another thing that will go from a physical form to digital form are bills that are paid on a monthly basis. When you think about the overhead of billing today, it's rather phenomenal, 15 billion bills over the course of a year, $6 billion spent by the companies who prepare and deliver those bills, $4 billion of time spent by people responding to them. And then a billion-and-a-half spent collecting and posting payments. And it's very, very inefficient.

If you get a bill that you disagree with, you have to call up, wait for somebody, describe who you are, get them to look up the bill, they'll probably have to get back to you. Well, in the digital environment, the equivalent of that is simply clicking on the item, saying do you want to just send a piece of electronic mail, or do you immediately want to initiate a voice conversation over the Internet. And so, your ability to have your billing information, track that against your finances, make comparisons, all of that comes for free because this system is just more efficient for everybody involved. So, for everyone, it's a significant improvement, the consumers, the billers, and the banks.

Well, as one of the players in helping to get this to happen, we have our Transpoint joint venture, we've reached some very major milestones recently in terms of signing up billers and banks. And this system has been in a beta test process, it goes live in the next few months. And so that's really going to start the revolution, where another thing that you expect to be purely digital will be the bills that you've been paying.

So, where does this go in the future? Well, we think it's kind of tough to measure electronic commerce. A lot of the big figures that get published are simply people who already would have done business with each other, taking that transaction that was on paper, and putting it onto the Internet. That's where you see the big, big numbers today. And that's a good thing. It gets rid of the paperwork. It lets coordination be a lot better. But that's not the profound change. The profound change is when you're matching buyers and sellers in a different way. When people who never would have found Phone Co. go out on the Internet and type "art deco phone" and they find this couple in Wisconsin, and they are able to get what they want, and do business together.

And that we're really just at the beginning. In examining our strategy here, we saw a lot of missing pieces we needed to help fill in: software building blocks that can make all the elements very, very easy. BizTalk is the glue that ties that together. It's based on XML, it's based on the industry standards. It's a very important element.

The partnership we have with people like SAP and PeopleSoft are a fundamental element there, because people don't want to go to manual work to feed data back and forth between their Internet sites and their ERP systems.

So, we think the Internet will become the marketplace for most businesses. This will start off in business-to-business, virtually every company that comes to Microsoft and sees how we're doing all of our buying electronically, and how we give the visibility of that information to employees who just sit at their desktops and essentially complete the purchase order and understand the approval process. They look at that and say they want to do business that way.

It's not difficult for the suppliers to get involved in this, because even if they don't have a fancy computer system, all they have to do is take the invoice that they would have printed out, go to our Web site, find that invoice form, and type it in, and immediately it gets into the electronic system. So there's a low barrier to entry to be able to draw in all the suppliers and have this system come together.

Now, the elements you've heard from us today include the idea of keeping the prices up-to-date, keeping the product listings up-to-date by having the electronic flow of BizTalk information into those business-to-business purchasing systems. Over time, business-to-consumer will be even more important. That is, as people are taking the web for granted, using it as a place that they get information about big purchases that they want to make.

One of the things I think we can say for sure here is that consumers will be the big winners. The convenience of shopping, keeping track of things, getting the best prices, it's all dramatically better here. And so, it's wonderful to see the industry tackling e-commerce as a top priority. I'm very excited about the things we're doing here, and I feel confident we will be able to bring millions of businesses online.

Thank you.

(Applause.)