BILL GATES: Well, good morning. It’s been great to see the response to Fusion this year; having our partners turn out as we’re at the start of this new era and indicate their interest in driving the new approach to computing is very, very important to us.

I titled my speech today "Creating the Digital Decade" because I want to share with you how I feel we’re just at the beginning of what can be done with digital technology. In fact, in the last year as some of the hype and mania have gone out of the system, I think for the first time we can say people are really underestimating the business benefits and the concrete things that will happen in the years ahead.

Microsoft has always taken a long-term approach to building its product platform and to building its partnerships. And we’re excited to see you sticking with us and driving computing into this next era.

I picked a quote here from Henry Ford talking about how it’s really the combination that we think is revolutionary. We’ve believed in partnership approaches so that we could focus on what we do best and let you do what you do best. We like to write software products; that’s the core of our business. That’s kept us out of chips, media, communications, large-scale consulting; many, many things so that we could stay with what we really do best, because there is so much opportunity ahead of us in that.

So coming together at the beginning, keeping together as we progress, working together is success.

And to make this XML Web Services phase in this industry really achieve its potential, it takes the group gathered here to make the bet on it and stick with it as the platform that we’re driving forward.

As I said, this last year has seen a big change in how people looked at our industry. You know, a year ago it was startup mania. People in traditional businesses faced the idea that did their historical assets make sense, were there any value to those or was it simply that using the Internet was so powerful it would wipe those out. Well, today that’s changed. People say, "Yes, the Internet is there," but everyone can use the Internet. It’s an enabler for traditional businesses as well as new businesses.

Today, people are looking at profits and saying, "Yeah, that’s worth considering," which was certainly not the case a year ago.

And the recognition that certain problems are very tough and require long-term research, that’s come back into people’s evaluation of what’s really going to happen.

Take a project like the tablet computer, the idea of reading on the screen, taking your notes there, having that wirelessly connected everywhere you go. That’s a dream that Microsoft has been pursuing for over eight years, and by the time that product launches a year from now, we will have put over a billion dollars into that effort -- not the kind of thing that can be done overnight, but the kind of thing that drives the industry to a new level.

A lot of Microsoft’s work, and I believe absolutely some of our best work was clouded by this atmosphere of a year ago. And it wasn’t just startups; it was also that the press around Microsoft tended to focus on the lawsuit we were in and Microsoft was at a low point in its product cycle; that is, we didn’t have major releases last year.

This year is the high point of our product cycle. In fact, we’ve never had a year with as many key releases. All of it is within this overall strategy called .NET. So with BizTalk coming out early in the year, Office XP coming out a couple months ago, Windows XP and VisualStudio.net coming out later this year, we will have more change, more opportunity in the Microsoft platform than at any time in our history.

Windows XP alone is a huge deal for us, representing the first big change in the Windows platform since Windows 95. And the minority of people who have been using Windows NT or Windows 2000 understand the kind of performance and reliability we’ve had at our high-end platforms. However, it’s been a minority of users who have had those benefits. Now, with Windows XP, we bring that into the mainstream and our goal is no less than a 100 percent conversion of all Windows machines to run some version of Windows XP. Obviously, that will take time to get to that 100 percent level, but we expect a very quick ramp as we get that product out into the marketplace.

So where we are today, Microsoft is still doing the same things we’ve always done: focus on partnerships, focus on software R&D. But I think the way the world looks at us and the work we’re doing is radically different now than it was a year ago.

One aspect of this that’s been kind of amazing to us is what’s happened in hiring. A year ago we competed with the startups for hiring. We even lost a few people to startups. Today, many of those people have come back. Some more want to come back. We actually find ourselves, for the first time ever, being able to hire as many talented people to fill the new things we’re doing as we want.

We are continuing to expand. Orlando mentioned that our R&D budget will be going up quite substantially this year. And if you contrast that to, say, the layoffs and cutbacks in many parts of our industry, which I can fully understand, you know, the fact that we’ve been conservative financially, the fact that we’re taking a long-term view of this, the fact that our high volume, low price empowerment-oriented model work and that we’re seizing the opportunity in this new era allows us to have the confidence to go ahead and continue to expand what we’re doing. Whether it’s marketing and R&D, Microsoft is on the mark and driving the industry forward in the new scenarios.

Now, this slide really tries to capture why I love my job as Chief Software Architect. You know, people often say, "Hasn’t it all been done?" And of all the big scenarios, they tend to point to productivity and say, "You know, aren’t software applications like Microsoft Office as capable as they’ll ever be?" Well, the answer is even in that case where we’re the furthest along, I don’t think we’re even half way there.

Think about business forecasting and planning and how XML in this spreadsheet will change that.

Think about controlling documents, being able to say who they should be forwarded to or how long they’re retained. We’ll use our Passport authentication and encryption to bring that forward.

Think about how you forward documents today. You mostly still keep them in paper file folders because you don’t trust that you can find and maintain them in digital forum. Well, that we’ll change. We’ll make this the primary way people archive their information.

So in productivity, we have a long, long ways to go. Even the basics of how the system works, the Internet still allows us to take a dramatic improvement there. Completing the feedback loop with our customers, whenever they’re on the PC and frustrated about what’s going on, we ought to see that and we ought to see when things don’t work, and we have now tools that allow us to get that feedback across the Internet when people want to give it to us, as well as use things like Windows Update to complete the loop and make sure there’s constant improvement there.

Some of the scenarios outside of classic productivity are barely at the beginning. I mentioned reading and annotation. Well, today that’s done on paper. We don’t have the screens or the wireless network or the software, including the handwriting recognition in a way that makes that mainstream. Well, we will change that. You can think of it as an evolution of the portable form factor for the tablet, but it’s a revolution in terms of what people do with it.

We can still more than double the amount of time people spend on the personal computer and we can completely change the way that the back office information relates to the front office information. When people talked about e-commerce they talked about simply taking that purchase order and putting it online. Well, that wasn’t the hard part. It led to some big numbers, but real transactions are much more complex. We have the knowledge workers talking to the knowledge workers in other companies and have changes as things go along, and you need not only the back end in those two companies involved to work digitally; you need to involve the front office people as well. And only through XML and Exchange in Office and all the applications can you really get the full vision of e-commerce to take place.

So much talked about with e-commerce but often in the wrong direction in talking about running everything through a single marketplace, whereas the spirit of XML and the Internet should be to let people sell any way they want without transaction fees of any kind.

Communication is another breakthrough scenario for us. Instant messaging is only text today. With Windows XP we move up to have video and audio. And the dream here is quite simple: Whenever you want to connect up with someone, if there’s a screen nearby, say the PC in their office, as soon as you call them, your screens will be connected together. You’ll be able to share documents, lists, contracts, budgets, plans very easily as you work together, and so that too will increase the importance of the PC and how you’re using it very dramatically.

As you move into the home, of course there you get photos. You get music. You get watching shows whenever you want or even creating family videos; a lot of scenarios that are not yet fully developed in terms of broad consumer usage.

So the digital decade is about taking those dreams and making them a reality. Most of them won’t take an entire decade, but I can say safely that this will be the decade where these additional scenarios come in, create value and become standard ways of doing things and it’s far more than the productivity that is largely what’s gotten us to this point.

Now, one of the basic assumptions that we made when we started Microsoft, the one that we’re continuing to make today is that the hardware will provide us the capabilities for all these scenarios. And with one exception that I’ll speak to, the hardware guys are performing their miracles. They’re giving us what we need.

The microprocessor speeds continue to improve. Things like Pentium 4 are a great step forward. We also have this 64-bit initiative from Intel, the Itanium. Particularly as that matures into the second generation McKinley processor, we will have a platform more powerful than the most expensive platforms on the planet, and that will mean that the issues of scalability, which we’ve made so much progress on this year, those will really become an issue of the past as we get that kind of power underneath the systems.

Storage: We’re getting unbelievable amounts of storage. In fact, that allows us to be very aggressive in replicating information down onto the client, looking at new things that will be stored in the data and new ways of analyzing the data.

The devices, whether it’s the camera, the LCD screens, the cell phones with screens: These things will come down in price and be really quite amazing. They will not be what’s holding us back.

The one thing that might change the industry in terms of its progress is the cost of high-speed connectivity. Wide area wireless, so-called third generation and broadband to small businesses and home, those have not seen the type of price declines that we typically expect with technology. And it’s a very complex set of issues, partly technical, partly regulatory, partly simply the recognition that that last mile connection was always going to be the hard part of creating networks.

What it means for the .NET strategy is that we have to accommodate connectivity from extremely high-speed broadband down to cases where your devices is offline, where you’re not connected or you’re connected with a slowed speed connection.

And .NET, the way we do the storage models, the way we replicate things around actually allows for all those variety of users. Obviously, we’d like connectivity to go as quickly as possible, but we have an architecture that’s immune from the fact that there are segments where that’s going to continue to move at a fairly modest rate.

Now, as we’re pushing this new approach where XML is the key standard, a question people might ask is how quickly will this happen. I mean, after all, you know, we’re all in business and you come here to this event to think about your plans for the next year. The next five years are nice but the next year is what has to be concrete. And so people say, "Will this XML Web Services thing, will it take off rapidly with the customers or not?"

Well, the fact is that it’s all about the ease of development. The vision is widely accepted. Yeah, there are some sectors, like the financial sector, that haven’t gotten ahead in understanding the vision, but as we’ve sat down with customers, we see very little push back on this. They understand that just having Web pages from one site at a time isn’t going to get them where they want to be, either working with their partners or with their customers.

The key question they ask though is how can they get the skill sets and well-written applications around this new approach. And that’s where our tool contribution comes in. Our tools have always made a big difference, starting with Basic as our first product, Visual Basic for the graphical era, Visual Studio for the initial Internet era and now for this era what we call VisualStudio.net. That product I’m sure you’ve heard quite a bit about it over the last few days, but if there’s any one area of investment I think is important, it’s to make sure that your services capability, your training capability wherever you work that you’re thinking about how to get into a leadership position with the kind of development supported by VisualStudio.net.

We’ve been rewriting Web sites at Microsoft from the old approach into this new tool and we’re using less than a quarter of the code and getting over double the performance. And that was really to be expected because there was never a tool built for Web site development. Everything happened so quickly that everybody rushed out and actually used methodologies and tools that were not perfect for what they were trying to do. This is the first built-from-scratch tool for this Internet, both HTML and XML era.

Now, to get things out in the mainstream, standards are very important. Going back to the original PC as the platform to build the real software industry around and build the idea of personal empowerment. That model has been very successful. Certainly the volume growth in the PC has been phenomenal. You know, in many countries we’re up at about 60 percent penetration in homes and over 90 percent penetration in business. And there’s little doubt that those penetration levels will extend worldwide.

At the server level we’ve now got the capabilities to say that even the most demanding task should be done on a PC server, particularly given the scale out approach that avoids single point of failure and really gives you the ability to add capacity whenever you’d like. So the PC standard is very strong moving forward.

At the client level, you’ll start to see microphones and cameras. You’ll start to see the tablet form factor; lots of changes there, but along the evolutionary path that was laid down really at the beginning of the PC era.

Windows itself is a very key standard, a standard that allows the server and client to work the same way and now with .NET our services like authentication and storage will match that as well, so you can think of it as Windows at many levels.

HTML was a key standard, and although that probably won’t change much in the future, it will still be there as an important element. But the new standard, the one that we’ve all got to participate in driving forward is XML Web Services.

XML actually got started back in 1996. Some of the people from Microsoft were looking at how data was exchanged, were saying, "This simply isn’t flexible enough, the relational model, to allow for scenarios like e-commerce." And so there have been many milestones that I have got on the slides here where we, through the standards bodies, have been driving XML forward.

XML is not proprietary. XML is like graphics interface. It’s something that every platform provider is going to get involved with. In the same way that in graphics interface there were implementations like OS/2 or Macintosh or Windows, there will be many implementations here. And of course ours is how we’re taking .NET and putting that into all the Microsoft products, including Windows, Visual Studio, Office and SQL Server.

The generation of products we’re shipping today are where we took XML and put it on top of the products. And we’re very proud of what we were able to do layering XML in, in that way. So Office, SQL Server are some incredible examples of how they work with XML. But the next round is more profound. It’s getting XML actually to the very core of the product. So that’s the version of Office we’re working on. That’s the version of SQL Server we’re working on. And it takes the direction that we’ve already set and takes it to a new level.

I have no doubt that industry by industry the right XML schema standards will be adopted. They need to do this just for the one scenario alone, which is e-commerce, but the benefits go way beyond that. The ability to extract information from their different systems, exchange data between the systems, let knowledge workers see into those systems, work across corporate boundaries; we need to take XML and make it clear to business decision-makers in the market that there is a checklist, a set of tests they can literally apply to say, "Is this project inside my company being done in such a way that I will receive the benefits of XML; and when I start one of those projects, yes, I get to look at all the different platforms." And one of those, the leading platform, the one that’s really driven as a native solution oriented towards the best price performance is what Microsoft is doing with .NET.

So it’s really kind of a new era. This is not an era where we’re saying rip and replace; quite the opposite. The Microsoft philosophy here is that you can take existing applications and put XML layering around them, just like we’ve done with some of our products as a first step. So you don’t need to rebuild the old systems. A lot of the showcases we have are where the application and hardware were left alone in the first stage with simply wrapping with XML to get the interchangeability.

We also believe that in terms of software development, people don’t have to rip and replace. They don’t have to rewrite everything in a particular computer language. They can use whatever language they want -- Visual Basic, Java, C, C#, you name it -- and those languages will evolve and there will be new ones, because the XML data model demands language innovation. And trying to have one language or one company saying, "No, we don’t want to extend for XML," that’s simply not going to let people do the development they want. The idea of a mix of different languages, rich in different ways, allowing the existing code to fit in, that’s the Microsoft philosophy here and we think that’s just going to get the world over to XML.

Now, part of the .NET strategy includes services in the sky. The word services is somewhat overused because it sometimes refers to computer services versus human services, but here when I talk about Passport and "Hailstorm", those are capabilities that applications can call into.

Now, we will have those capabilities working behind the firewall inside the corporation, where we license the server and, for example, Active Directory will have the same authentication that Passport has and it can run inside the corporation. In fact, Passport will be able to federate and actually call into software inside the corporation to do that authentication.

And so corporations will want to continue to run a lot of their infrastructure internally. This is not about telling them they have to do that in a different way. In fact, it’s giving them a way of writing applications that they can change what infrastructure is inside versus outside without changing that code.

A very typical case would be to run the infrastructure internally and only in the cases of peak loads or disasters then that would go outside.

Now, some things like Web sites and email, some corporations will move those outside, particularly as you get down to smaller companies. And the .NET model allows our partners to do that hosting, and because of the way we federate the name space, you can have your services appear just like they would if the company was running those things behind their corporate firewall.

Since we’re just at the beginning of this era, there’s a lot of learning going on. It’s a lot of training. There’s a lot of feedback from customers. You know, I can’t stand here and say that all the challenges of XML Web Services are understood, but I can say that the standards, the key standards are now in place. That was an achievement of the last year. I can say that the market excitement is there. I can say the key tool that allows this kind of development is in its final beta stages and will be out later this year.

So there’s a lot of opportunity for all of us. It’s a computing model where data is available easily, turning the Internet into this distributed platform. Some people know that for 20 or 30 years in computer science there’s been talk about this kind of computer platform and how you would do the security and how you would do the performance and how you would debug these things. Well, the day has arrived that that is actually a practical reality.

Twenty years ago, people talked about object-oriented databases, a lot of academic work, some early companies that were in a sense ahead of their time. These XML-centric databases we’re talking about really benefit from the lessons of that object-oriented work, but it’s done in a far more evolutionary fashion, where you get the existing model and the XML model together and you get the best of both.

This approach is a very open approach. The industry schemas are going to be standardized and very open. It’s just like the idea of graphics interface being there for everyone.

We do believe this is something that is about companies of all sizes, making it easy for them to get involved. After all, how can you have an electronic marketplace for a large company if you don’t get the small companies drawn in? And the incentive there can’t simply be that they’re going to have to have lower prices; the incentive has to be that their ability to work with their customers, the ability to deal with their information is going to be better, and that their costs in doing it are going to be very, very reasonable.

And so Microsoft .NET is very ambitious. Only a company with a large R&D budget and a long-term focus could start down this path. We start down this path knowing that we’re very dependent on the work that you do. You know, this kind of yearly gathering is a great checkpoint for us to see where we are, but perhaps most importantly for me it’s a chance for us to get feedback.

In my new role in developing the products, there’s a lot of choices about the priorities and the feedback from the marketplace is something that I know we can do better in taking in and I know that’s something that’s going to drive the priorities that I have with these new products.

So thank you for coming this year. I think there’s a lot of exciting things ahead. Keep your feedback coming. We’re proud to be working with you.

Thank you.

(Applause.)