Remarks by Bill Gates
2002 International Consumer Electronics Show
January 7, 2002

BILL GATES: Well, good evening and welcome to CES. I’m actually glad to be back at work after the holidays. I spent most of the holidays being beaten by my nieces and nephews on the Xbox. (Laughter.) When I started Microsoft 27 years ago, I had no idea I’d create the ultimate machine to humiliate myself -- (laughter) -- but there it was and it was a lot of fun.

What I want to talk about tonight is where consumer electronics is going, and in particular the role that software is playing in defining new types of devices and how these devices work together. You’ll find that I’m very optimistic about what we’ll see, not just in the next decade that I call the digital decade, but even in the next year or two in terms of the advances that take place when great software and hardware come together.

So what are the fundamental hardware trends? You know, consumer electronics historically have been mostly about hardware. How is that changing? Well, first and foremost we have the continued truth of Moore’s Law. It may not last forever, but for the next decade we’re certainly going to get this doubling in power every 18 months to two years.

And there are two ways to look at Moore’s Law. One is to say that the processor in the PC, the $100 to $300 processor, is doubling in power. That’s amazing for the PC. It means things like speech recognition, handwriting recognition, linguistic analysis become possible when they wouldn’t have been feasible before. It brings entertainment to a whole new level of capability.

But another way to look at it is to say that for a particular level of richness, say screen management or video decoding, the price of that chip is dropping in half every two years. And so this means that we can take microprocessors and put them everywhere. Now, for $4 to $8 the kind of intelligence we get in the microprocessor is far beyond the original PC. And so what it means is that we have multiple devices that are smart and we have protocols, digital protocols, digital standards between those devices allowing them to work together.

This is a real mindset change for the hardware industry because it now means that software and protocols come in, in a very fundamental fashion.

Metcalfe’s Law says we’re going to connect all these things together. It’s very cheap to do it. The value of these things comes solely from they're being connected together. So you won’t have to simply control a device with the buttons and displays that are on that device, you can turn to your large screen or literally any screen in the house to do those things.

Maxwell’s Law -- I haven’t talked about that for a long time -- but what it says is there is a lot of spectrum out there and we’ll be able to have lots of bandwidth, certainly inside the home, allowing you to get information, even high-quality video wherever you go. And so these devices will connect, connect in a wireless way and they’ll be very, very intelligent.

So that’s a new framework for the hardware world.

Let’s look at the software world. I said the hardware world started with very much an analog standalone device approach. Well, some of the same things can be said about the software world. The software world definitely had a single device approach. The PC was that device. And it was a miracle device. The whole software industry of course today is 100 times the size it was before the PC came along. The openness of the PC, what we did to evangelize Windows, making sure Windows was the same across different hardware manufacturers, and so that the desire to change and differentiate wasn’t there so that users weren’t confused when they got that PC device, that was fundamental.

But a lot of the focus was not only on this single device; it was on the scenarios that arose in the office environment. And so use of the PC in the home by and large mirrored what people were doing in the office. The productivity applications, the hardware design, the whole focus was very driven by that market. And there was nothing wrong with that. A lot of people do work at home. Homework is a lot like classic office-productivity work, and the PC, even on this approach, rose to over 60 percent home penetration in the United States.

Well, just like hardware, now we have a different framework to think about. It’s about many devices. It’s about many different peripherals, some of them with a lot of intelligence that we connect to, and it’s about the idea of services, services to make your information immediately available, services to authenticate who you are, so mechanisms like digital rights or group authentication can work on a very easy basis.

All of those things are now part of this framework, and we have to take care of every one of those things to achieve the potential of these devices.

The success of each of these devices will drive the success of the other devices. It will be the people on the streets who will be the most aggressive at using things like the PDAs that will now have telephony and rich connectivity, not just through the wide area wireless network but also through the wireless network, the Wi-Fi network in the home environment; so many devices.

New service standards based on the XML approach that’s really driving us to think about distributed computing across the Internet in a very new way; very exciting developments there that have accelerated in the last couple of years as everybody’s gotten behind this, and some of the key building blocks around XML have been delivered.

Now, consumers and knowledge workers won’t know that that service platform, that technology is there, but they’ll see the benefits of it.

For Microsoft, we have two key software products, Windows XP and Windows CE, and those are the software products we adapt to every one of these intelligent devices to make sure we can deliver the integrated experience.

So what’s driving the opportunity? The smart devices where the hardware costs are coming down and the intelligence is going up. The fact that digital media means software can add value, we can let people organize things, we can let people control the rights of how information is distributed, we can let people notify other people of what’s new, what might be interesting to them.

Wireless connectivity: This is a pillar. For many years we’ve talked about AC power line or X10-type approaches or running new wires throughout the house. And I’m not saying that those won’t be there, but the explosive way that these devices work together will overwhelmingly be the wireless approaches and the standard around Wi-Fi or so-called 802.11. The costs of the chip are coming down. The breadth of use is going up. And that virtuous cycle that drives higher use means more applications. More applications means more volume, means lower prices, means more use. That virtuous cycle, which we saw for the PC itself, is certainly driving Wi-Fi to critical mass in business, in homes and even in so-called hotspots -- hotels, convention centers, copying centers and airports, where you’ll have access with the Wi-Fi very, very easily. So that’s something that you saw is built in in Windows XP and it’s even come further since Windows XP has been shipped.

Another key element and probably the top priority at Microsoft, even beyond the key stuff we’re doing around usability and new capabilities, is what we call trustworthy computing. This is the idea of taking the need for extreme reliability, knowing that when you install a new application that it won’t disturb other things, knowing that your privacy and your security settings will be appropriate without your having to become an expert or your having to go out and get the new software updates manually going across the network. Having that be an understood and accepted thing is important to driving these intelligent devices to new levels. Without that, people will be reluctant and the way they do things simply won’t change. They won’t see that potential.

So this trustworthiness will have to be an element of all the different devices, which is a substantial challenge, but a challenge that the software industry can meet.

When we talk about integrated experiences what we mean is that as you move from device to device your information is there for you. If you customize the news page that you care about, when you pick up your screen phone, it comes on to it. If you’ve said you care about certain traffic, certain stocks, it’s always there. If you’re using one device, when the system wants to notify you that somebody’s wants to connect up to you for instant messaging, they know where you are and so you can decide, based on your priorities and who it is, exactly what sort of interaction you want to have with them, but you don’t have to give out many addresses for all those different devices, and it’s not like phones today where you have to go from one phone number to the next trying to locate that person.

For something like photos it means that if you take the photos, organize them, then they can show up on all your other devices. You can look at them on the TV set. You can look at them on your PDA device. You can send them off to other people very, very easily.

And so these are big opportunities. I think there is no one that doubts that with the digital approach, software can add value in so many different experiences.

Well, let’s take stocks, where are we right now. Certainly we’re at the very beginning of the decade. This is the decade where all these digital approaches will be common sense, the fact that you organize business appointments through electronic mail, that you coordinate your activities, that you can pick shows and know exactly what that schedule is and have them recorded for you, that as you move around, the music that you care about is available to you.

We’ve laid a very strong foundation for the digital decade. Although the Internet hype certainly was extreme, particularly in terms of the valuations and some of the new activities, the fact is, Internet popularity continues to go up. Internet traffic is up. Internet shopping is up. And all the key infrastructure pieces were driven forward in the last couple of years in a big way.

PC sales in the fourth quarter are very strong, 130 million units, and growing as that’s the PC industry; huge numbers by the standards of any type of device out there.

Big growth in terms of the digital cameras, the music players and so those are there to be used in these new experiences.

Microsoft had three really centerpiece products that were updated recently that for us play a central role. First would be Windows XP. We shipped that in October and already in less than three months we have over 17 million copies of the operating system in use. That’s a combination of new copies, which were put onto existing machines and new machines that were shipped that included Windows XP, so a very fast adoption rate, well ahead of anything that we’ve seen in the past, about 200 percent of what the equivalent was for Windows ME or 300 percent for Windows 98. All the new things we’re doing build on the richness of XP.

The second big milestone for us that came a few weeks later in the middle of November was the Xbox launch. And that was a new thing for us. We had to get involved in doing everything end to end to create a breakthrough game platform. Well, it’s gone incredibly well. We’ve sold all that we can make. We’ve been making them at a furious pace on several continents and the sell-through is over a million and a half units. So from a standing start to a million and a half is pretty incredible. More important than that, though, is the word of mouth and the quality of the games that have been built.

Later tonight we’ll give you a glimpse of where we’re going with Xbox, but already we’ve got over three games being bought for every single console sold. That’s a record, and it really talks to the fact that the richness of the experience, the breadth of the experiences there is very, very strong. And those games are only going to get better as people take more advantage of what we’ve built in.

Finally, MSN, our online service, there are a lot of metrics here, but the one I picked is the shopping metrics, over a 50 percent increase in shopping during that holiday season. So as ease of use gets out there, as people are using the Internet more and more, there’s big growth that’s making this a centerpiece, almost in an expected way for people to do things.

Now, one of the things I try to do every year is really capture what’s going on out there in terms of how people are looking at these advances, and so this year we went to some experts in Hollywood and asked them to think about the digital decade, try and document for us what the possibilities are and what’s going on. So let’s take a look at that.

(Videotape presentation.)

(Laughter, applause.)

BILL GATES: All right. (Laughter.)

So how are we going to look at these new experiences? Well, the easiest way is actually to give you a little demo of what we’ll see this next year. It’s a big year in terms of some neat new things. We’ve got it divided down into devices: on the go, entertainment, what’s going to happen there, and finally Windows at home and how that will change.

The different smart devices are really exploding in volume. The pocket-sized devices are about communications. And here I’ve put together two categories that historically people have thought of as separate, that is, the screen-based cell phone and the PDA type device. While there will always be the voice-only cell phone devices, it’s argued that the difference between a screen-based cell phone and a PDA will become only a matter of emphasis rather than a black and white boundary between two different devices. And so you’ll see really the best of both worlds there, the kind of rich communication you expect from the cell phone and some of the richness of applications and experience you’ve been able to think about with the more powerful PDA devices like the Pocket PC.

The PC itself is constantly evolving. That’s the high volume device here. Over the next year you’ll see not only some of the things we’ll show you tonight but also the tablet PC will be coming out in the second half of next year. And that’s a very significant thing because it actually takes the entire PC and gets it into that portable form factor.

The other form factor that we think is important is the big screen and these screen sizes are really the key differentiator. The experience of what you can have on a small device, the desktop-size screen and the big screen, those are the real boundaries that will last even over time. Even as the software and the network and the capabilities converge, the user interface experience of the different screen sizes will have to continue to be optimized for those devices.

For the big screen, it's multiplayer. In the office you might share information, conference together, but you need a user interface that deals with the idea that you’re at a distance, you’re far away. The PC screen, you’ve got the keyboard, you’re close up, but again it’s too big to always have with you and that’s where the pocket size comes in. So applications will do user interface specialization to target those devices.

Now, devices without screens will in a sense be peripherals. You’ll be able to go to any screen device and go and see their state, understand what’s going on, give them commands and there will be a way that those devices, without having any buttons or knobs or screens, will be able to declare themselves and be located and declare their capabilities, so all the different screen devices are connected up.

That’s really the dream of this vision, a wireless network, a common way to remote all those capabilities, and then you just pick the size of screen that’s appropriate for the task that you’re working on at that point.

Now, a key platform I mentioned is Windows CE. We’re announcing a major new release of that called Windows CE .NET. This is where we really take the real-time capabilities to a very rich level. All the requirements our customers have had in this real time area we’ve been able to accommodate with this new release.

We also were able to take the richness, the 802.11 support, authentication support, smart-card capability, different peripherals, networking protocols and benefit from the work we do on Windows on the PC by taking those drivers and that software and customizing them for these smaller devices, making sure we fit into the right memory size, making sure we fit for the small screen and the power budget that these devices have.

We have very broad adoption of these devices. I remember about four years ago, I came to CES and talked about Windows CE and then all the devices were futuristic and we were kind of vague in talking about those. Since then many tens of millions of these devices have shipped and we’ve been surprised at the variety of devices that people have built around this platform.

We made the development kit, a very rich kit. We put it out there. We’ve made large parts of the source code available to make it easy to license. People take that and do with it a lot of very, very neat things, and this next version, the CE .NET will just take that to a new level.

So that’s a platform you can consider it in a sense the little-brother platform next to Windows XP itself, which we custom-tailor also into the so-called embedded XP edition.

Well, I’d like to ask Steven Guggenheimer to come on out and give us a look at what these devices on-the-go look like, what kind of communications things can you do with them, where have the creative hardware companies taken this software power and made it all work together.

Welcome, Steve.

STEVE GUGGENHEIMER: Thanks, Bill. (Applause.) Good evening, everyone.

As Bill said, what I’d like to do is take a few minutes to talk about how software is helping make devices, work better on their own, as well as work better together. With CE .NET we enable a wide range of devices to take advantage of the latest technologies, from browsing the Web, playing back multimedia files, connecting using the latest wireless technologies such as Blue Tooth and 802.11.

CE .NET also allows the consumer electronics industry and manufacturers to begin differentiating devices by combining different technologies together and seeing what takes or what works well with consumers.

Lastly, it allows these devices to participate in the growing ecosystem of experiences, as well as participate with web services.

With that, let’s take a look at several of these. I’ll start on this end. This is something called an Icebox. I’m not sure how many of you have seen those screens that sit below counters and people drop them down for watching TV. Well, this company has taken that notion but extended on it by allowing several capabilities. One, you can browse the Web. You can do instant messaging here if you wanted to while you were browsing the Web. They’ve actually created a keyboard that you can drop in water and it’s waterproof so if you drop it in the sink you’re okay.

You could also watch TV from this device. You could play a DVD from this device. It even has a camera built in, so if you wanted to monitor the kids in the other bedroom or just listen to them, it’s basically an all-in-one device that supports all these capabilities, again building on CE .NET, testing how different devices or appliances might work.

As you move along, you’ll see several other Web-type appliances or Web pads up in the top here. This device from Samsung is a new form of a handheld PC. It brings together the best of traditional PDA capabilities, the digital assistant, as well as cell-phone technology and a very high-resolution screen, 720 x 1280. So in this case it has brought several technologies together.

One thing that’s important to understand with Windows CE is that it is a platform. So people can take the technology, and mix and match them in any way they like. We take some of those technologies and build certain categories out of that, for example, the Pocket PC. However, not everything built in the PDA category is a Pocket PC and manufacturers are free to build things that compete with the Pocket PC or partner with us in that area.

So this is an example of one PDA. Here is another one next to it from Cyberbank. This one again is an all-in-one device -- phone, Web browser, personal assistant. The cool thing about this one is it’s got this little Bluetooth handset, so while this PDA is a little bit large, if you want to go within 30 meters and just leave this on the desk, this is your handset for using for a phone. It’s probably the smallest handset I’ve ever seen.

Now, this device next to it, I’m going to go ahead and turn it on and I can actually rotate this screen around and hopefully you can get a camera angle on that. I’m going to go to the top menu. What this is it’s a little music player. It’s a little music player that allows you to play back videos as well as listen to music. I’m going to go ahead and go into the video area and play a track. Again, it’s using the CE technologies to be able to play, the latest Windows Media technology. I can skip ahead if I want.

And what I’ll do, the nice thing about this is that if you look at the form factor, and I’ll just go ahead and go back to the top menu, you can sort of figure out the direction they’re going. Instead of having just a personal music player on one hand and a cell phone on the other, this one will combine both capabilities into one device. So instead of having two you’ll be able to try this out as a phone and music player all in one.

Next to this, from Hitachi there’s another PDA. This one has built-in 802.11, again taking advantage of wireless, and over here we see a terminal, a cash register and several other devices around.

So you get a sense for how people take software and build a wide range of different devices that allow them to participate in the ecosystem to take advantage of services and really be unique in many ways.

Now I want to switch gears a little bit and talk about the Pocket PC. Again, one of the things we do with CE is create a category called Pocket PC by adding extra applications to it and certain capabilities.

Last year we announced Pocket PC 2002 and it’s been going very well. This particular version from Compaq, which is brand new, supports Bluetooth natively, so with Bluetooth supported here -- I have a Bluetooth phone next to it -- I could actually use the phone to dial out and then Bluetooth to have this one connected over the Internet in that fashion, so again built-in Bluetooth on this device.

I want to come around now and switch up to the screen, if I can. One of the other things that’s nice about the Pocket PC is that it supports the latest in Web standards, so you can take advantage of new Web services. At this show, Ultimate TV is announcing several new services. One of them is called Remote Record. What it does is it allows me to go anyplace that I can get access to the Web and set up my Ultimate TV to record programs.

So, for example, if I go into the guide here on this Web site, if I go and search the guide, I’m going to go search for NFL because we’re all missing Monday Night Football tonight, and I personally want to record it. So I’m going to go search on that. Let me go ahead and go down to NFL football, Monday Night Football. And what I want to do is set it up to record it. What you see over there is my Ultimate TV receiver, which is in the back, and the way this works is when I click “record” it actually sends a message out over the Web site up to the satellite and then the satellite downloads over to the Ultimate TV box and we’ll see a red dot appear when it’s set up to record.

(Applause.)

So unlike the rest of you I’ll be able to catch the football game when this is over; very cool stuff.

Now, as Bill talked about, the next logical direction in terms of Pocket PC technology is how do Pocket PC technology and traditional cell-phone technology begin to come together. Well, there are two ways to approach that. You either take phone capabilities and integrate them with the Pocket PC or take Pocket PC capabilities and integrate them with the phone.

Yes, James? Hello, James.

VOICE: I need to get Moneypenny’s phone number. Can you help me out?

STEVE GUGGENHEIMER: I don’t have it at the moment. Can I call you back later?

VOICE: Very good. Thank you.

Now, the nice thing there is I didn’t have to think about, oh, I’d better shut down the Windows Media Player so I can hear him talking. It automatically knew what to do. And that’s a great example of where software knows how to handle different incoming capabilities and work to mix and match those together.

So this is an example of mixing phone capabilities in with the Pocket PC. I have two devices up here, one of them from Audiovox and one of them from HP. These are the types of devices we expect to see in market in the next year that bring these two worlds together.

Now, let’s head in the other direction. What I have here is a cell-phone form factor, the same size as most of the cell phones all of you carry out there. The only difference is it has a slightly larger screen. And when I go over here, what you’ll see is this particular device. Now, this device has had the code name "Stinger" up until now, but at the show this year we’re announcing that the name for these, the smart phone category of devices that support our software, will be Smart Phone 2002. So our software for the smart phone is called Smart Phone. It’s pretty logical.

And what you can see is the same type of UI. If I browse around here I can get access to all the programs. It’s very similar to the menus you see on a Pocket PC. You’ll notice the quality of the screen. If I go down to browse the Web, and let’s go maybe to the BBC site, we can see that not only can I see the text but I have images there, they’re in color. I can scroll down. I can read the news. You can imagine a hundred places where you’re stuck with your cell phone and it would be nice to be able to go out and browse the Web as easily as this.

If I go back to the home site one of the other logical things with a cell phone obviously is to be able to look at your contacts, and so here I have James Bond’s information so I could call him back if I needed to.

And the nice thing here is this contact list is synchronized with my contact list in the PC. So in the same way that the Pocket PC today allows you to keep the same contact list, the same schedule on both devices, now cell phones in the future will be able to do the same thing. It’s super seamless, a great UI.

So with that I think we’ve done a pretty good job of showing how CE is taking off in terms of enabling a wide new range of devices that take advantage of the latest technologies, as well as how a certain category with Pocket PC and smart phones are allowing phones, as well as Pocket PC technology to come together.

So with that, I’m going to ask Bill to come back out, and say thank you.

(Applause.)

BILL GATES: OK, those were the devices on-the-go. Now let’s think about the home and what would be ideal there.

Today, when you have digital music, you put it on different PCs. You’re never sure which song is on which PC or which thing you’ve downloaded to more recently. Likewise with photos and files and software updates. And so you’re kind of in the position that an IT administrator is in where you’re having to manage these various things and think about how the connectivity works.

Well, what’s ideal? What’s ideal here is that the devices, using an advanced form of Universal Plug and Play, would simply declare what they are and what their capabilities are, including whether they have storage, including whether it’s appropriate to copy things like music or photos out onto that device, and then the user doesn’t have to get directly involved. They know that because of this wireless connectivity, the information that’s on any device, whenever that device is on, is available to them to use.

And so part of the idea here is that over time what you think of as really special-purpose screens, screens that might only be picture frames today or used for home control like the security system, those screens would become general purpose and you could literally connect back to any application on the PC and have that information and interaction with those devices as you please, for not just the Internet, not just photos, not just music, but any intelligent capability projected out onto these different devices. So it’s extending the PC through the wireless networking. Digital media experiences are a big part of that and even for home management.

Music, photos and videos: We always focus in on those because those are so key. With Windows XP we built in a lot more capabilities, made it so that you had richness in these areas without having to go out and buy extra things. Many people, once they have those basic applications, go and buy extended applications, but we wanted to be there ready to go integrated, so people say, "Wow, that’s something I hadn’t thought of doing with my PC, but now I’m going to go ahead and so that, or perhaps it’s time to make a switch from having my CDs on the shelf or taking my photos with an analog-type camera."

The benefits, once you get into this form, are very strong, the way you can organize, the way share your list of favorites with other people, and so it’s really a matter of getting the cost, ease of use and trust of these systems up to enough level, and then it will be common sense that each one of these scenarios will be done exactly this way.

We have two technology announcements that we’re making. These are things that will be out in about the 12-month period. They’re extensions to Windows, both of them very important to make these experiences more accessible.

(The first is codenamed) "Freestyle": This is the idea of being able to use your PC without sitting down at the keyboard, simply having a remote control and a user interface that’s appropriate for using it at a distance. So if you have it in the living room as a media center, in your dorm room as a media center, wherever you are, the idea of remote, simple interaction is simply a feature that comes with Windows, letting you get at browsing, e-mail and all the digital media experiences.

Second is codenamed "Mira." This is the idea of letting Windows connect up to an intelligent display, and that display itself, if it has batteries and has the wireless capability built in, can be carried around the house and used in a variety of ways.

These are both Windows extensions, and areas where we have very key partners in the hardware business that are helping to bring those forward.

Let’s go ahead and take a look at different things around the home, including in particular "Freestyle" and "Mira" and try and understand what those are all about. So let me ask Steven to come back out and show us what this is.

STEVE GUGGENHEIMER: Great, thanks, Bill.

Well, as Bill mentioned, one of the things we want to do in the coming year and into the future is build on the great experience that Windows XP has enabled. Whether it’s the digital media experiences or Web browsing, it would be nice to have them more accessible throughout the home.

So the first thing I want to do is show you "Mira". I can sit up at this PC and work on my pictures if I wanted to. We could look at pictures from last year’s CES show, some of the highlights if we wanted to.

It’s a little hard though for Bill and I to work together on this, so what I’m going to do is, I’m actually going to pick up this particular monitor, walk around to the front here and show everyone now what we’ve done -- using the CE .NET technologies that we showed you, along with wireless capabilities -- is enable a new generation of smart monitors or smart screens. This means now I have a wireless connection back to the PC, so it’s an extension of my existing monitor, which now allows me to sit up here in the front with Bill and we can share the photos. Remember this one? This was a pretty good one. I thought you looked very good here next to The Rock, about same dimensions and proportions, very good slide there. (Laughter.) If we want, I can minimize this.

Now, there are a lot of things that would make sense here. For example, I’m going to bring up music. You can imagine a couple of kids sitting around browsing the Web together looking for their latest music. This is the latest from MSN Music, which allows us to really discover all kinds of things, whether it’s the hundreds of thousands of radio stations that are out there, music to download, read reviews. In fact, I want to go and download this particular song that we could listen to.

Now, for you, Bill, since I know you like to play bridge online, it’s very logical --maybe not Bill’s style for music, so we’ll go ahead and stop that, but you could play bridge online with your friends without having to be sitting in front of the desktop. You could sit on front of the couch. So it’s really a handy way to extend the experiences for Windows XP throughout the home.

And I’ll set this down over here and you could imagine sitting at the breakfast table and sort of reading the newspaper this way in the future.

Let’s step over here now and switch over to the "Freestyle" technology. Again, starting with the Windows XP PC in the same way, and I could go to my pictures again and it’s still sort of difficult for Bill and I to share. But one of the things we’ve done is created a new distance user interface, which allows us with Windows XP to step back away from the PC, and let me go ahead and bring it up, and from here what I can do now is take advantage of some of the more social functions or the digital-media capabilities and browse those from back here. So we can not only have the productivity capabilities of the PC, but experience entertainment in a better way.

Let’s go down to music. If we wanted to bring up some music in this fashion we could go in here and choose an album. And it’s choosing from the same Windows Media library I have on the PC, but you’ll notice the UI has been set up so it’s easier to browse with a remote control.

Let’s go over and start a song. And once we’ve done this, we’ll get that playing, we’ll go back to home. You could from here, if we wanted to, go and pick up some pictures and we could start a little slideshow so we’re looking at pictures and listening to music.

Now, the logical thing if you’re going to add a TV type UI to the PC and make it available, the next logical thing to do then, of course, is to enable TV-type capabilities. So the next thing you can do with the "Freestyle" technology is add a tuner card into the PC, and from there you’ll be able to have the same capabilities as you do from devices like Ultimate TV and the set-top boxes. Let me go ahead and bring this up. There it is. And actually let me go back to the guide real quick. So I can go up here and I can search the guide if I want to. It’s similar to what you do today. If we want to watch "Everybody Loves Raymond" we could do that.

And so when you think about a dorm-room PC that has all the productivity aspects plus entertainment aspects, you have it all in one. And here I’ll pause this video, so again building on some of the technologies we have. You have the ability to extend the experiences in the PC both for around-the-house access with "Mira" and, in terms of entertainment, with the "Freestyle" technologies.

Now, let’s kind of step over here and we’ll take one more step. You can imagine in the future, as we move beyond these two, how these work together on behalf of the user. So you could think about a flat-screen TV in the future that had the "Mira" technologies built in, so I could access the PC over here, as well as supporting the "Freestyle"-type UI, so if I went to it I could access the PC from any screen in the home, whether it be a smaller "Mira" device or a TV. We could again access the pictures. And when I think about this, when I was a kid and I’m a little younger than you, but my dad used to have the carousel, when you stick the slides in there and set up the screens and that’s how we looked at home photos. In the future I think this is the way from any screen in the home you’ll be able to access your digital photos or your digital movies.

Let’s go back here and we’ll go back to the TV.

Now, the other thing that’s important as we go forward is how do you synchronize and make sure that even though you have multiple monitors you can decide what you want to do on which monitor if the PC is in another room. So, for example, if an instant message comes in you’ll notice that it comes in both on this screen as well as on my screen down here.

And, Bill, why don’t you go watch TV and I’ll check and see who’s calling real quick.

And what I can do is, without interrupting Bill, I can actually take this instant message -- it’s the babysitter calling. Let’s see what she wants.

Hello.

BABYSITTER: Hi, Steve.

STEVE GUGGENHEIMER: How are you? How’s it going?

BABYSITTER: Hey, am I interrupting anything?

STEVE GUGGENHEIMER: Well, maybe a little bit, but what have you got?

BABYSITTER: Well, I have to tell you what the kids have been up to.

STEVE GUGGENHEIMER: OK.

BABYSITTER: OK, let me send it.

STEVE GUGGENHEIMER: All right, so she’s going to send me a file and so we’ll download it back to the PC.

BABYSITTER: OK, well, we can’t wait for you to get home. We’ll talk to you soon.

STEVE GUGGENHEIMER: The kids always miss me. That’s nice.

So I’m going to take this video and I’m going to download it, and once it’s downloaded to the PC, I might want to play it here and just watch it or I might want to share it with Bill. So we’ll go ahead and do that. And you’ll notice once it comes up I have the ability to play it locally here or send it over to the living room TV, which is what I’ll do, and it’s smart enough again to pause the TV over there --

CHILD’S VOICE: (Unintelligible.) (Laughter.)

STEVE GUGGENHEIMER: Well, I’m not sure that’s a good thing the babysitter is teaching my three-year old that she’s smarter than I am already. Well, it’s probably true.

At any rate, I’m going to go ahead and set this back over here, and I think you get a good idea with "Freestyle" and "Mira" technologies, as well as in the future, how we’ll be able to extend the experiences that are available in Windows XP today throughout the home.

BILL GATES: Super.

STEVE GUGGENHEIMER: Great. Thanks, Bill.

(Applause.)

BILL GATES: We have some key partners that I mentioned on each of these products. On the "Mira", the smart-screen approach we’re taking, Intel, Wyse, National Semiconductor and ViewSonic are all working with us to make sure that there will be great products out in the marketplace based on this concept.

Microsoft, of course, is only doing the software pieces, making it easy for anybody who wants to do these screens, to deliver those into the marketplace.

With "Freestyle," we’ve got some key companies very involved in the idea of home PCs and changing the experience in the home. We’ve got Samsung. Their CEO will be here in the next few days talking about the partnership and some of their vision and how we’re working together. We’ve got NEC and we’ve got Hewlett-Packard, so three very key partners who will be helping get us get that Freestyle approach into the marketplace.

I did want to make sure that you got a whole sense of what the benefits of the "Mira" approach are and so we’ve put together a little video that was actually to get reaction for the product, which were very, very positive. So let’s go ahead and take a look at a little more extensive use of "Mira" in action and what that will be like.

(Videotape segment.)

(Applause.)

BILL GATES: So it goes anywhere in the house. (Laughter.)

Well, finally let’s focus on the third area here, which is the change in entertainment itself. It’s important to remember that not only is new technology going to make entertainment as we know it today more accessible so that you’re in control -- you organize it the way you want, you customize what you want, you see new things, you’re notified of those things in very simple ways -- it’s also going to allow for some breakthrough new approaches. Certainly we’re seeing that on Xbox. We continue to see that on the PC as well.

Some of the dreams that were so strong during the Internet-hype period were actually valid dreams and many people are forgetting what was possible there. For example, thinking about the future of advertising, advertising on the TV being far more targeted than it is today, giving viewers a way of interacting and responding if there’s something they’re intrigued with. The idea of taking quiz shows or sports shows and letting you get more information on things that you care about. All of those advances are still in front of us, and as we have these intelligent devices, including the PC and the other devices, those dreams will be realized. And so whether it’s music online, every one of those things I think we’re going to see surprises as the creative community gets hold of these platforms.

The improvements in the graphics are quite phenomenal and those are not slowing down in any way. The fact that you’ll have voice interaction with these devices, and so you’ll have a natural way of working with that, is certainly coming with the next generation.

And so entertainment will get these devices in the home by making it more convenient, but then entertainment will never be the same.

Part of this is taking the formats for digital audio and digital video and constantly improving the quality and the accessibility of these. We do that by increasing the compression capabilities and better microprocessors, and simple software cleverness are the key there.

We now have formats that, simply on a CD itself, that you used to think of as something that would be for just an hour of music. Now we can store 22 hours of music. That’s a lot. I mean, you can drive across the country and never listen to the same song twice off of a single CD. You don’t have to make a change to what’s in there. And that’s done without sacrificing the quality of the audio that’s available there.

Now, these formats that we’ve been building have been available, of course, on the PC, but the big progress we’ve made recently is getting major companies, and I’ve listed the partners here on this slide, to adopt these and build them into their dedicated devices. And so, for example, Panasonic, who’s a clear leader in CD and DVDs, will be building both the chips for this to enable other people, and using it themselves in their own devices.

If you take that over to a DVD and think of the capacity, the numbers are really quite phenomenal, over 160 hours or 3,000 songs on a single DVD.

In the area of video as well, the kind of quality and richness we’re getting is much advanced as well, and so digital formats are getting a lot better.

I’d like to ask now Steve to come out for our last round of demos and show us what this means for the world of entertainment.

STEVE GUGGENHEIMER: Thanks, Bill.

So, as Bill talked about, the Windows Media guys are doing a great job in terms of allowing us to store more music and to play it back on traditional media such as CD.

Bill talked about 22 hours of music. I burned this CD earlier today and here you see a car stereo I could play it in. But we’ve also got one of the Panasonic players here. Let me go ahead and wake it up. Energy management is a very good feature, so we’ll take advantage of that. And you’ll see us loading and reading the tracks.

So here’s the first generation of a consumer home entertainment system that can support these new capabilities such as the Windows Media technology directly on the drive.

Once I get to my menu, let’s go ahead and bring this up and you’ll notice a normal CD has roughly 10 tracks or maybe 20. But if I go next here, next, next, next, next, a lot of George Harrison -- he must have gotten tired of burning the same song. At any rate, in fact, we can pop up to track 365 here and go ahead and play that. (Music.) There we go. I’d better bring it down again. Again, my choice of music doesn’t seem to be working tonight. I’ll go ahead and pause this.

So you get an idea of what you can do with the new Windows Media technologies in terms of making it very usable for consumers. For more than the hundred consumer electronic devices, little handheld carriers that are available now to devices like this, there’s just a wide range of ways to take advantage of music and in the future video.

Now, the second thing that the Windows Media guys previewed recently was new professional compression techniques that apply to both audio and video. So for the first time you’ll be able to over the Internet send streamed content that’s compressed now but supports surround sound audio, so traditional Dolby 5.1 sound over the Internet. And when you think about video compression in the future and doing it over the Internet, people for movies and videos are going to want that level both in terms of audio and video.

So let’s show you a little sample of what the audio looks like. Let’s go ahead and bring up the PC in the back. And let’s show you what the audio sounds like now coming off of a PC compressed using the new format.

(Audio clips.)

I definitely tuned the speakers for that one. (Applause.) It’s great stuff. Now, as you could tell, we’ve set the hall up to handle the new sound.

The second thing that makes sense, of course, to go with the audio is the video, so now we have a clip of the movie "Dinosaur," which is compressed basically at 720P format but obviously at much better bit rates than today’s DVDs. So we’ve got a 720P clip -- it will take a second to bring up -- that brings together both the video quality plus the audio quality. Let’s go ahead and switch over and bring that up.

(Video clip.)

At any rate, it’s quite a clip. I think it shows off the new technologies. It is a G movie about dinosaurs, but it did scare my three-year old. (Laughter.)

At any rate, so great progress in Windows Media technology all around. I think we should switch gears now and do a little bit on Xbox. For that I want to bring out the CXO. In most companies CXO has different meanings. In our company it’s the Chief Xbox Officer. So I’d like to invite Robbie Bach to come out and tell us a little bit about Xbox.

(Applause.)

ROBBIE BACH: So about a year ago exactly Bill Gates stood on this stage with The Rock and showed you Xbox and Xbox games for the first time. Now I’m very excited to report that our launch, which we just completed through this holiday, has gone very, very well. Bill mentioned the numbers, 1.5 million consoles and over three games per console sold in North America. That’s really amazing and makes this the best console launch in videogame history. That is an exciting achievement for us.

But perhaps more important than that is what I see we’ve been able to achieve with the buzz around Xbox. You know, I see Ron Howard on Jay Leno talking about his son playing Xbox and having trouble getting him to stop playing. I read a Non Sequitur cartoon that talks about Xbox. And what you see is the brand is becoming part of the vernacular when people talk about entertainment and videogames. And that lightning that we’re managing to capture in the bottle to create the buzz around the brand is going to be key as we build Xbox going forward. And the combination of our early launch success in North America and that brand awareness and buzz is going to lead us to a great future in this business.

Now, 2002 is going to be a very exciting year, just as 2001 was. On February 22, we launch Xbox in Japan. We follow that up closely on March 14 with the Xbox launch in Europe. By the end of our fiscal year in June 2002, we will have sold between 4.5 and 6 million units of Xbox, so that’s in seven months from a standing start. That, we think, is a great achievement. And by the end of calendar 2002 we will have over 150 games on the platform.

It really is a very exciting time and what I wanted to do today was bring Seamus Blackley on stage with me to show you two of the games that are going to be featured as part of our launches in Europe and Japan. Seamus?

SEAMUS BLACKLEY: Hey, Robbie, how are you doing?

ROBBIE BACH: Good.

SEAMUS BLACKLEY: So one of the things that Robbie alluded to about the launch that’s really exciting was how great the games were. And, really, for me as a non-business guy, the counterpart to Robbie, that’s the most important thing. And I wanted to give you guys a glimpse of what you’re going to see for Xbox coming up in the near future and really carrying on the revolution in games that everyone is talking about that’s causing that popular buzz.

In fact, a couple of Xbox guys were up at a snowboarding mountain a couple of weeks ago and the term, “Dude, that was totally Xbox” was used for excellent move. True story. (Laughter.)

Now, for those of you who have ever wondered what it’s like to drive 100 miles an hour down a back dirt road with Seamus, I brought along a fine driving game from Microsoft here, Reality Sport.

(Videogame preview.)

That’s enough. (Laughter.) But I think you can see that sort of feels like driving fast. And all the little technology, all the little tricks that are built into the Xbox are starting to really get used there. You saw the road was a little shiny. The bushes actually move when you go past them, the incredible detail of the ground, the individual blades of grass. That's the kind of stuff that you’re going to start seeing people put into Xbox games, but by no means does that mean that every Xbox game has to be a hardcore simulation of reality.

Here we have Jetset Radio Future from my pals at Sega, and to call this an inline skating game would be a little bit like calling Xbox a game.

(Videogame preview.)

All right, that’s enough from Seamus, the game expert, unable to stay on the rail. But I think you can see from just a glimpse of those two titles that Xbox games are really headed in a new direction. They not only look, but they play, unlike anything anybody’s ever seen and it’s just going to keep on going, and that’s the most exciting thing that you can imagine in the videogame world.

So, Robbie, back to you.

ROBBIE BACH: Thanks, Seamus.

So now you’ve seen a little bit of the games and what we have coming and the portfolio is just going to continue to get stronger, as Bill said. But the other exciting thing that’s going to happen in 2002 is we will bring out our online service for Xbox.

Now, Xbox Online is very important because we think it is a key element to continuing to drive innovation in the videogame space. And Xbox is the only console designed to take advantage of online right out of the gate. We designed it into the box so it’s very easy for people to get started.

And so we’re focused on three things: One, that ease of use and enabling people to get up and have a fun online experience in a very straightforward way. Two, building the kind of competition that people are looking for. Part of this experience is being able to compete with your friend around the corner or to be able to compete with somebody else across the city or your cousin across the country or somebody you’ve never met in someplace else around the world. And we want to bring that competitive level to the Xbox online service. And finally, of course, it is about community. You know, at its heart gaming is an intensely social experience. It’s about talking with, communicating with, interacting with people. And Xbox really again is designed to do that.

So what we though we’d do today is show you a concept video, kind of like the concept car in Detroit, which could give you an idea of what Xbox Online is going to bring to the industry and bring to gamers and our customers over the next few years and really demonstrate how we’re providing leadership in the videogame industry. So let’s roll that online video.

(Videotape presentation.)

(Applause.)

ROBBIE BACH: So you really can see that this is going to be a very exciting space for us. The videogame industry is now about a $10 billion industry just in the United States. That makes it bigger than the box office receipts for movies in the U.S. This is an industry that’s continuing to grow and it’s an industry I’m excited to be leading Microsoft in, and look to be successful for Microsoft in the future.

Thank you very much.

(Applause.)

BILL GATES: Well, I hope we’ve given you a sense of why we’re so excited and what the opportunity is. The pieces are coming together. The hardware is there. We and others are building the software. And it’s a case of the software industry and the traditional consumer electronics industry coming together to build these products.

We’ve got some key things we’ve got to focus on -- Trustworthy Computing, ease of use, really focusing on the scenarios that make sense for users. And by doing this, I think we’re going to have some breakthrough software running on great new hardware.

So I appreciate your support. I think there’s a lot of exciting times ahead. Thank you.

(Applause.)