[Due to the varying sound quality and subject matter of tapes, the information in this transcript may contain inaccuracies.]

BILL GATES: Good morning. I am very excited to have a chance to talk to you today about the high-performance company of tomorrow. I think there are more opportunities now to do business in a better way today than there have ever been. In the sessions that we have over these next two days, we don't want to focus on the details of the technology. Instead we want to talk about what the business activities look like and take advantage of them.

There is a term I use to talk about companies that have taken advantage of the new digital approaches, and this term is "digital nervous system." The idea is that a company has a lot of information moving around inside of it. Information about the customers, what the customers are thinking, who they are buying from, information about projects, information about internal activities. And historically, all the better information is moved on paper: phone calls, meetings. This is really inefficient.

If you take something like sales analysis, the data would be printed out from the computer and carried around by people, typically on a weekly or monthly basis. Companies need to analyze that data and look at the patterns by different kind of accounts, regions to compare it to what you know about what’s going on with competitors. It’s very difficult. Information tends to be in the hands of the top people in the company, so these processes take many, many steps. People would fill out paper forms, they would move around between different offices. It definitely was a nervous system. But it was not digital.

The use of computers was largely confined to the back room, printing bills and maintaining a few databases. The computers are not used actively by the workers to ferret out where the profitability was, what new activities should be engaged in. The idea I am presenting here is to go to a very digital approach and involve not just those back office databases, but to involve all the activities in the company. The basic operations, the strategic thinking, the analysis, the customer interaction and the ability to react to changes in the market. What we call business reflexes. The need for quick reaction speed is much higher. And these digital nervous systems are there to provide that. The digital nervous system is not just something to offer in the corner. It is something that changes the way that all of your workers engaged in their jobs.

A key element here is the Internet. I am sure you are reading more and more about the Internet -- In the United States, you can't pick up a magazine or newspaper without reading about the latest new startup company or how a company is improving its business by using the Internet. The Internet is the most important development since the creation of the personal computer. In fact, in many ways it is a more important development. The Internet is a new communications medium. And it's a communications medium that is far more powerful than what’s come before. The ability to match up people who have common interest. In particular, the ability to match buyers and sellers is quite profound.

Think about when a buyer wants to find out about where products are available. It takes a lot of work. Traditionally, you will work with the same suppliers you worked with over time. On the Internet, you will be able to do that in a different way. You can find anyone who is offering that product. Likewise, the Internet allows us to get rid of paperwork. It allows us to do customer service in a very new way. The Internet is such a powerful set of standards that it’s in use globally. In business, and even in households and education. So it's a very, very powerful force.

In this environment, we think that the old jobs of simply entering the information are going through some changes. Most of those kinds of office jobs will go away. Because customers will be entering the data on the Internet, you won’t have to transfer it onto paper. If a customer wants to know about what’s going on with their account, they would be able to call it up electronically. They won’t need to have their own attendants just for that simple function. So all the jobs will be converted into jobs where you want people to be thinking and have access to information. Every worker is a knowledge worker. Every worker needs access to a rich set of tools and information that they did not have in the past.

These new systems need to be designed to consider everything that’s going on with the customer. You want to be able to call up in one place all the information about the customer. Who has talked to them, what their needs are. When they visit your Internet site, it should be easy to get to that so you can provide the best offerings and best service to that customer.

And finally, the systems need to be designed so that information travels very quickly. Not just good news, but also bad news. It is very typical when a company gets an electronic mail system, people send mail around about good developments. Say a project is ahead of schedule. People love to send mail about that. Say you win a customer account, people would send mail and hope that you will send back mail congratulating them on their good work. So I would get lots and lots of electronic mail messages like this. And I think that’s a great thing. But I have to say that when I get those messages, I would wonder what about the accounts I wasn’t getting mail on? Because I wasn’t getting many mail messages about where we were losing accounts.

The interesting thing is that good news, in some ways, doesn’t change what you are doing. When you hear that things are going well, you keep your current plan. What's really actionable is the bad news, news about customers who would expect more. That's why you have to get all the information out there so that you can react to it quickly. When you still have an opportunity to change the bad news into good news. In the design of the systems, you have to make sure that’s one of the principles that’s kept in mind, so that everybody is dealing with the same set of issues. This principle is very important.

When I talk about this nervous system, what does it mean? Does it mean going out and buying new hardware? Does it mean building up a new network? The answer is "No, it does not." Every company does have to invest in the basic infrastructure. A PC on every desk. A network connecting those together. High-speed connections to the Internet. And perhaps, most importantly, the culture of using the computer, using electronic mail. Getting rid of the paper forms. Putting that information on the network. Even from the very top of the organization, that’s an example that should be promoted.

To have electronic mail going, the benefit in terms of communication is quite fantastic. I am quite sure that Microsoft cannot run a global organization the way we do without having an electronic mail system. Putting together new project plans, we make sure that we get the input from our different groups around the world. We simply could not do it at the speed that is necessary without electronic mail. So that is really a starting point for all of these systems. Not just using the PCs for word-processing the spreadsheets, but using them as a fundamental knowledge tool.

Once I asked for the all of the paper forms inside Microsoft be brought to me. And I was amazed that even as a technology company, we have hundreds of them. So I said, we are going to get rid of every single one of these because they are so inefficient. And it only took about 9 months for us to make the change. And the impact was incredibly positive. Now our employees can find the information more easily. If they have questions, every form has the ability to send electronic mail to the right person. They never enter the information twice, and it is very simple. The basic activities, like human resource decisions, are done very, very well without the paper work. Things like purchasing are done without any paperwork.

Once you get in the mindset that you are going to do the digital approach, you need to make sure people know that the network is very reliable and that you have decided to standardize the electronic mail. Then you will find that all the employees will be coming up with ideas about how you could use this in a better way. So the building blocks are fairly inexpensive, the PCs themselves, the office software, the database software, and the business applications that are used on these machines.

The incredible success of the PC industry is the reason the Internet could blossom into light. Having over 300 million personal computers out there that were powerful enough to browse information in a new way. So two things came together: the low cost of communication with optical fiber and then the installed base of PCs. And it's turned into something that is really quite phenomenal. It started out in universities but spread out to the business sector.

Today, there can be no doubt that it is at a critical mass. People still underestimate what a powerful agent the Internet is. And there is any one key message that will get across very strongly over these next few days is that it’s not good to underestimate what this will be doing, because your customers and your business partners will be moving to use the Internet. For new companies who have started up without any of the old systems, it's easy for them to design themselves with the Internet as an assumption and therefore have the efficiencies that it provides.

One of the reasons that people underestimate the Internet is that they do not appreciate how the personal computer itself will continue to improve. Of course the PC is based on chip technology, and the power of the chips is doubled in every two years. And that kind of exponential improvement allows us to make the PC much more effective. In the future, we will be using that power to create a very natural interface, things like speech recognition or handwriting recognition. Three or four years from now, you will have a computer tablet which will automatically do handwriting recognition of Chinese or Korean or whatever language you are using. It will be very simple, and because it is connected up to the Internet it will be far more powerful. It's these kinds of devices connected up to the Internet that are going to make it really pervasive. Even more pervasive than the PC itself has been.

Companies more and more realize that standard software packages can be a huge benefit to them. Not just in areas like operating systems or electronic mail, but for their business applications as well. And the PC is the place where the hardware is the most inexpensive and is now providing the kind of reliability and performance of very large computers. The PC arena is unique in that there are hundreds of companies making compatible equipment. So whenever you use a PC, you get the full benefit of all the improvements without having to change the software base. So that’s the foundation that we started with here, and the key foundation as we move forward.

About a year ago, as I was thinking about digital nervous system, I was trying to make it as concrete as I possibly could. As I was going around to different companies, I would find some that were doing really great work. I thought the best thing I could do was to come up with something, almost like a report card, so that people can rate how well they are doing in this area. So that they can measure their progress. I also thought it would be good to highlight examples of the companies that are in the leadership position. So I started work on a couple of presentations. As I got further into it, I decided to turn it into a book.

In the next two weeks, a new book will come out which is called "Business at the Speed of Thought". This is something I worked on a great deal in the last year and I am very excited about it. Because it cover a lot of what we are talking about in these two days and makes it very, very concrete, particularly for large companies, in terms of what they can be doing. The idea of a report card is a good one because no company is achieving 100 percent of the potential of their digital nervous system. Even Microsoft, which I think is a great example and is by far further along than most companies, I would say is doing about 60 percent or 70 percent of what is possible to do. Here are some of the ways you can measure yourself:

• How good is your corporate memory.

• Do all the people in the company have the same information.

Let's talk a little about the customer database. Not just tracking and financial status of the customer but everything you know about them. So that when they come in, whether it’s face to face or over the Internet, you can present to them the options you think are most appropriate for them.

Drawing in partners to use your data is increasingly important. In this world of Internet, it is easier to work with partners. In fact you may even find some things that you used to do inside your company that because of the Internet you may decide to do simply through a partnership. The Internet makes it easier to find partners, easier to collaborate with them, even if they are very far away. You can work together in a spreadsheet, send electronic mail to each other. As you design a digital nervous system, it is important to think through how you will be using partnerships in a new way.

I want to give some examples of a few companies that are doing some exciting projects. One of the projects that is just really just at the beginning of what we are doing here with the government in Hong Kong. Right now the government is very much based on paper work. We have to go to a government office, fill out a form. Get rid of that, and you simply have people from their PCs able to apply for a business license or fill out their tax information. For people who do not have a PC, you put PCs in kiosk form into public areas like libraries and government offices. Anybody who wants to start a business or look for a job, all of the government data to help them with that is easy to get to. Although this is just starting, the government is very ambitious about this. By 2001 all their key functions will be available in electronic form.

We think that having the government be a model user of technology is quite important. It sends a message to all the companies and allows them to work with digital systems. So we are working with governments all over the world. In fact, we have a yearly conference that is dedicated just to the topic of how governments can use a digital nervous system, since they are the biggest creators of paper work and the biggest managers of information. And in some ways their ability to do better is even greater than in the business arena. They won’t be the fastest to move, and that is why we needed to start now. And we are glad to see Hong Kong and others being out the forefront here. It is more of the smaller governments that are moving quickly to do this. Singapore has been looking at doing this for a long time. There are some state level governments in larger countries that are doing well.

This is actually the only area I would say where the United States is actually not the leader. The U.S. government has been very slow in using the Internet. The U.S. government still prints all sorts of things on paper rather than mail them on the Internet. That’s crazy, because things are easier to find on the Internet, they’re cheaper on the Internet, they’re more up to date on the Internet. The rule should be that the information that you print should only be a small subset of what you publish electronically. The default should simply be electronic publication.

If somebody comes in to interact with the government they don’t need to think about the government organization. They can simply think "Hey, I am getting married," or "I am starting a business," or "I want to see some finance information." So the interface should simplify navigating what the government offers. In fact, sometimes when you fill out forms here they will be sent to multiple government groups without you having even known that there are several groups involved.

Another good example goes back many years and this is a case where CEO of British Petroleum decided that he really wanted to be able to stay in touch with his employees, and he decided electronic mail was the key to that. Although supposedly they had electronic mail, there were many different systems and they weren’t managed very well so people didn’t use it much.

A metric for electronic mail that is really used heavily is that employees will receive 50 to 100 messages a day. I am sure to some of you that sound like a lot but once it is really a primary tool, it reduces meetings quite a bit. It reduces a number of phone calls by quite a bit. You end up using phone calls only for things when it’s very, very urgent and you have to talk directly to the person. You end up using meetings, not for presenting information, because if it is just to present information you can mail around the presentation through the electronic mail. The meetings are about brainstorming and electronic mail is not good for that, so if you get that on mail a lot of people disagree and have a lot of different ideas. Then it is a good idea to call a meeting because that is still by far the most effective way if you have a group that needs to work out a new approach.

So British Petroleum said: "Okay, we have this electronic mail system, let’s see how it works". So, he sent mail out to his 35.000 employees and 20% never got the mail. And when he put in an attachment with a presentation of some sales figures, half the employees couldn’t even open it. So, he decided that this was a basic problem. It was like not having a good phone system, and that British Petroleum was going to pick a standard and get that out there so that they’d have virtually 100% reliability of electronic mail.

In this case they used Microsoft Exchange, and they got their partners connected up, so that they could also be included, and they use this to make faster decisions. When they first went into this, they thought of this as a pretty large investment, it was about $10 million because of the network improvements they needed to make. However, they found that the amount of paperwork moving around and the amount of express delivery charges that they avoided once the system was in place, that alone have justified the investment. But the real payback was that the employees felt so much more in touch with each other, so much easier to collaborate with each other even across different departments.

Another example, the third of the four that I have here, is North China Power, a very large company supplying electricity to over 140 million people, and they decided that they would take the most mission critical activity, the power delivery, and use the PC system to do that. Now in the past, a system like this would have been very, very expensive, it would have involved mainframes costing many millions of dollars, and doing a lot of very difficult software development.

In the PC environment, not only is the hardware less expensive but the software development tools are far better. So, by taking the high bind building blocks, the PC approach and building on those technologies they were able to do this project very rapidly. It is a project with a huge database and 20 gigabytes of information because they track so many aspects of their operations -- every day a gigabyte of data is created. That’s really a phenomenal amount of data. It is more than about 20 mainframe systems have to deal with on a daily basis. So it puts them certainly in the top 100 of using data in a rich way.

It is no difficulty doing that now in the PC environment. For them it has made a huge difference in terms of how they tracked their efficiency and were able to spot where they can do better, so it is a great example of how building a fundamental system has a huge business payback. This kind of data presentation they have actually uses the richness of the PC to navigate around and look at the different numbers. Of course, like all of these business applications, what’s important in the power business differs from what’s important in other businesses. So, the kind of screens you would see would be different, depending on the business that you’re in.

The last example that I want to talk about is Withbond Electronics. And this is a company in the semi-conductor business, and they really decided they needed to make faster decisions. They were rounding up a lot of obsolete inventory, the lead time for their customers to order things was to long and they were losing business because of this. And so they needed to have all the information completely up to date in one great system and they took the PC, they used the building blocks on the PC and offices and the mail system and got all the employees involved in this are very consciously using this system. And it had a very big impact -- their obsolete inventory has been reduced by 80%.

That alone has been worth it, but when they talked to their customers about the service they were providing, that too has been a huge advantage of having this system. This shows you the kind of screen that they get when you go into different information about how the company has been managed, this actually includes personnel information as well as the business information, this is the human resources management slide. You will find that once you do one application that, because you got the infrastructure, people get so excited about it will really drive you to additional applications.

What is Microsoft’s role in all of this?

It is very simple, we are a very specialized company and we create the building blocks that are used in these systems. Windows is a very key element of this, it’s on virtually all of the hundred billion PC’s that are sold this year. And so for software developers, it has been a clear standard that they can take advantage of. For Microsoft Office, these are the productivity tools, things like spreadsheets and documents --more and more, they're not just for information the individual is creating, but they connect up to the corporate level of information. They connect up in a way that allows the worker to see the data in rich ways, to navigate and see patterns that wouldn’t be possible if he only had a fixed presentation. That wouldn’t be possible if the information was only on paper.

It's more interesting to talk about our key initiatives that span all of these products. Our approach of simply being a software company, not being in the hardware business, is a very new idea. To a lot of people it seemed crazy because all of the key software in the past was written by hardware companies, IBM wrote a lot of operating systems, Digital wrote their own operating systems and the idea that this was done separately from a hardware company seemed very strange. The reason that it was great, was it allowed for specialization, it allowed us to run the operating system on all the different hardware and invest in our R&D at a level that no single company was just selling hardware would be able to do. Our R&D has been growing over 20% a year and now it is over a billion dollars a year that we spend on these new products.

Now we are able to take a very long-term view of investing in these products and think about what can we do 3 years from now, 6 years from now, and hire the best researchers from all over the world to get involved in this. The Internet made a big impact on us. In 1995 we had some support from the Internet products but because it was primarily been used by the universities and we didn’t recognize it as a key priority. And in 1996 as it caught on we said to ourselves: "Hey this is a big challenge". In fact, I devoted a chapter in my new book to the question of how changed our strategy so quickly and how did the digital systems that we had, including electronic mail, allow us to be responsive to something that was a big surprise to us. Something where other companies were ahead of us we needed not only to catch up with them but also innovate and get back in the lead. And so in 1996 and 1997 were very excited as we built Internet support into Windows and the other products. We also became the company most involved in Internet standards, driving other companies forward.

The Internet is not standing still. Today certain things are still difficult on the Internet, such as using the Internet for voice or video. Inside most companies today you will find that the phone network and the data network are two different networks. That should change. Inside most companies today the networks are simply based on wires. You don’t have a wireless network, so the phones are just sitting on the desktop, they are wired up and the computer is on the desktop. In the future we’ll have wireless in the business environment so you will be able to take your phone, you will be able to take your tablet PC with you and have that kind of connection.

We need to advance the Internet for more security for this video and audio so that the most important traffic is delivered quickly and you can avoid having to have a private data network simply relying on the Internet. Those are the kind of things that we are pushing right now, so that the Internet a year from now, or 2 years from now, will be even more powerful than it is today.

It is kind of phenomenal that at the time the Internet came along, in virtually every country there was a liberalization in the communications environment. Allowing new companies to come in and allowing a lot of approaches whether it was wired or wireless. The innovation there will continue to be very, very rapid. Particularly in things like wireless connections whether that is over satellites or other approaches. So you can expect that as your company is using the Internet dramatically more, the actual cost of doing so is surprisingly low. Even for things like a videoconference and very large documents that you might want to send on a global basis. So the Internet continues to be among our key initiatives for every product we do.

Another key activity is called interoperability. This is the idea that even though new applications are virtually all being built by using this PC approach and the great tools that we have for building Internet applications, very few companies are moving 100% to the PC approach. They have existing mainframes, they have meeting computers, and all of those systems need to link together with these newer systems. They want to move one application at a time, one department at a time without having to throw out any of the old systems. That means we have to do an amazing amount of work in our software to connect up to the mainframe databases.

A great example of this is that the leading banks are doing all their software development now in the Windows environment, but they haven’t moved their central database. So we communicate with the mainframe in a way that guarantees the data integrity. That’s the kind of interoperability that we didn't have two years ago, but our customers made that a priority and so it is a huge initiative for us and it's key to our products.

The last two areas are scalability and simplicity. Scalability means simply handling very big loads and the amount of traffic. The number of transactions that people need to handle on the Internet will be far beyond what was necessary before. This is an area actually where mainframes were never good enough. There were specialized systems from people like Tanton to do things like run stock markets, applications where the transaction rates were high, where the need for a 99.9999 % reliability was very high. We are taking that approach that Tanton used, and we are building it into Windows. We started doing that with Tanton about 4 years ago and it was accelerated when Tanton was purchased by Compaq several years ago. They are doing the hardware improvements and we’re doing the software improvements so that the Windows environment will have that high reliability even beyond what the mainframe was able to deliver.

The final initiative, and most important, is simplicity. As the PC has become more powerful, we've ended up with too many commands, too many error messages, too many things that you have to deal with. So taking the power of the machine and reducing the complexity is very important. Part of that is better design, part of it is customer feedback about where they have problems, and part of that is breakthroughs in things like speech recognition and handwriting recognition. That will be very important, and it's coming in the years ahead.

I just have one slide about a specific product and this product is so important I couldn’t help it but just briefly mention it. And that is a next generation of Windows that comes out later this year. We’re in late beta testing in this, it's called Windows 2000. This was based on our customers saying that managing large networks of PC’s was fairly complex. Keeping the software up to date, making sure that everything can run on all the different PC’s, being able to have policies about which employees were able to access which information or use what applications.

And so Windows 2000 was designed for customers to manage these large networks. It has some very big breakthroughs -- for example; if somebody’s PC stops working and they want to switch to a new PC it is a huge amount of work because all their data is on that PC and it is very difficult to find it and move it to the other machine. With Windows 2000 we completely avoid that. If your PC breaks, you just plug in a new machine and as soon as you log in again you are off and running, because of the way we managed the information, so that it is stored centrally.

This will be a pretty big advance. It is taking us more time than we had expected, to get this totally right, to get the new level of quality that we demand out of this, means that this project has taken about a year longer than we expected. In fact, we have said to people is that quality is the thing that will determine when we ship, so we about 200 of our early customers all have to agree that the product is ready to ship before we will send it out. And so that means that we can’t guarantee a date because we will let the quality drive that. We feel very confident that we will get that milestone sometime in the next 6 months or so.

So this Internet revolution comes first to businesses. I am sure you read all the time these numbers about electronic commerce and how people are going to do business over the Internet. Well, the numbers on electronic commerce are very, very big, if you have somebody like Microsoft or Intel who changes the way they buy things from a paper system to an electronic system, immediately that’s many billions of dollars of goods that are being done through e-commerce. But what is even more important is the way in which we stay in touch, make orders more accurate, and collaborate with those customers. So when you do electronic commerce in some cases it’s been the same buyers and sellers that would have been in business before, just doing it more effectively.

What's even more interesting is when you have buyers and sellers that would not have found each other were it not for the Internet. That is a profound change, the Internet as the ultimate marketplace, one that is growing in very, very global way.

Here is a case where the numbers don’t tell the whole story. You will be able to sell to more customers because of the Internet. Now, on the other hand, you will see more competition because of the Internet, because the physical presence won’t be as necessary for different companies. So, the Internet's initial impact will be in the business arena, business to business, companies doing business with each other.

For example, when you work with your bank, you will have screens full of information that help you track what your are doing. But eventually it will not be just businesses, it will also be individuals using the Internet on a regular basis. The term Internet has a synonym which is Web, Web and Internet, although in the beginning they were two different things, it's a little bit different now, the terms are used interchangeably. So in business we talk about the Web workstyle, this is the approach where everything is easy to find through the PC.

When you move out of business, and talk about people at home instead of at work, we talk about Web lifestyles. And this is using the Internet to get news, to get weather reports, to organize trips, to stay in touch with your friends, to send photos to your relatives. What is interesting about this is once somebody starts to work this way they never go back. Even though you can ask people about the PC and the Internet: "Are you frustrated, would you like to see it better, would you like to see new things?" They will give you lots of new ideas, and once they’re involved they not only keep using it, they also encourage their friends to use it as well. They promote it, partly because they’re excited and partly because it is easier for them if their friends are also connected up and using it as well. Even people in their family they’d like to be able to stay in touch this way, and so it is spreading out to more and more people.