Who: Stephen Elop, president Microsoft Business Division
When: Monday, May 17, 2010
Where: J.P. Morgan Global Technology, Media and Telecom Conference, New York
JOHN DIFUCCI: Thank you.
Good morning, and welcome to the 38th Annual JP Morgan Technology, Media, and Telecom
Conference. My name is John DiFucci. I'm the software analyst at JP Morgan. But, more
importantly than myself, we're very happy to have with us here today Stephen Elop, who is
the president of the Microsoft Business Division, which is the largest division at Microsoft.
So, thank you for coming, Stephen.
STEPHEN ELOP: My pleasure. Good morning.
JOHN DIFUCCI: So, Stephen, there's a lot that's been happening in your area, and before
we get into the new product news, I'd sort of like to take a little step back, because we're all
investors here, and we've all been watching software, a very attractive business model,
interesting space, always interesting space. But on this first quarter, after the fourth
quarter, we sort of saw what looked like enterprise spending generally was getting a little
bit better. But the first quarter was very mixed. And we take took at seasonality, we look
at how companies behave quarter-to-quarter relative to how they have done that in the
past.
It's a little bit more difficult for Microsoft because you have a consumer component, which
makes it a little more interesting. But on the enterprise side, first of all, because most of
the companies out there in software focus almost exclusively on enterprise, how does
Microsoft view that? You talk a little bit about it. You were one of the few in the fourth
quarter that said, you know, Peter Klein, your CFO, I believe, said something to the effect
that it's still tough out there in the enterprise market. And that came to fruition in the first
quarter for just about everybody.
I just wondered your thoughts on how that's developing today, and then also given your
unique position with a consumer component, if you can address that also?
STEPHEN ELOP: You're right, because within the Microsoft Business Division, we've got a
mix of consumer and business, 20 percent of our revenues are consumer related, about 80
percent on the business side. You know, generally the way we're seeing things right now is,
sure, on the consumer side there's some excitement, because we're seeing the purchase of
PCs really pick up. There's been a real surge of that. That's really exciting. You're seeing
that reflected in some growth in our consumer revenue.
But, on the business side, it's very definitely in that, you know, we're hopeful stage. We're
seeing some nice signs on the annuity side where, for example, the billings that we had in
the first calendar quarter were on the upswing. So, that's a positive sign. But on the
transactional side, businesses making purchases for today, one-off purchases, and so forth,
what we essentially saw is a decline, still. And that was largely driven, though, I think less
by whether they were buying PCs, because business PCs are just beginning to pick up, but
in our particular case, because we have this major launch of products landing last week
actually, what we heard from businesses, and what has been very typical in our pattern is
that those businesses are saying, you know, I'm going to wait for that new version of
software as the new version that I'm going to start purchasing.
So, some early signs, but we're definitely in the hopeful but not willing to declare an upturn
at this point.
JOHN DIFUCCI: Also, given the transactional vs. the annuity business, is the transactional
more weighted towards smaller businesses, too. Could that have had some effect?
STEPHEN ELOP: Absolutely. The transactional business tends to be smaller businesses.
The larger annuity purchases, which is about 60 percent of our business, tends to be the
larger enterprise, although there, of course, are always exceptions in both directions, but
that's the general pattern for sure.
JOHN DIFUCCI: Okay. So with the business launch of Office 2010 last week, Microsoft is
off to the races.
STEPHEN ELOP: You know, it was an amazing week, because after so much work, and
preparation, and engagement with our customers, it's a great time to be out there
presenting the work that we've done. You know, what's really going on out there is the way
people are working, whether it's at home or in the workplace is constantly evolving. So,
today, it's like the advent of social networking, the importance of cloud computing, which in
the enterprise in particular is the topic out there right now amongst CIOs and CEOs. You
know, there's a whole variety of things that people are really focused on. And with Office
2010 and SharePoint 2010, we were really landing a suite of products that says, you know
what, the best productivity experience is this combination of what you can do on the PC,
what you can do in the browser and the context of the cloud, and what you can do on your
mobile device.
And so, as we were onstage presenting what we were doing, as we were talking to the press
and analysts, you know, the types of things that people were celebrating were, for example,
within Outlook, I can interact and connect directly with Facebook, and LinkedIn, and
MySpace. I can edit video in PowerPoint. I can edit the same analyst report amongst
multiple people at the same time. These were the types of things that were really exciting
our customers.
And what we were able to share as well is that the momentum we're already seeing around
these new products, for example, we've had a beta program over the last several months.
We announced last week that 8.6 million people have downloaded the Office 2010 and
SharePoint 2010 bits, which is just a number, but when you realize that's three times the
number that we saw in Office 2007, you get a feel for the potential momentum, and
therefore the hope that we have for this release of products. So, it's a really exciting time
out there for us.
JOHN DIFUCCI: Okay. That's interesting, three times what it was.
STEPHEN ELOP: Three times.
JOHN DIFUCCI: Also, you have with this release, you have a free Web-based version of
Office. Just if you can sort of talk a little bit about, you mentioned cloud, talk a little bit
about the strategy there?
STEPHEN ELOP: Yes. So, we did for the first time introduce something called the Office
Web Applications, which essentially bring the Office experience into the context of the
browser, both for consumers at no cost, and also in the context of the enterprise as copies
of Office are purchased, they get access to these Web applications as well.
And it goes back to the principle that we believe, again, that the best productivity
experience is a combination of the different ways people want to work. There are times,
and activities you might want to pursue where using the browser -- you know, you're at
your mother-in-law's, you need to make that quick edit, you need to view a document,
doing that within Word, Excel, PowerPoint, in the browser is the right thing to do. It's just a
natural way to get that task done. But, equally, there are times where your head is down
and focused on a document, or preparing a PowerPoint presentation, there taking
advantage of the memory, the processor capacity, and the graphics capabilities of a PC is
the right thing. And then still, the next moment, you may be on the road wanting to do
that quick bit of work using your mobile device, we supply that as well.
The magic in all of this, and this is what we've really focused on, is to make sure that the
fidelity of the documents, or the spreadsheets, or the PowerPoint presentations is wellmaintained and preserved through all of those environments. So, if you take a complicated
Excel spreadsheet, move it over to your phone, make a change, move it up to the browser,
edit it there, co-author it, work with multiple people at the same time, move it back to your
PC, just go around that a few times, what comes out of that process at the end is the same
formatting and capabilities that you would expect. You don't lose fidelity as you move
through those environments.
And that's something we've really focused on because from our customers they say, you
know, looking at other approaches and other alternatives, you know, you move round
through the cloud, and your document doesn't look the same anymore. We make sure it
looks the same. And that is something that our customers have responded very favorably
towards.
JOHN DIFUCCI: That leads to our next question, because Office is the biggest component
of MBD, the second biggest business across all of Microsoft after Windows. And I'm sure
you get this question all the time, but it's a competitive question. Google Apps, OpenOffice,
StarOffice, how do you see those competitive threats? And is what you're doing now an
answer to those competitive threats, or is that a step ahead?
STEPHEN ELOP: So, a couple of points. First of all, there are various competitors, certain
of those competitors, they've got some wonderfully bold claims, and they’re out there
saying wonderful things. What we would like to point out is that the customers are actually
being won by Microsoft.
Last week, for example, at the business launch, we talked about Novartis, Kraft, Coca-Cola
Enterprises, Starbucks, McDonalds, Codelco, all of these large customers who are making
commitments in the hundreds of thousands of seats to our cloud computing infrastructure.
Today, at this point, we have over 40 million paying seats of cloud-based customers. Those
are customers who are relying upon us for the delivery of, it could be Live Meeting,
Exchange in the cloud, SharePoint in the cloud, that whole array of capabilities. If you look
at our nearest competitors, they are orders of magnitude less in terms of people willing to
pay for those services.
Now, we love the competition, we're respectful of it. But what we hear from our customers
in terms of why are they picking Microsoft in the cloud as they have been historically for on
premises, or on the client machine, there are really four reasons that are really coming out.
The first is cost of ownership. When people compare the Microsoft cloud approach for
Exchange, or SharePoint, or the whole collection with our nearest competitors, our total cost
of ownership is lower. There is no ambiguity about that. There can be marketing
positioning, and nice ways of describing what it costs, but when you add it all up to bring
everything together, there's clearly a cost advantage to Microsoft.
The second point, and this is one of those enterprise things, because it doesn't play well in
marketing messages, but it's very important to enterprise customers to have a high degree
of interoperability between their e-mail, word processing, ERP, CRM, unified
communications, custom business apps, financial systems, all of those things have to work
well together. And that's part of our promise from a cloud computing perspective, whereas
our competitors have a very hard time bringing together what's out in the cloud with what
may be on premise.
The third point, and this is something that if you watch the blogosphere, the popular press a
little bit, is really bubbling into view. In the context of the enterprise the competitive
solutions are hated by our customers. It's a real problem where, sure, there's various ads,
this company has gone to this competitor, isn't that exciting, but the individuals, the people
using the technology are revolting against that, and you're seeing out there in the
blogosphere all sorts of reports as to the productivity losses that people are having by
making some of these early transitions. Of course, what you're now seeing is some of those
early transitions are now turning into win-backs for Microsoft, as the CIOs say, look, this
isn't working so well, we've got a problem here.
And then the fourth real reason that enterprises are awarding business to Microsoft so much
more rapidly than our competitors is because over the last 10 or 15 years, and we had to
learn this, as well, is we understand what it takes to support the enterprise. What does it
mean from a support perspective, from a reliability, security, privacy turns out to be a
pretty big issue to our enterprises, and on, and on, and on.
There's been a number of announcements by our competitors recently that have really
underscored this point, features that were really important to enterprises taken away from
them with five days notice. So, enterprise customers can't deal with that type of response
from a vendor. So, from a Microsoft perspective, that experience we have from an
enterprise perspective, that enterprise sensitivity, maturity, is something that is allowing us
to win a great deal of the business relative to our competitors. So, it's an area where, bring
it on, compete in everything, but we're being very successful out there in the marketplace.
JOHN DIFUCCI: What about on the consumer side for that same question, because the
majority is enterprise for the Office business, but as you point out it's not immaterial, the
consumer side. I'm just curious, especially the Google Apps, that's the one where you hear
generations after me, so like my -- actually, it could be children of mine. I don't have
children that old, but that you hear, you at least hear of people using Google Apps in college
today. Is that having an effect, and do you think that's going to -STEPHEN ELOP: So, I do have children, though that's probably not a fair test case, in
terms of what they use. But, the reality is that when a student turns towards writing that
term paper, preparing that presentation, even in elementary school, whatever the case may
be, the vast majority of those circumstances are Microsoft circumstances.
We're very excited, as well, in some of the markets where free is the point of competition,
there are some announcements I think even later today, and during the course of this week
around our Windows Live properties, where you'll see some very exciting news around what
we're doing there to bring the whole Office experience to literally 400 million people.
There's a lot of movement there, a lot of excitement, and so again, it's an area where
there's competition, but we're having great results there, as well.
JOHN DIFUCCI: Okay. I'd like to move on to something else, Stephen. You have a vast
experience in business, coming to Microsoft from being the COO of Juniper, prior to that
running field operations for Adobe, who bought Macromedia where you were the CEO.
So, one of the topics I think from the audience that they think about a lot here is expenses
on Microsoft. So, we've gone through this downturn and we had Ray Ozzie up here last
year, and he talked about an external force hitting a company, or hitting the world, and that
external force being the cause of material change, as to how people think. On the expense
side is still seems like there's potentially even more opportunity there at Microsoft, at the
same time I think there's always a concern out there in the audience, just given Microsoft's
history, that it can go the other way, too. I think it just becomes less important to
Microsoft. We all look at cash flow and earnings, and the more expense the less of that,
generally.
So, I'm just wondering, your thoughts around that, not only from running the MBD division,
which is the largest division in Microsoft, so from that perspective, but also from somebody
who has come into Microsoft, I think about two-and-a-half years ago, what your thoughts
are just generally for the company?
STEPHEN ELOP: Yes, I think perhaps the best way to respond to that is to characterize
what the mindset is around expenses, spending, spending growth, how we make
investments, and so forth within Microsoft, because it's clearly an area where as a member
of the senior leadership team, I mean, it's one of the top topics along with our people, and
competition, and what have you. And Microsoft is very definitely poised to be remarkably
precise, remarkably focused, and very in tune with the investments we need to make. And
what I'm really trying to say here is that the way we're approaching this is to make sure
that Microsoft is very clear on the critical bets, the critical missions that are important to the
company, investing behind those, and if at times that means we have to take, for example,
the expense money and investment dollars from other places to double down on those
areas that are really important, then we'll take that approach.
The economic reset was a moment where the company said, man, we've got to be laser
focused on the investments that really matter. We're going to invest there, while at the
same time we've made decisions where we're going to invest less, and there's been some
examples of that within my division as well as others.
So, the degree of expense control, the focus on that, making sure we're investing
appropriately is stronger than it has ever been at Microsoft. I think that's something that's
been evidenced in our results, very consistently over the last many quarters, and I would
anticipate seeing exactly that same pattern going forward.
JOHN DIFUCCI: Has it been something deeper in Microsoft? Has it been -- I think Ray
talked about it almost wasn't -- it was obviously talked about with the senior leadership
team, but it's almost like a ground swell within Microsoft. There are a lot of bright people at
Microsoft, obviously, people understand what's happening out there in the world, and that
actually seems to me how you -- you almost have to change culture.
STEPHEN ELOP: Yes, and I think there are a lot of smart people, also it was noteworthy
that for the first time in Microsoft's history we had to lay people off during that economic
reset. And those people are individuals, -- those are people whose kids are playing soccer
with your kids. You see them in town, and so forth. And you realize, this is real, there's a
degree of responsibility owed to the entire workforce, to our shareholders.
It's very definitely the case that the culture in Microsoft today is very in tune to the
requirement to manage expenses, to continue to manage those even as we see the early
signs of improvement. Certainly within my business it's great. You see some early signs of
improvement, but what I'm doing from an expense management perspective is saying, hey,
how can I spend less here so I can double down elsewhere. I'm absolutely working within
that envelope, and not looking to excessive expense growth or anything like that to solve
some problem.
JOHN DIFUCCI: Okay, thanks. I'd like to move on to Office Communication Server 2010,
I think you mentioned it earlier, coming out later this year.
STEPHEN ELOP: That's correct.
JOHN DIFUCCI: It's something we've heard a lot about. At the same time it went from
our perspective, my perspective, covering Microsoft today it's always like one of those
things that potentially seems like it could be really big, but it's not quite really big yet. But,
I realize it's not immaterial either. But, just curious, if you can talk about some of the new
features it's going to have, and I've gotten this from some of our other analysts. But, will it
have E-911 lawful intercept support? I think that was something that has been talked
about. And generally how is adoption of unified communications?
STEPHEN ELOP: So, first of all, just to define what we're talking about here, when we
talked about unified communications all up, we're talking about all of those capabilities that
allow people to communicate and collaborate together, and that includes e-mail,
collaboration through SharePoint, and also capabilities like instant messaging, voice, video,
presence, and elements like that. And I think your question is mostly on the instant
messaging, voice, video aspects, which we call Office Communicator.
So, that is an area where about three, or four years ago we came out and said, we're
making a serious investment in, if you like, expanding our definition of productivity to
include those scenarios and those workloads. And what we've done over that time is had a
series of rapid releases.
At this point just a few years later I believe 70 percent of the Fortune 100 are using Office
Communicator in some way, shape, or form, at some degree of scale, not just the pilot, but
in real form. And what we're seeing with the upcoming release, which is later this year is,
we have introduced the, if you like, the final pieces of the puzzle, which allow companies to
say, you know what, I'm putting up a new building, do I need a PBX? No, I don't need a
PBX. For example, in building 36 at Microsoft, which is the building where I'm based, there
is no phone system, there's no PBX. Those types of things aren't used any more. Instead
it's taking advantage of the capabilities of the personal computer, combined with software
to give you a full voice and video experience.
The momentum that we're seeing here is substantial. But, the way we like to think about
this is it's not just the voice and video capability standing on its own. Our overall strategy is
to say that our approach is, the whole needs to be greater than the sum of the parts. So,
our competitive approach is to say, it's the combination of e-mail, interoperating well with
collaboration and SharePoint, interoperating well with Office Communicator. It's all of those
pieces together that our customers are looking at and saying, wow, it's that whole suite of
capability, and it's on that basis that we're competing very effectively.
So, momentum is high. You made the comment that it was sort of a small piece of
business, that's a scale point. In the context of Microsoft it may be on a smaller end,
relative to the software industry, it is, itself, a force. So, a lot of excitement there.
JOHN DIFUCCI: Along those same lines, you collaborate a lot with Cisco?
STEPHEN ELOP: Yes.
JOHN DIFUCCI: At the same time in this area in particular coopetition or competition
directly. Can you talk a little bit about that?
STEPHEN ELOP: Yes, I mean, Cisco and Microsoft have the classic relationship where in
some areas we are working very collaboratively together, where we have joint solutions and
things like that. In this particular area, a Gartner, for example, would say there are two
players who are in the 'leaders' quadrant around unified communications, Cisco and
Microsoft. And so in that particular space, John and I have very regular, direct competitive
effort underway and enjoy that.
The one thing that I'll say, and this does speak to, again, enterprise sensitivity and working
well with enterprises, we also have many joint customers, where there may be an element
of a Cisco solution, particularly their handsets that people may be using. They want to use
the Microsoft capability. So, there's also a very deliberate engineering effort between our
companies to drive a high degree of interoperability between our systems. And, of course,
we both do that for our customers, and also with the belief that we have the better solution,
and ultimately the customer will swing our way. So, it's good, clean business competition,
as well as collaboration where that's necessary.
JOHN DIFUCCI: Okay, thanks. I'm going to go back again and sort of take another highlevel question. Again, you came to Microsoft two-and-a-half years ago, a lot of experience.
Looking at Microsoft just from an observer, at least from my observation, and I don't think
anyone would disagree, Microsoft is one of the biggest success stories of all time, not only
in technology, but of any company. At the same time, with that success comes massive
scale. We talked about that. And with that scale can come systemic bureaucracy. I
worked for the Army for 13 years before doing this, so I understand all of that. At the same
time, when you look at Microsoft there's obviously a lot of bright people there, like there are
out in the world, but certainly at Microsoft. There's also a lot of bright people at GE. And
I'm just wondering, looking forward, how should we think about Microsoft? Is it more like
GE? Can it become more like GE, or how can it not become more like GE? How can it
remain nimble? How can it remain flexible with so much scale?
STEPHEN ELOP: I think -- I'm not quite sure which way you're using GE, because they've
got some great examples of a full spectrum of how you approach things. The way I think
about it, and indeed the culture that I drive and that Steve drives is one that recognizes a
balance, because it's great to say, hey, just be nimble, change everything every day and life
will be good. Well, some of our competitors are doing that, and customers are rejecting
them as a result of that. So, you've got to be careful about striking the right balance.
The balance that I deliberately try and strike is something that I characterize as
constructive disruption. And those words are deliberately intended to imply balance. From
a disruption perspective you are seeing us move more aggressively in the cloud computing,
changing more things in terms of how we develop, deploy, license software at a rate of pace
of change that is beyond even what our customers would expect. So, it surprises, it
delights, sometimes it frightens, but boy we are willing to move forward aggressively. And
we're doing that, and the results are accruing to us as a result.
At the same time, the constructive aspect of this, when we make a change to something
simple in the user interface in Microsoft Excel, for example, there are somewhere between
500 million and a billion people today who will be affected by that. So the obligation we
have to our customers is substantial. So, with great success comes great obligation to be
very thoughtful about how you move people through this disruption. You can't just say,
hey, I'm taking those features away and doing it this way next week instead. You have to
be thoughtful.
My sense of Microsoft is that it responds best, and it takes this approach of constructive
disruption when it's faced with real competition. That's the moment where it really steps
forward. And I'll tell you today, with the advent of cloud computing, and that change in
computing, there is an opportunity for more competition. So, that's what you see at
Microsoft, as it relates to embracing the cloud and moving forward there, moving at a
tremendous pace.
Indeed, just in the weeks that have just passed us by our entire sales force has gone
through another series of, hey, here's how to best present and sell, and support your
customers as it relates to cloud computing. That's tens of thousands of people who we've
taken through that, just rapidly moving through that change. Those are the types of moves
that I think demonstrate Microsoft at its best, responding to competition, and leading our
customers going forward.
JOHN DIFUCCI: I'm going to ask a follow-up to that, but I think right after that I believe
we'll have microphones in the audience, and we'll open it up to the audience. You
mentioned cloud computing a few times, and we're familiar with the implications for your
business and how technology will be consumed. At the same time it will affect your model
you're financial model somewhat. Can you talk a little bit about that, and what your
expectations are?
STEPHEN ELOP: First of all, we view cloud computing as a revenue and profit growth
opportunity for the company. That's the way I've modeled it, that's the way I think of it.
And it's important to understand what that means, because people say, the margin is going
down, how does it work? Here's the basic way to think about it. Today, for an enterprise
customer, we sell them software. We get a certain amount of revenue, and a certain
amount of profit at a very high gross margin from those customers today. So, we
understand that model.
When we enter into the cloud-computing world, where Microsoft is providing, for example,
Exchange, or SharePoint, or Office Communicator in the cloud, we are now doing more for
that customer. Not only are we effectively selling the same software, perhaps licensed
differently, but still selling them the same thing, but we are also providing a broader array
of services. We're buying the hardware for them, we're running the hardware, we are
purchasing electricity, we're maintaining the software, we're doing user support. We're
doing a much broader array of services for those customers. So, we are now participating
in a larger share of the IT budget.
Now, because of the economies of scale associated with cloud computing, we can provide
those services to the customers for less than what they're currently paying. So, for the
customer, they're seeing their overall IT budget going down, but the amount of revenue
flowing to Microsoft increasing.
Now, on the Microsoft side, we're seeing roughly the same, licensed differently, software
revenue, but we're now getting the services revenue. And, granted, services revenue is at
a lower gross margin as a percent of revenue, but in absolute gross margin, in absolute
profit at the end of the day, we're putting more money in the bank.
So, you're right, the model is changing. So, when you're dealing with things on a
percentage term, you'll see things, okay, so gross margin as a percent of revenue
necessarily has to go down, bit by bit, as there are more of those services elements, but the
absolute profit dollars in the bank for Microsoft, because we're participating in more, is
going up. So, it's a revenue and profit growth opportunity for us. And that's what we're
focused on doing.
JOHN DIFUCCI: Thank you.
Are there any questions from the audience?
STEPHEN ELOP: The microphone is just coming forward here.
JOHN DIFUCCI: Yes, it's coming around.
QUESTION: Just to follow-up on that, can you talk a little bit more about the business
model for the consumer Web-based Office, and how, you know, when it's free, how do you
generate revenue in that piece of the business?
STEPHEN ELOP: It's a good question, because the Office Web Applications are available
through Windows Live at no cost to our customers. The primary focus there is to bring as
many people as we can into the Office family using the contemporary versions of Office.
This is really important, because as they get exposed to that experience, clearly a big part
of what they'll experience in the Office Web Applications is the various clues, and up-sells
into the pay-for versions.
It is the case today that there are roughly, you know, those half-a-billion customers I talked
about, about half of them today who are already using our products for free. They don't
happen to be using Office Web Apps. They might be using some borrowed software,
whatever the case may be. Those people, if we can draw them into the Office family
formally, have them participate with us and present them with that up-sell, represents to us
an overall positive growth opportunity. So, we look at it as a revenue positive opportunity
all-up, not as a cannibalization concern, which is what some people have written.
QUESTION: Stephen, next to Windows, Office is probably the most pirated product out
there.
STEPHEN ELOP: Just the point I was making. Thank you, yes.
QUESTION: Right. And then the second question I had was, what do you think of the
prospects for the Dynamics product, the ERP and the CRM product lines?
STEPHEN ELOP: Good. So, you're right, from a piracy perspective, Office is a heavily
pirated product. And that's something where we're doing a lot of things to draw people in,
and present them with that up-sell. Something I haven't talked about is, as part of Office
2010, we've done some special things to make sure that Office is broadly available on new
PCs also at no charge. Specifically, we have something called Office Starter, which are
simple versions of Word and Excel that will be on about 80 percent of all shipping consumer
PCs as this ramps up in the next few months.
Now, of course, part of that story as well is the up-sell into the full Office Suite. They'll
recognize they need PowerPoint, and so on. So, broad coverage, and of course the bits
we've put out there on the PC, the simplified versions of Word and Excel, behind keys are
actually the full bits. So, with a simple e-commerce transaction, we can activate that and
80 percent of new PCs will have that capability. So, we're very excited about that from a
coverage and up-sell perspective.
Switching gears to the Dynamics business, which is CRM and ERP, those are products that
help us a great deal because, again, they extend the definition of productivity for our
customers. You asked some competitive questions. When we're talking to our customers,
and can have a much broader discussion around CRM integrated with collaboration,
integrated with communications, that's a very powerful platform from which to have a
conversation with our customers. What we're seeing there is, as you'd expect, you know,
going through the economic times, certain products, like ERP in particular during the
economic times, tough conversation with mid-sized businesses, do I need to upgrade my
ERP systems today, can I wait a year? But what we're already beginning to see is the early
signs of recovery there, while on the CRM side, you know, throughout the economic reset
we've continued to see strong growth with our CRM products. We're coming into that
marketplace with a very disruptive solution. Comparing with our nearest competitor there,
particularly in the cloud, we're at about a third of the price. So, it's a very strong economic
proposition, very good from a utility perspective, and, again, very interoperable with the
rest of the capabilities that we have.
We like both of those products a great deal, because what they also cause is essentially a
pull-through of software from across Microsoft. They take advantage, obviously, of
Windows, of SQL Server, they integrate well with other products. So, it's a really good
proposition for us. Different business model in terms of the type of selling, but interesting
nonetheless.
JOHN DIFUCCI: Before we go to the next question, just a quick follow-up to that. That
business, the last thing you said actually rings well with me, because when I look at this
business, and I talked to Peter Klein just a few years ago when he was the CFO of that
business.
STEPHEN ELOP: Of our division, yes.
JOHN DIFUCCI: Of your division. And I look at the business, and I think that's why it's so
hard for some of the large ERP vendors to move down market, because Microsoft is there,
and what you've done is, you've really gone to market through partners. And partner gets
part of the sale.
STEPHEN ELOP: They get sale, services, ongoing revenue.
JOHN DIFUCCI: Ongoing, too, which was really surprising to me. I remember having a
conversation with Peter and saying, how can you ever see a lot of profit coming from this
business if you're going to give away that sort of golden egg part, or part of the golden egg,
that maintenance-like revenue stream afterwards.
STEPHEN ELOP: Well, certainly we're sharing in the golden egg, so we like that. But,
again, I go back to the message that it's not about the silos of the business. I mean, the
steps I've taken from an architectural perspective, from an organizational perspective, and
go to market is to say, each one of these pieces supports the other, they all interoperate
well, and that's the all-up proposition that we present. So that when we're faced with
competition saying, hey, we've just added rulers to our word processing product. It's like,
yes, that's interesting, but let me tell you about the whole broad perspective. And the
enterprise customers very much want to engage in that conversation.
JOHN DIFUCCI: Okay, that makes sense.
JOHN DIFUCCI: On the mobility side, we've seen strong trends in mobility, and people are
trying to understand how to play that for investors, or how important it is, and what's
important in that space. But from your perspective, from MBD, mobility looks like it can
become very important. And I took my Blackberry off just because they told me it would
start buzzing up here, but it's been hard to use some of your mobile applications. The
interface is just hell because it's such a small interface. But as things start to change, as we
start to see pad-type or tablet-type PCs.
STEPHEN ELOP: Pad-type devices.
JOHN DIFUCCI: Pad-type devices, and even one thing that I think of that we heard a lot
of talk about, but it really hasn't materialized in the market yet, were smart books. And it
was interesting, because I thought netbooks was as serious threat to Microsoft, but
Microsoft thwarted that. And part of the reason was that Microsoft reacted when they
thought they had to react, and reacted very quickly, and did a great job. At the same time,
I think part of it was the competition wasn't really up to it yet.
But, if smart books come out that are running ARM-based processors, which don't, at least
today, run Windows, the Windows that we use on a PC, there may be another opportunity,
and Microsoft, I'm sure, is thinking about it and will react, or will do something about that.
But, how do you address that from the MBD side with mobile applications, and trying to
make sure that you're there, or even trying to see if you can get people to use mobile
applications today on Blackberry?
STEPHEN ELOP: So, first of all, from a mobility perspective, we have with Office 2010
delivered the next family of Office mobile applications as well. Our focus, obviously, is to
make the best mobility experience on Windows Phone, and Windows Mobile. So, you'll see
that in those platforms.
At the same time, we recognize that the diversity in the mobile marketplace is significant.
There are different platforms. It's a different marketplace than perhaps exists in the
personal computer world.
And that's why you've seen our division in particular also make other decisions. For
example, a year ago we announced a relationship with Nokia where the full range of Office
Mobile capability is being deployed on Nokia Symbian-based smart phone devices. And over
the next few years, we expect to reach over a quarter-of-a-billion devices and users through
that mechanism.
What we've also done with Office 2010 is that there is a wide array of devices, and there
are certain things that people want to do across those devices. So, for example, with
PowerPoint 2010, there's a great new capability to simply broadcast your presentation.
You're just sitting on your PC, you want a bunch of people to review it with you, maybe a
bunch of customers, whatever, that's something you can view on a Windows Mobile device,
it's something you can view in a Safari browser. We've demonstrated it on iPhone. There's
a lot of examples like that.
Similarly, Exchange Active Sync, which is the main mechanism for interacting for e-mail and
calendaring, and what-have-you, with the Exchange environment from Microsoft, you see
that today on a wide array of different devices. And we've supported, facilitated, and made
that happen.
So, we recognize that there are these different platforms, and we're evaluating one step at
a time what are the right things for our customers in each of these environments, and how
do we support that. And you've seen us make those moves.
JOHN DIFUCCI: Thanks.
Actually, I think we have time for one more that I think is a sort of very broad question. I
think you hit on it along the way today, but what's your vision longer-term for MBD? I
mean, like you talked about bringing together a lot of different components into a cohesive
platform, but as you sit here, an especially after going through the last year and a half or
so, how do you see this business going forward, and not just this year, but into the future?
STEPHEN ELOP: We spend a lot of time thinking about what is the longer-term vision for
productivity, both for consumers, for people working in businesses, and it might be best to
highlight a couple of key trends that we think are really important.
The first is the advent of natural user interfaces, touch, speech, gestures, you are probably
all familiar with the excitement around Project Natal, which is a gaming capability allowing
full body movement to be interpreted by the console. Well, imagine that in certain
productivity settings as one example of how gestures could be interesting. So, there's a
whole advent of natural user interface and what that means.
Another key theme is around how do you seamlessly and securely connect people, and that
is, it could be across boundaries, things like video conferencing, and all of that, but also
across cultures, across language barriers, across all sorts of different environments,
because today more and more we're working in a global environment where you need to
bring people together in different ways.
And then, a third theme that is very high on our list is doing a far better job of using
technology to divine and deliver insight. I'm working in a Word document, I'm writing you
some piece of research. The system should be bringing forward and presenting to me all of
the contextually relevant information that helps me get that job done more effectively. And
we have the raw capabilities to do that through Bing, our search capability. Right now,
people are entering search terms and getting results. Well, of course, when you are doing
productivity work, you're showing intent all the way along. We want to do a better job of
interpreting intent, and presenting insight in response to that.
So, that's, without mentioning products, or anything, but thinking more broadly, we have a
sense that there's still a lot of things we can do to drive productivity. But bringing it all the
way back to the excitement today around Office 2010, and SharePoint 2010, one of the
things we published last week in terms of advances in productivity is that the payback
period for Office 2010 is 7.4 months. A big survey done of early adopters that comes as
productivity gains. That's where it's coming from, today with what we're delivering, we're
showing people really how they can improve productivity, and we'll be focused on that,
because that's fundamentally the mission of our division.
JOHN DIFUCCI: Well, thank you very much for being with us here today.
STEPHEN ELOP: Thank you.
END