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

And then, eventually, at the end, when we went off air. This guy says, you keep interest rates where you like, I've got 40,000 pounds invested with Nationwide.

(Laughter.)

MR. Tim Melville-Ross: So, I tell you that story, Bill, just to assure you that this is going to be a very benevolent discussion, although I dare say there will be some contentious issues that come up. I have a number of questions which you know about. But also, during the course of the day here at the Albert Hall in London, a number of delegates have given questions to me, which I hope I'll be able to put to you in the course of our discussions.

Perhaps just to start the ball rolling, many of the delegates here will already, I think, be familiar with, either because they read it directly, or read extracts from your new book, Business@the Speed of Thought, which appeared in the newspapers in the United Kingdom. They will be quite familiar with some of your thinking.

But for those who are not, it's is well to point out that you make clear that the biggest challenge, looking three or four years ahead, is to predict the direction of software, and computer development. And I wonder if you might just have a go, in the way that you do in your book, in just a few minutes, giving us some idea of your thinking on what those developments are likely to be over the next three or four years, which is encapsulated in the question, what do you think the role of technology will be in the 21st Century?

Over to you, Bill.

MR. GATES: This is a very exciting time. What we're seeing is that the personal computer, combined with the Internet, is creating a whole new way of communicating. And that, because it's achieved a certain critical mass, it's now changing business more profoundly than anything that's come along in the last 50 years.

We're going to see some companies seize this opportunity to do business in a new way, reach out to customers in a new way, have a new efficiency of having information move inside their organization, and really empower their workers by letting them see trends, see what's going on with customers, see what's going on with projects, and use these digital tools. Other companies that don't adapt will miss out on the new efficiencies, and they'll face an intense competition, because the Internet really reduces distance. It allows people to go after your customers who wouldn't have been able to do that in the past.

And so, the need is for a business to step back and think about how they use these tools. It's a really strong imperative. We're seeing an incredible focus on this, whether it's evaluations of these new companies, or the growth of usage, or the young people coming out of schools really spreading the ideas.

And so I wrote the book with the idea of giving examples, being very concrete, not just about the hype and creating a sense of concern that people need to do this, but actually giving them a way of seeing what the concrete steps are, and what leading companies are doing it, and where that is working for them.

MR. Tim Melville-Ross: One of the points you make much of in your book is the idea of a digital nervous system. I see the parallel that you're trying to draw there with the human nervous system. But, if I may say so, there are limits to the parallel. After all, the human nervous system incorporates genetic code that's developed over many generations. It informs and controls the more straightforward impulses that are transmitted along the nervous system.

Does that, to a degree, make the parallel break down, or how close do you think the parallel is? Will technology eventually be able to, if you like, learn in the same way that we do?

MR. GATES: Well, businesses today are surprisingly inefficient at dealing with information. They'll see information that's of great importance that people aren't aware of, and it won't be summarized in the right way, and so I thought, where's an analogy where information is dealt with appropriately? And I thought of the human nervous system, and how you pay attention to what's important and not to the other things.

Certainly, the parallel breaks down when you talk about evolution. We used to have a tool, and it's up to the managers to evolve the tool. It, itself, is just there making it easy to get whatever view of the data you want. So, the expectations people have that it's hard to look into information, it's hard to track everything that's gone on with a customer - that has got to change. And so, you want to think of a company as responding to crises in a different way, of only seeing the information that really counts, and yet spreading that out so that everybody can contribute to it.

So the analogy I think is an important one, and one that I try and make clear as I give lots of examples.

MR. Tim Melville-Ross: One concern that occurred to me in this process of your digital nervous system reaching out to everybody in the organization is that, for that to work, you need to have very free access to information, and everybody from top to bottom, if you like, has access to the information that's there in the digital nervous system. Is there not a danger there when the information, perhaps, is not as you, the chairman of Microsoft, would wish it to be? I'm sure this doesn't happen in Microsoft, but it certainly can happen in other organizations, where the information is not what you would wish the employees generally to know. Maybe there's been very poor sales performance, something like that. Is there not a danger in that information being so freely available to everybody within the organization through your digital nervous system?

MR. GATES: Well, certainly you'll have some data, like salary information, that you'll want to protect. And the technology is very good at letting you assign different groups of people different access to the information. However there is a philosophy here about sharing lots of information. Take your sales example - you absolutely want people to see, as soon as they can, any developments that are going poorly, because only by catching that information early are you able to respond where you may still be able to save the customer who is a bit unhappy, or go about your sales or pricing in a way that reverses the sales problem that's maybe taking place.

Certainly, with that kind of information, eventually people are going to know about it. Eventually those results will be broadly known. And yet, if you can get it, you can see the trend coming on, everybody can share that problem and use the digital nervous system to talk about what new approaches might make sense. And so, the whole way that management has been distinguished by being the only ones who have the information, and these little notebooks that get printed out, there is a big change in that. You'll be able to send mail to anyone in the organization independent of what the hierarchy looks like, and a lot of information will flow, including tracking what's going on with every customer.

MR. Tim Melville-Ross: I think an interesting question that comes out of that, and which you make in a very telling way in your book, is that people need to think very hard about facts that are actionable within the company. That means, if you like, developing a list of questions, to which the answers will actually go on to change people's actions.

Now, it's quite easy to state that principle, but how do you do that? You're not a great admirer of paper being around the office, I know that. How can you be reasonably sure that the information you have coming out of your system is actionable?

MR. GATES: Well, let's take numbers to begin with. It should take just a few seconds for somebody to call up on the screen the sales information on the top level, by product, by time period. But you also ought to be able to dive into the information, break it down geographically, break it down by type of customer, break it down by the sales people that are involved, and really see something that might suggest a different course of action.

You always start at the top, but not just the executives, everybody has that way of navigating through the data. And you can mail around to someone else what you're looking at. So, I'm seeing a trend where we're doing very poorly in this area. What does that suggest about our service, or our product, or our pricing? Maybe we ought to do something about that. So, my vision here is that there is a lot less paper in the process. As soon as you print numbers out, they're out of date. And, if you see a number on paper and it surprises you, what do you do, pick up the phone and call someone? It's incredibly inefficient to do it in that way.

Also, the paper forms that people are filling out for human resources, or purchasing, or invoices, all that paper can be put onto the screen in a way where it's easier to fill it out. If you're confused about something, you can always ask a question through electronic mail. And so really one of the basic steps is to take paper processes, get them up on the screen, and therefore get more value out of the PC networks that people are already investing in.

MR. Tim Melville-Ross: Developing that point, there is, I think, always a risk that if you try and focus on unusual developments within the organization, as those which you want to come out of your digital nervous system, that's fine, so long as you can be reasonably sure that a particular piece of information is telling you something unusual. What concerns me is where you have a series of pieces of information, which taken individually may not matter very much, may not tell you very much, but when they're all taken together, they represent an unusual development. There is a conjuncture, if you like, which makes that stock of straightforward pieces of information really important. That, again, is something that has to come from the top, you have to decide what really matters in terms of the combination of information, as well as individual items of information?

MR. GATES: Well, the top people in the company need to decide how that information is going to be formatted. For example, how do you track whether a project is going well? How do you gather customer feedback and let everybody see that so they make sure that the changes you're making are really responsive to what the customers are asking for.

One of the great things here is that feedback loops, which are a great thing, they work better in the digital world. Your ability to pull customers, pull your employees, take a lot of little pieces of information and summarize those up, it's much better. But there's definitely a need for leadership from the top to say what information would help this business do better. What quality metric do we want every employee to think about, and perhaps even tie some part of their bonus to that quality metric. You can only really do that if people can track the figure on a regular basis, and track the elements of their contribution to it. And so there is a need for top management to step back and think about how the information is presented, and then have a system that allows everyone to look and see the trends, the trends that might lead to a change in plan.

MR. Tim Melville-Ross: If I could move us on to a comparison between the U.S. and the U.K., this isn't meant to patronize when I say that the U.S. is ahead of U.K. business, ahead of most other businesses around the world in adopting digital technologies. And you're open to risk-taking, the individual empowerment we've been talking about within organization, labor, mobility, all of the characteristics of the U.S. market.

Now, that could mean one of two things for economies like the U.K. Either digital technology will be a spur to this kind of development in the U.K. and in other countries, or, and this is the darker side to it, it could have the opposite effect by promising a kind of protectionism because countries will be fearful of the pace of change and the impact on vested interests of rapid digital technology development.

Do you have a view on whether we're all going to be ready to catch up, or whether there could be some kind of putting up of barriers between what you're already achieving and what we seek to achieve?

MR. GATES: The efficiencies that you create by these approaches are beneficial. It's not a zero-sum game. Every company throughout the world can make better products or can be more responsive. When I visit different countries, there is a lot of interest in saying, why is the U.S. rushing ahead, what are the elements that will allow that to take place? Because people look at our job creation, they look at the economic growth. They look at these startup companies that are pioneering some of these new approaches, and they see so much of that here in the U.S. On a relative basis, I'd say the U.K. is very much at the top of all countries after the U.S. The fact that you've liberalized your communications market. The fact that there are startup businesses looking at this.

One thing we see in the U.S., more than in any country - in the universities, you used to sign up for your classes, research your homework to hand it in. The Internet has been taken as a tool that students of all types use, not just engineering students. And so those students go out into the companies and they're change agents, really promoting the ideas of why isn't this information just a click away. Why don't we remember what the company did in the past to make it easy for people to call that up?

I agree there could be a problem here where some countries say this is not for us, and therefore they don't participate in the global network that's being created here. However, even some of the developing countries, who at one point talked about a fear of the information availability, they're now saying that, yes, that this is a necessary thing. They're going to have to be involved as well.

So, it's going to take some time to really get all the students involved. It's going to take some time to get all the businesses involved, but this is really a global phenomenon. And these standards of the PC and Internet, every place in the world, those are how business is going to be done.

MR. Tim Melville-Ross: If we can take your optimistic answer and look to the U.K. racing ahead to embrace the new technologies and catch up with the U.S., that does present us with a major problem, because there is a tremendous shortage of skills and IT professionals in the U.K. who can effectively implement these solutions and the vision that you articulate. As you will realize only too well, this is a little prompt for you to tell me a little bit about your Skills 2000 initiative, because it seems to me, knowing a little bit about it, that that may be part of the answer to that question of where are we going to get these IT skills from.

MR. GATES: Well, it's fascinating that these IT jobs, which are very interesting jobs and very well-paying jobs, the demand far exceeds the supply. And in every country that's going to hold back how quickly the businesses seize these new approaches. So there's a lot that can be done between industry and the education institutions to try and encourage more people to go into these fields, whether it's taking and creating courses, coming up with certification plans, really explaining the opportunities that are out there, and what the jobs are like, that they're fascinating jobs.

And Microsoft, through what we call Skills 2000, is one of the companies that's trying to drive this forward. We see it as a potential bottleneck because whenever we turn to our partners that are helping companies deploy these systems, we ask, how can we help them, they say, helping them to get more qualified people, even at the entry level, where they can train the person from that point on, that's what's going to hold them back. So, focusing on that problem is something that we think is very important.

MR. Tim Melville-Ross: Just one last point, before we move away from what we see in the UK. A problem that we see in the U.K. is, we had some presentations earlier today, including my own, which made much of the fact that we British tend to be a little bit self-critical. And one aspect of this is that we are perversely also kind of arrogant. And one manifestation of that is that according to recent research many business people in the U.K. simply don't see either the threat from the Internet or the opportunities from it. Something like 2 percent or less of British business people see the Internet as any kind of a threat. Now, clearly, it is a threat, and it is an opportunity. What do you think that the 3,000-odd people in this great Royal Albert Hall should be doing not just to adopt new technologies in their own firms, but trying to get that message across to the wider business community, in the way that you do so effectively?

MR. GATES: Well, there's a need to have almost a crisis-like atmosphere, where people question will they be able to take what they're good at and make sure they apply it in this new environment. Certainly, in the U.S. one thing that's helped a lot is you have the startup businesses, like the bookseller Amazon.com, who now has a value greater than all the other booksellers put together, even though their share of the market is only 4 or 5 percent. It helps concentrate people's minds to see the value that people are seeing out of these new approaches. And there's absolutely no reason in a case like that that the traditional bookseller shouldn't have been out in front there. In fact, you know, they're the ones who have the infrastructure, and the relationships, and the information, and they should have seized that opportunity.

There's a real need for this to be something not just that junior people in the company talk about. The top management has to see both the positive side, and the potential of a problem if they don't get involved. Now, part of the idea here is to share examples of companies from every different industry - what does this mean for retailers, what does it mean for banks, what does it mean for manufacturing companies? Because the approach you want to take is somewhat different in each case. The kind of information that counts, the way that your suppliers network, the partners you have, and the way that information is published is going to move into this digital form.

I think there is no doubt that getting onto the Internet and using electronic mail is something even the chief executive needs to do, whether they have their kids help them out, because kids are very involved in this, or they simply go off and take a course that they're comfortable with. It's not something that you can delegate down to a CIO, because you have to have in your mind the whole behavioral change behind this. And over the next decade, the way that business is done will be fundamentally different. The way you find buyers and sellers, the way that you plan things, the way you organize and collaborate. And so there's no one who shouldn't have this really on their top set of priorities.

MR. Tim Melville-Ross: Can we spend just a moment talking about the social implications of all of this? One thing that strikes me is that, obviously, the social implications of the Web lifestyle and the Web workstyle are very far reaching, they're enormous. Do you think that we understand these well enough to be racing ahead, for example, with Internet development in a kind of unrestricted way, or should we stop and think, perhaps there are parallels here with what is a bigger issue here in the U.K. than it is in the U.S., concerns over genetically modified food. You know, do we really understand what is happening with technology? Can we, in a social sense, keep up?

MR. GATES: When you introduce a revolutionary communications tool, it is very hard to predict how people will use it, what sort of new things that people use to reach out to find other people with common political interests, or if you want to learn things, you belong to communities in a different way than was possible before. It's not like genetics, though, where there's some deep equilibrium issues that you might be concerned about, that we wouldn't have a full understanding of.

Here, it's a tool. Its use is totally under the control of the control of the people who are sitting down and using it. So they're the ones who will shape how it gets used, how you save time so you can be more efficient in your business, have higher quality, get more time, stay in touch with members of your family who may not live in the same neighborhood, send photos around. Take something you care deeply about, researching some medical advances that might help a friend of yours. I think we can rush headlong into it.

The main concerns that people have to have about this are, what about the people who don't have access, and there you need to use the schools and the libraries to provide universal access, and there's a few issues related to privacy that have always been there, but now we need to have more explicit policies, because the efficiency of information, searching and moving around is so great that the way we've relied on inefficiencies to protect privacy won't be adequate.

MR. Tim Melville-Ross: There's another aspect to this, Bill, which is to ask the question, do you feel there might be a danger of natural human impulses being dulled by technological development? Everyone hears about electronic babysitters watching children's playgroups, enabling mothers to see how their children are doing via the Internet. What worries me there is that you my get a mind set where people are thinking, the system says the kids are okay, so they're okay. And that just, in a sense, dulls natural human instincts. Do you think there's a problem there, or am I exaggerating it?

MR. GATES: Well, the technology is going to let you have a video monitor, even from your place of work you may be able to check in and see what your kids are doing at their school. That's probably beneficial in terms of being able to check on them in a way that wasn't possible before. One thing we see is that kids have gotten used to TV, and the incredible animation and production values there. So in the classroom, when the teacher is just up at the chalkboard it doesn't grab their attention, because they're used to TV.

Now, with the Internet, you have teachers creating exciting presentations, with great examples, putting those out on the Internet, having other teachers find it, and then take it, make it a little better, change it around, and then also putting it back. So everybody is sharing. So for the first time teachers have a tool that really can compete with TV's richness, and they're able to collaborate with each other. So it's not just the students going out and finding each other on the Internet, but it's also the teachers, as well. So you get something that is very, very engaging, that educates kids.

MR. Tim Melville-Ross: Can I just quickly ask you a couple of technical questions. There's a severe risk I might not understand the answer. But, I'm going to ask the questions, even so. And I'm sure there will be plenty of people here in the Albert Hall who will understand the point. I was intrigued, though, in what you had to say about low orbit satellites. And I believe you're particularly interested in those, and the impact that they may have in Internet development. Just tell us a little bit about that.

MR. GATES: One of the key assumptions here is that these communications networks are going to continue to get faster and cheaper. And you see lots of optic fiber being run, which has incredible capacity, that's being run inside city areas, and over the ocean. Companies like BT, or the other communications companies really are making great investments to improve those networks.

One area that's still difficult is the rural areas, where you have very few people, it's often not economical to run out a high-speed connection. And one solution to that is, which is complementary to the fiber people are running, is to have satellites that can connect up to any point on the globe. And so whether it's a rural area, or some place in Africa, because you're connected up with that satellite you have a high-speed Internet connection. And doing this right means that medical consultation, or educational courses will be available to any hospital, any school, any library because they will be connected up to the full richness of what's there on the Internet.

Now, these new satellite systems, there's a number of companies building them, including one I've invested in, they'll be up and running probably in the next three to five years. And that would go together with all the other investments, so that whether you're at work or at home, you'll have a quite inexpensive high-speed Internet connection, that you don't have to wait for that phone to dial up to be connected.

MR. Tim Melville-Ross: I have another question to ask, Bill, which is kind of technical, and that is how much of a problem do you think the millennium bug is going to be? Is it going to be an issue for Microsoft? Well, of course, it's an issue, but how big an issue for developed economies? Are we getting on top of it or are we not?

MR. GATES: Well, it's a very serious issue, and it's one that every company has had to devote resources to going through and looking at their application software and saying, does this need to be updated? In the case of PC software, it's not as complex as the larger machines, because most of the software is newer, most of it is packaged software where you can simply get an update from the supplier. But, even that, knowing when the version is there, what it is, what the issues that might be generated are, there's quite a distraction there.

My view is that companies are taking this very seriously, and although there will be some problems, in terms of billing systems that get confused or some printouts that don't look quite right, I don't think the drastic predictions that people are making are going to come about. It's when you get out to developing countries, where maybe they haven't gone through their systems, or been as serious about updating them, as in most of the advanced economies. So there will be some disruption, but the main cost is the preparation cost that we're going through right now.

MR. Tim Melville-Ross: Staying with bugs and viruses and things that go bump in the night, the Melissa virus was at one point thought to be, as I'm sure you know, a Serbian attempt to sabotage NATO's ability to communicate on email. And I just ask a question, using what I think is a new expression dreamt up by a young friend of mine, Chris Langridge, namely e-wars. Do you see that as the way forward for nations, in future? Will we deal with aggression electronically? Will we have virtual conflict? I mean, good news if we will.

MR. GATES: I don't think that will become the primary battlefront. Certainly, as you become dependent on things like electricity, telephone systems, and now the Internet being added to that list, it's very important to think about how vulnerable it is. How vulnerable is it to equipment just breaking down. How vulnerable is it to an earthquake, where some system might go out of order, or how vulnerable is it to an attack that somebody makes on it.

This is a very important question that security experts and software design people, including a lot of people at Microsoft, are working on all the time. And we are improving the automatic security that's built into these systems. And having things like these virus scares really highlights that there is still work to be done. Fortunately, in that case, the updates to the software that made sure there were no problems at all were relatively simple. And we actually used the Internet to automatically get those updates out to people. And so I don't think you're going to see a system that is subject to a very deep attack, because we know we have to design it so that at most it's only a small part of the system that could be attacked at any one time.

MR. Tim Melville-Ross: We're getting towards the end of our time, Bill. And I'd just like to end with a couple of questions from young people here in the audience. One is, in a sense, personal. The question is, what motivated you and was there a specific person who inspired you?

MR. GATES: I was very lucky to be exposed to computers at a young age. And some friends and I became quite fascinated with where the computer was going. Even though it was very expensive, and nobody owned one individually, this idea that the chip could double the power every couple of years and what that might mean really caused us to say that something fundamental would change. And so the teachers I had who encouraged me were great about letting me play around with the computer. My co-founder Paul Allen and I really decided that we wanted to be there at the beginning, and so that's why I dropped out of school when I was 19 to start the company.

In the early days, a lot of people were skeptical about what we were doing, and yet the fact is we could have gone back to school, and so people thought, well, let them give it a try. Our first few customers were people like ourselves, people who believed in something that hadn't taken place. And so this whole idea of being able to take that risk and start a company, it's great to have an atmosphere where that's definitely encouraged. And so I really have to thank the entrepreneurial environment for allowing us to jump out and take a new approach.

MR. Tim Melville-Ross: And I think probably the last question, Bill, is the punchiest, again from a young person. How can I develop a business idea involving a large sum of money, with no money?

MR. GATES: Well, part of the beauty of the Internet is that in order to create a great Web site the equipment and software you need to do that is relatively inexpensive - for $30,000 or $40,000 you can get all the equipment and be online. Now, you have to have a site that is either selling something, or is exciting to people, or a software tool that's helping lots of other people out there on the Internet. More fortunes are being made here during this Internet era than ever before. And so the opportunity for new approaches has never been as great. Now, some percentage of these companies will look back and say, why did the market give them such a high valuation? But, then again, we'll look at some of them and say, hey, these companies have grown to be fantastic companies, having the same sort of success that Microsoft has.

So, for somebody who wants to dive in, this is a great time because the rules of business are changing, and some people who can get on top of that and show the way deserve to do very, very well.

MR. Tim Melville-Ross: Bill, thank you very much.

We have come to the end of our time now. It's been marvelous talking to you again, and I don't know if you'll remember you were here in this Royal Albert Hall six years ago, and you made a lot of friends then, and I think those friendships have been reaffirmed. And we really do very much appreciate what you've done for us today. It's been a fascinating discussion, much easier for me than I was expecting it to be. Thank you for that.

And a big round of applause now from everybody here.

Thank you.

(Applause and end of event.)