BILL KOEFOED: We have some prizes to give away, for those of you who have given feedback, and again, if
you haven't given feedback, please do that as you're wrapping up today.
But the Xbox award winners, we have two of those. Baltej Kochar, and I'm not sure I said that right. Is that
you? Congratulations. Claim your Xbox outside. And then Barton Hooper, you've also won an Xbox, so
congratulations. But you can pick them up at the registration desk afterwards.
And then those of you who won a Zune. Craig Gentry. Craig, are you out there? Congratulations. And
Sandeep Aggarwal, Sandeep, thank you for filling out your form. And, again, you can pick those up at the
registration.
Now I'd like to welcome up for Q&A in addition to Chris, Steve Ballmer, Ray Ozzie, Kevin Turner, and Qi Lu.
(Break for direction.)
BILL KOEFOED: OK, paddle three over there.
SARAH FRIAR: Terrific. Sarah Friar, Goldman Sachs. It's really a question for all of you, but I'm going to
focus it at Steve, who is sitting there in the middle.
It seems to us that Microsoft needs to stay focused on becoming the enterprise IT company of choice.
Whether you want to call it the cloud provider or whatever. When we talk to CIOs of large enterprises right
now on who will be their vendor, the No. 1, Microsoft is not normally one of the first, second or even third
companies that comes out of their mouth. We hear a lot of IBM, HP, Cisco, Oracle. How do you get that to
change? And does that mean we see more acquisitions happening in and around the enterprise arena now
that you've kind of got Yahoo! put to bed here?
STEVE BALLMER: Actually, let me take part and give Kevin part. When you ask somebody who are the top
enterprise vendors, it could mean a lot of things, honestly. And for most of the companies—and I'll let Kevin
sort of explain a little bit—that we do business with, we'd be one of their top two or three most strategic
vendors. But there's an area, clearly, where we are not fulfilling our own aspirations. The thing I called
enterprise infrastructure this morning, we sell a lot of databases, we've got a great business, it's a big
business. But if you talk to CIOs, we may not be yet in their tier one.
And it's not a question of whether we own an ERP platform or we don't, because most of the most
important applications in many companies are actually not the ERP system, it's the billing and provisioning
system at a phone company or it's the customer database at a bank, it's that sort of thing.
So really continuing to push. When it comes to things like security and management, we're right up there,
productivity, BI, we're right up. I mean, we have room for improvement, but we're right up there.
When it comes to really who you're going to be your tier-on apps, we have some. And we have some share,
there's no question about it. But you'd probably get Oracle, you'd get IBM mainframes, and you'd get
Oracle, IBM, and you'd get somebody's hardware, probably HP's many times. You might get a services
company, HP and IBM both have the large enterprise human services businesses.
So you say what acquisitions would you do. The truth is, there's not much to acquire. Either we get into
enterprise applications, I think everybody knows exactly what's there to be acquired potentially in that field,
and knows our kind of past dialogue. But really the question is not just ERP system, what else do you do?
And would it really—IBM bought SPSS yesterday. I don't want to buy SPSS, that's not going to make us an
enterprise vendor. With Bob, they had a chance to talk about and show and discuss in terms of business
intelligence, I think will get us there faster, cheaper, etc. That doesn't mean we won't do some acquisitions.
Talk a little bit more about how you kind of see the competition—not the competition, but the whole
situation there, what we need to do.
KEVIN TURNER: The thing we look at is certainly we participate with the Research Board, which has
between the top 100 to 150 companies' CIOs globally. And they do a survey every year. And we either
finish No. 1or No. 2 in strategic relevance amongst that group. That's an excellent yardstick for us, because
they're very tough customers on that particular round of group.
STEVE BALLMER: We don't always finish in the top one or two on customer satisfaction.
KEVIN TURNER: No, we don't.
STEVE BALLMER: So go look at, we know we've got room.
KEVIN TURNER: There are plenty of other metrics where we're not one or two. But in strategic relevance,
which is an important characteristic for us, the thing we have to do is really do a better job of articulating
our roadmap. The Office of the future, the productivity map of the future that you saw glimpses of from
Craig, you saw some of it from Stephen today, where we're headed with collaboration, where we're headed
with unified communications, where we're headed from a business intelligence standpoint, those things give
us a great platform to compete broadly for that mind share, which is what you're talking about in the
enterprise.
I also believe, and Steve has taught me this, that the better job we do in consumer, the better job we'll do
in enterprise by default. Enterprise doesn't help us with consumers, but consumer sure helps us with
enterprises. And things that we've got coming out right now, the improvements we've made with Bing and
how that leads into helping us with enterprise search with FAST, an acquisition that we made and how that
ties to the collaboration story, it's all related.
So there's a lot of momentum we haven't been getting from the consumer side. Windows 7 is going to help
us, Bing is going to help us. Where we're headed with the Web apps is going to help us as it relates to that
vision. And we've got to do a better job articulating the road map, articulating the strategy and continuing
to earn it in there.
But you saw the share numbers where we're at with servers. I'm sure you've seen the share numbers
where we're at with SQL, the database. We're going to really amp up what we're doing with .NET and Visual
Studio and all of the development platform tools and where we're going there to take on those tier-one
applications that Steve talked about. And that's really the strategy that we've got going forward.
But we've got some things we can do better to help get more mind share, for sure.
BILL KOEFOED: Great, who has the next question? Four.
QUESTION: My question is for Steve and Dr. Lu. What would you consider as a blockbuster success,
average success or disappointment for Bing at its first-year anniversary in terms of market share, RPS or
maybe getting higher active traffic? And secondly, how do we view the relationship with Yahoo! evolving in
coming years? Is this all, or do you think this may be a steppingstone for more future collaboration?
STEVE BALLMER: Let me make a remark or two about the numerics, and then pass it to Qi. We're not
going to make some public forecast of what we hope to do in search. I'm merely going to point out
statistically, you know, you could say if we were to grow by a few points, that doesn't sound much. And yet,
if you think of a few points on top of eight, it sounds like a lot on a percentage basis.
Qi often highlights for me that, you know, the Web's going to grow 35 percent in queries—not in revenue,
but query volumes will grow 35 percent. If you put that together with, say, a three-point, four-point growth
in market share, it basically means we'd almost double our query volume year-in-year just to get a few
points.
So I think you've got to think a few points, and then a few points more, and a few points more, but with
no—I don't think it would be appropriate for us to make a specific comment. I'll let Qi kind of extend from
there, and then answer the Yahoo! question.
QI LU: Yes. So, the most important thing for us is the quality of the search experience that we provide to
our users. And there's a lot of different ways you can measure. Typically, when people talk about the pillar
of the Web search experience, they talk about the comprehensiveness of the index, how fresh the result is,
the speed of the result page coming back, and also how good the overall relevance ranking is.
For Bing, we are focusing on all of those foundational pieces at the same time building very compelling
experiences for our users and user engagement, search intensity, those are the ultimately measures of our
long-term success. The experience of product, the quality of search experience is what we focus on growing
our basis for our search product, that's No. 1.
With regard to the Yahoo! partnership, I would just say a few things: First, as I mentioned earlier in the
talk, it's a commitment on our part in spirit, in everything we do to make this partnership work, it's a high
priority for us. Second, a lot of tight collaboration is needed on multiple fronts.
First is the transition—assuming the deals get approved with getting to the implementation stage, there are
lots of transitions that need to happen. When we migrate an advertising system into adCenter, there's lots
of work that needs to be done by the two parties together. We want to ensure a smooth transition process
so that advertisers, their businesses will be continuing to grow and get the results that they want; at the
same time, the consumer experience also will be smooth during the transition phase.
After the transition phase is done, there's a lot of ongoing development work that needs to be done to
make sure that the search experience can be seamlessly integrated with the rest of the Yahoo! portal
experience. So, working together as one team, building a full partnership is going to be the key for this
relationship to truly deliver the economic, consumer, customer benefits that we set out to achieve.
STEVE BALLMER: If there was an implicit question about are we interested in a full acquisition, the answer
is no, Yahoo!'s happy to be independent, we're happy to be independent and we're delighted with the
search partnership, just for something that I should probably make clear.
BILL KOEFOED: OK. Who has the next question? Paddle three, John.
JOHN DIFUCCI: Hi, it's John DiFucci from JP Morgan.
I heard a couple of times today even at lunch, people talking about enterprise customers moving to
enterprise agreements, ELAs. And I'm just curious, especially now, how is that happening and why is it
happening other than sort of understanding the strategic value there, but in this environment and given
your small- to medium-business exposure, I think that most of them are just wondering rather than sign a
three-year deal, wondering if they're going to be around for another year or two. That's the question.
KEVIN TURNER: Well, I think it's a real credit to the innovation story. I call it a moment of truth that for a
company that's not going to go bankrupt or get bought out or get acquired, it's a moment of truth for our
account teams on how good is the job we've been doing the previous three years, and have we really
shown and demonstrated the value of the software stack, where we're headed, where we're going?
I'm delighted to be—in fact, I told Steve I was delighted this week that we were able to actually improve
our position from an annuity standpoint in the fourth quarter, the toughest quarter that we've ever had,
within our discounting guidelines.
We didn't do anything crazy. Of course, we wouldn't do anything crazy, but certainly, that's one of the
questions I got at lunch. And it's absolutely within the range that we've always said it will be. And it is
about our ability to up our game from a selling skills standpoint and earning the right to be that trusted
advisor. I do believe the Saving Customers Money initiative that we launched in September really put us in
a great position in the second half, because we had been in there with those business decision-makers and
IT decision-makers having the right level of conversation with them about how to add value.
And in some cases, it was buying our stuff differently; in some cases, it was displacing competitive
products; in some cases, it was just best-practice deployment and adoption. But in all cases, it was adding
business value.
And I think that with the incredible innovation that the product groups have given the field, that when the
two get going, as Chris articulated on his very last slide, it's a really powerful combination for us to really
seize the moment and grow our share. So, that's the only thing I can tell you, is that we had good
execution on it, but we were backed up with great innovation and great solutions that are, again, extremely
great-value, high-value, low-cost products. And that really plays well in this environment.
STEVE BALLMER: Another thing I'll just tell you about the pricing. The ELA compared to the license, ELA is
modestly more expensive, modestly, for the same thing. It's modestly more expensive. You pay it over
three years. If you think you're going to go out of business, you only pay a third on the ELA, you paid 100
percent if you needed the software and you bought it the other way. So, you could say, hey, look, on top of
it, it's modestly more expensive, you get future upgrades, and we financed it. I mean, what's the biggest
financing on our balance sheet? We're a big financier.
You look, unearned revenue is a form of financing, right? Somebody's using our software and hasn't yet
been—and that's just what we billed. I think everybody in the room understands that there's money that
has been committed but not billed, that doesn't show on the balance sheet, billed but not yet earned, and
then there's the earned revenue, which runs through the GAAP statement.
So what it says is in this environment, it shouldn't come as a big shock that given the price gap is modest, I
don't know that I would have predicted it, and I agree with everything that Kevin said about gaining share
and facing down moments of truth, but we're not sailing into the wind. Our pricing terms are not sort of in
the way in this environment, they're OK in this environment.
CHRIS LIDDELL: In terms of economics as I talked about the underlying health of the business, it's not
something that doesn't show up on GAAP earnings to any extent. As Kevin and Steve say, that to some
extent might hurt us if we're translating from a license only. But in terms of the underlying health of the
business, one of the most positive things that happened in the fourth quarter is the renewal rate that we
actually had.
STEVE BALLMER: Absolutely.
CHRIS LIDDELL: And the amount of people who were going into a long-term commitment relationship.
BILL KOEFOED: Let's take our next question from paddle one.
ADAM HOLT: Hi, it's Adam Holt from Morgan Stanley. Steve, I'm going to ask a little bit of a different angle
on the question I was asking you at lunch today, and also want to get Chris's perspective on this. This is
about margins.
So if we start with the premise that software plus services is obviously an important part of the strategy,
albeit at a lower gross margin on a going-forward basis, I guess I have two questions: One is, in the near
term, where you've got very strong product cycles coming out, is there an opportunity to show margin
expansion in the near term? And then secondarily, if we assume over the longer term that maybe margins
are flattish to even down as you move into the cloud, do you see the opportunity for revenue growth to
accelerate to the point where earnings growth actually could accelerate even with lower margins?
CHRIS LIDDELL: Well, the first thing you've got to do in terms of any margin discussion with Microsoft is,
you've got to break it down into the individual businesses, because the margin structure inside each of
those businesses is so fundamentally different to each other that the weighted average of how they grow
messes it up.
So look on a business-by-business basis. Could we see in, for example, Server and Tools, as Bob talked
about, or MBD as Stephen talked about, margins contracting because we moved people to a cloud-based
service? Absolutely we could. Is that a good thing? Absolutely it is, if we earn more aggregate dollars over
the life of the relationship with that person than we would otherwise.
So you have to look at it in terms of aggregate dollars. And you have to basically net out the efficiency
aspect of the change in margin with the business mix change.
So we are certainly seeing a business mix going on not only between divisions, but inside divisions. Overall,
assuming that we actually get people to commit to the long-term, annuity-based relationships, that's
fundamentally healthy. Just as the discussion we were just having before about our shift to enterprise
agreements. Over time, that's actually going to drive, hopefully, margin growth at some stage, but in the
short term, sure, it could force us to accept lower margins on individual businesses.
BILL KOEFOED: Who has the next question?
KEVIN TURNER: Well, one beautiful thing on S plus S, though, is we get paid for people using our stuff.
And I don't know how you model that, but it's not trivial, either. It will certainly help.
STEVE BALLMER: Meaning we avoid piracy.
KEVIN TURNER: That's right.
BILL KOEFOED: Paddle three.
BILL WYMAN: Thank you. Bill Wyman.
Steve, you made a comment. This is probably for you and Ray that the cloud or the software-plus-services
strategy was well developed, but you still had a fair amount of implementation to do. Going forward, can
you give us some sense of timing? How does that play out either in terms of revenue or developers or
market share or units? How quickly do you see the core product, whether that's Office or Server or
Exchange, moving to a cloud or a hosted environment?
STEVE BALLMER: Let's divide it into two pieces and then two on one side of it. There's what goes on in the
consumer market, which has a weird set of dynamics because at least today, nobody other than maybe
what we've done with Xbox LIVE has really come up with a subscription-based model for the consumerfacing services. The things tend to be more ad-funded. And advertising is in flux right now. So, think of that
as our Windows Live business, or our Windows Live offering. Very popular, very high scale, a lot of COGS,
variable ad market, has a set of dynamics that are interesting, and the question is, how do we turn that
into something even bigger and more valuable. In the Xbox case with Xbox LIVE, we figured out how to do
that. We're going to keep working.
On the enterprise or business side, there are really two levels. There's the so-called Azure level, which is
the Windows SQL kind of app platform level, and there's what I would call the core applications level, which
we refer to as the online level, where you pick up Exchange and SharePoint and Office Communications
Server. Maybe I'll let Kevin talk a little bit about the online level. He mentioned some in his talk, and that is
taking off. Kevin should probably talk about that and then have Ray maybe talk a little bit about the Azure
level, which isn't not taking off, but it's got even more work. And Ray can comment.
KEVIN TURNER: You know, one of the most exciting things we did in FY '09 as we'll look back historically
will be the launch of the Business Productivity Online Suite, where you have hosted Exchange, SharePoint,
CRM, Outlook, our security suite, etc. As I said, we've got over a million customers already using the e-mail
side of that.
The thing you have to really understand is, it's not an all-or-none strategy. It's not that everything moving
to the cloud from a business model standpoint; our model is on-premise and cloud. So, that choice in
allowing customers the flexibility to have a hybrid model, I mean, what we're betting the company on on
this particular space is that they will want choice. And we've heard that from our customers, that they don't
want everything in the cloud, and that they don't want to manage everything.
So the real strategic advantage is for us to be relevant with choice, be able to support the hybrid method,
which will include a partner model in that as well, very strategic as it relates to not missing a seat or at
least competing for every single piece of that business. So, it's very strategic for us now, and certainly we
expect—we launched it across Europe in the early spring in 19 countries, there's another wave of another
set of countries coming online in the next few months, so you're going to just see momentum really
happening around that space very, very rapidly. And right now in the business space, in the commercial
space, we are the market leader in online services for S plus S. And, again, it's that hybrid model that gives
us the advantage.
STEVE BALLMER: To think that we or any of the competitors will wind up someday owning all the world's
data centers, buying all the world's computers or servers, and all the world's storage, kind of doesn't make
sense. That's why you have to think about partner-based clouds, our own cloud services directly as well as
on-premise and private.
But the explosion, the move in the direction, it's something that all CIOs are kind of talking about. If you're
a government customer in a country where we don't have a datacenter yet, it could be a problem for us to
sell. But if you're GlaxoSmithKline, somebody talked about them earlier, or Coca-Cola Enterprises, these are
folks who are just moving. Software plus services, the cloud, it's just happening, and it's going to go like
wildfire, and we've got an offer.
RAY OZZIE: Several years ago, we began this investment in the infrastructure underneath all of our
software and services. This is what—the offerings that have the Azure branding on it. Windows Azure, SQL
Azure, and there will be more and more.
You know, we have a selfish reason to want to do it, because our apps and our services need to be
deployed at scale. We have a great developer ecosystem, and we believe that ultimately this is a model, as
Steve said, that is going to be pervasive, that people will want to write applications, business developers or
customers themselves that run perhaps on premises, perhaps in the cloud, and we want to give them tools
and infrastructure that gives them that choice. Might even give them choice at the very last minute to
decide what belongs up there and what belongs up here.
When you see videos and you see some of these more abstract things that Deb Chrapaty was showing you
in the session earlier with datacenters and things like that, what you should—how you should internalize it
is this: Our profitability is a direct function of our efficiency. You know, we have to run these services
incredibly efficiently. Yes, there are environmental concerns, and many, many concerns. But ultimately, the
opportunity in here is to have a really tight supply chain in terms of building out this thing so we don't prebuild infrastructure way before it's needed. You know, and so that, in essence, when it's running, it's
operating at really efficient, peak capacity.
We are in early days as an industry. You know, the software that's running this infrastructure is really
fortunate that we've had MSN, Hotmail and Messenger, products like that around as consumer products for
ages because the learnings of those teams are now benefiting all of our enterprise infrastructure. And this
puts us in a very, very unique position, but these are still early days.
We're going to get our infrastructure on it, our applications, our customers are going to come on it, and
we're going to bring this thing to more and more and more scale. And as it does get to more scale, the
coverage by partners, the percentage of the world that's covered by partners operating these datacenter
infrastructures that's federated with ours, that's connected with it is just going to increase. And I think it's
really—you know, this is a long-term phenomenon, but mostly when you look at BPOS and at our higherlevel online—
KEVIN TURNER: BPOS Online.
RAY OZZIE: Yeah, online. This is the beginnings of the trends that are going to be happening over time.
And that's why we're making those infrastructure investments.
STEVE BALLMER: But there is an invest in the OPEX and all the guidance that Chris gave on that in Azure
this year. But you shouldn't expect any material revenue. That layer, doing sort of the platform for tier-one
applications and tier-two apps, that business with CIOs, etc, is farther in the future that the applications
level that Kevin was talking about, Exchange, SharePoint, etc. And we have a major milestone coming
towards the end of this year, and our Professional Developers Conference, and we don't even charge
anybody yet, so that tells you for sure it's not a major financial revenue opportunity this year, but building.
BILL KOEFOED: Great. Who has our next question. Three.
QUESTION: Thanks. Just a follow-up to the previous couple questions on the transition to the cloud. And I
think we've asked this the last couple years trying to maybe get a little more clarity on whether this is
cannibalistic or additive to revenues and earnings. So, if you could sort of give us an update on what your
thinking is there.
And so to the degree that you go through this transition, as we saw when you moved to EAs, we had a
metric to look at, which was the bookings number, the deferred revenue, unearned number so we could
tack a sort of gross bookings number to see that the volume business was actually doing pretty well, even
though the revenue growth slowed during that period. Would you anticipate that we have similar metrics
through this next transition to software plus services so that the revenue is being impacted for some period
of time and margins that we at least see the volume metrics of the businesses itself? Or might the contracts
be shorter in duration so you don't actually see a deferred revenue or unearned revenue kind of number as
a metric?
STEVE BALLMER: Is it cannibalistic or additive? It's all a function of pricing. Right now, given that we've
got the strongest value proposition on the block, we derive a positive gross margin from the software. Bob
or Stephen talked about that. And we get another positive gross margin that is additive for operating the
service. In fact, we even sell it that way. Here's the license, here's the service, if you want to buy them
separately you can, that supports our kind of flexibility message that Kevin talked about, off-prem, on-
prem. And if you want an integrated offer, but it's additive today.
Now, you know, it's a competitive world, so we're going to have to keep competing. And so far, we feel
good—so far—on the app side where we have experience, we feel good that it is additive.
Bob showed you some numbers that would say it's also additive if we can sustain the pricing we announced
on Azure on the Azure front. So, that's as to whether it is additive or not.
In terms of numbers you can look at, not really. I don't think. It depends—some of them are big contracts,
but they bill when they bill, it's like committed revenue. We don't show committed revenue on the balance
sheet. We don't expose that in any way, but we do show revenue which has been billed but not earned. And
there will be a billed but not earned piece. But it will be relatively small depending on how often we bill.
So you can ask us, and we'd be happy to give you some insight, but I don't think it'll pop immediately off
the balance sheet.
CHRIS LIDDELL: It won't.
RAY OZZIE: Let me just add one more thing, and this is a little bit more subtle, but fundamentally, even
though we don't believe in thin clients as Steve said much earlier this morning, we do believe in appliancelike—making our software more appliance-like in nature. And a very key part of that is bringing all of our
desktops and laptops and any device, phones, any device that we make—using the cloud to connect these
things together. As we make them more appliance-like and reduce the burden and the fear of owning a
second machine, owning a third machine, using that service as a way to connect them, as a way to back
them up, as a way to publish the photos, we believe that people will have less fear of buying that second or
third one, or fourth one for the family in their life. And certainly the prices of the devices are coming down
and in certain developed markets, making people think about that. So, there is another potential
opportunity there just from a volume perspective.
BILL KOEFOED: All right. Next question, paddle two. No? Next question, paddle three?
PHIL WINSLOW: Hi, Phil Winslow, Credit Suisse. This is a question for Steve and Kevin. Given Chris's
comments about sort of just some conservatism around use of cash for buybacks, and given the fact that
you have $30 billion in cash on the balance sheet, you have billions of net free cash flow for dividends each
year, has your stance on acquisitions changed at all? And given Kevin's comments about wanting to go for
wallet share during an extended downturn, how does that change your thought about the size of
acquisitions?
Due to the varying sound quality and subject matter of tapes, the information in this transcript may contain
inaccuracies.
STEVE BALLMER: No. We think there may be interesting things to buy, so we want to keep the powder
dry. We have strategies, and we acquire underneath strategies. We don't acquire as a strategy. That is so.
That's why I give you sort of the simple no.
Now, may there be some things that make sense, that are value? There may well be, and we'll have the
flexibility to do things. But I don't want to want to make it sound like the acquisitions will drive the strategy.
The strategy will continue to drive whatever we do from an acquisition perspective.
CHRIS LIDDELL: If I could just add to that, the purchases are exactly the same. They have consistently
been a net buyer over the last few years. And, interestingly, even in the last six months, we've bought six
companies. Now, that's down from two a month to one a month, but you won't have even noticed them
because some of them are $10 million, some of them are $25 million. And so, we actually, even in the
environment that we have, we're still a net acquirer. The good news is, the headline price has gone down
somewhat. And, clearly our sweet spot will still be that small, medium-sized business that has an overlayer
product or product feature on what we're already doing. But clearly, we have the opportunity to do, you
know, essentially what we like. Our attitude is exactly the same as it's been.
BILL KOEFOED: Great. Who has the next question? Paddle 2
.
KEVIN BUTTIGIEG: Thank you. Kevin Buttigieg, FTN Equity.
Chris, the question is about operating expenses. One thing that I heard from some Microsoft employees
here today was that for many, many years the company would regularly overspend its operating budgets,
and last year was the first year that the company actually underspent its operating budgets. Assuming
that's the new normal and perhaps by chance becomes the old normal, or that just as the economy begins
to improve, how do you ensure that Microsoft maintains the kind of cost discipline that you had last year,
that it doesn't require a sense of urgency to stick to operating budgets?
CHRIS LIDDELL: Okay, sure. Just give me the names of those people you were talking to earlier. A quick
one thing, I don't think we overspent budgets in the company. I'm sure you can point to individuals.
What we have done in the past is
STEVE BALLMER: I'm going to be clear, we've never overspent our budget. We have overspent our
guidance, because we came in under in a quarter, and people still thought they could spend it. And Chris
didn't believe they could spend it that fast, or Chris' predecessors, but with an annual budget
CHRIS LIDDELL: Within budget.
STEVE BALLMER: I mean, it's sort of like an offense you get terminated for. You can come ask for
permission, but it's not like, OK. It never happens. There's a reason we make a lot of money, and it's not
because we tolerate kind of people running around randomly overspending budgets. It just doesn't happen.
But I'm glad there are some people who think it does. Sorry, it just got kind of both Kevin and my blood
extra boiling.
CHRIS LIDDELL: Do you want the answer to the second half of your question, or do you think you just
heard the enthusiasm. So people don't overspend their budget or haven't historically. And, as Steve said, I
mean last year I stood up here and said, look, the reason why we blew fourth quarter was because I didn't
think we could spend our budget and we did in the fourth quarter, not because we overspent it.
In terms of the second half of your question though, this year we definitely underspent budget. And I gave
guidance in January based on a set of initiatives that we put in place, and we underspent even that. So I
definitely think there has been a really positive trend, which I'll describe as bottom up, in terms of people
not only embracing a new and tighter budget but being incredibly tough about every dollar that they spend
as well, and right through the field, right through the business groups. There's lower travel, tough on
vendor negotiations, all the disciplines that I would like to see, I'd like to think that survives obviously going
forward.
But the first and fundamental thing is how much budget we give people, and then actually how they deliver
it. I think actually the discipline has been very good in previous years, it's just been exceptionally good in
the last six months.
BILL KOEFOED: Where's the next question? Paddle 3.
KATHERINE EGBERT: Hi, Katherine Egbert with Jefferies.
I want to go back to search for just a second. It seems like the partnership with Yahoo! is going to get the
feedback loop going, get relevancy better, get the product up to speed, but that seems like it's only the first
step. You have the oddity of another company's sales force helping monetize your product. Can you talk
about how that might work?
And then, also down the road, once you get the product going and you have the Yahoo! partnership, you're
going to have to go over removing the muscle memory of typing in G-o-o-g-l-e, and instead put in B-i-n-g.
So, you have to spend more on promotions coming in the second phase to get people out of the habit of
typing in one thing, and typing in something else.
QI LU: I will answer both questions. Maybe the second question first.
In our overall go-to-market strategy in a compete strategy, we always felt it was very important to have a
pure search brand.
If we look at the search industry as a whole, there are many companies that are in the search space, but
the companies that tend to do very well are the ones having a pure brand, a brand that's only meant for
search. In the U.S., in Europe obviously Google is a good example of a pure search brand.
And in the Asian markets, the companies that are doing well like Baidu in China, Naver in Korea, other
companies can offer search services but they're brand represents many different things. So having a
distinct brand that only represents search is a key part of our strategy. And that's why we launched Bing.
That's number one.
The second, it's a choice of Bing. One consideration is, it needs to be short, easy to remember, easy to
pronounce, and accessibility. It's easy for people say what the URL is, and it can become a verb. We're
already seeing initial anecdotal evidence that people are using Bing as a verb. We have seen it. And I have
Binged it this way.
So the important part is for consumers to like our product and engage with our product, and over a period
of time break away from their habit, which is to Google it, and to use Bing. And we believe as we're
focusing on innovation, improvement of quality, and differentiating in a mature and meaningful way, we will
be able to succeed at that. That's the answer to the second part of the question.
The first part of the question is about the Yahoo! partnership and integration. And there's indeed many
different parts to it. The specific part you mentioned is the sales part. Let me just talk briefly about that. In
this partnership structure, the Yahoo! sales force will be handling the hand sales, we call it hand sales.
Essentially for large advertisers, you sell by the relationships, and help your advertisers to set up the
keywords, write the creatives, and manage the budget. The Yahoo! sales teams will be responsible for that.
But at the same time, the Microsoft sales team are also in the loop. We will provide the tier two technical
support for helping those advertisers. We will also be able to, through our sales force, we'll also be able to
evangelize the benefits of our search product for advertisers. And Microsoft will also work with large
strategic partners for products such as cashback. For example, cashback right now is in the U.S. market.
We're working with companies such as eBay to build those programs. So in that context, Microsoft sales
teams, biz dev terms, will continue to work with large advertisers.
So, we see this as a win-win, because the Yahoo sales team will have sales force, one front door, have a
combined marketplace for all the inventory to sell, with the Microsoft team providing tier-two support,
because Microsoft owns the platform. You need tight integrations, collaborations between platforms, and
sales forces. So, in that context, the partnership is designed to deliver the economic value for advertisers
and for the two companies combined.
STEVE BALLMER: One thing that is just so weird you can't even parse it, at least I couldn't when Qi and
these guys first talked to me. The sales force doesn't know when they sell you whether you're going to
show up on Bing.com or Yahoo.com. You're just in the same marketplace. You sell the marketplace and
then wherever the ad happens to be clicked, that's who winds up deriving the revenue. So it was a logical
concept to have a single sales force to the large guys representing the single marketplace. And we agreed
as part of the partnership that should be Yahoo.
QI LU: Just to add to the point Steve talked about, which is kind of somewhat unique to the search
advertising marketplace, unlike other online form ads, you actually cannot sell placement locations. You
cannot say I buy this keyword for only this at this particular dot-com, this site. You buy that keyword
through a broader marketplace. So, therefore a single sales force, a unified front door to get all the search
spend or demand into our marketplace, it removes friction, and it works out well for both parties.
KEVIN TURNER: One thing I would amplify on your second question, which was around the muscle
memory, how to reprogram yourself around that. I think it's important for you to understand the strategy
that Dr. Qi Lu and this team is not to be me-too. It is to differentiate. And if you look at the areas Yusuf
showed today around travel, around medical, around images, that's just a start. It will be a different
product. The plan is for it to be a different product, intuitive enough that it has pull associated with it.
That's our ambition. It's bold, it's big, and it's undefined, and it's being worked. But, it is not to be a me-too
search engine, for sure.
BILL KOEFED: All right, Paddle 3.
KASH RANGAN: A question for you, Steve, if I can try and peg you to a one-year discussion as opposed to
a three- to five-year kind of outlook. The macro is clearly tough. You guys have a refresh cycle coming up
with Office 2010, Windows 7. And one would argue that there's more older, existing base of these systems
among the corporate, compared to the prior cycle, which you launched in early 2007. And you've taken cost
structure down tremendously. You have some macro is tough, but help us paint the upside. How well can
these things go, even if at macro things are tough, you've got these factors that are really working for you.
I would like to see a little bit, juts a little bit more enthusiasm and seeing the potential. We all understand
the downside, but how well could things go next year?
STEVE BALLMER: Look, I'm a super-excited guy. I'm excited every day. I was being excited, in fact,
earlier this week with Chris and Kevin on this topic. But, you don't know what you don't know. We're taking
share. In a world in which you're taking share, life is pretty good. I talked about where we're not taking
share. We kind of—passed that out, too. But, if you look at it, particularly with Windows Server, what we're
doing with Windows Server, what we're doing with SharePoint, where we're going with SQL. SQL is a little
flatter but we've got a lot of swing possibilities in SQL.
If you want to grow faster than the—I talked about Windows and what are some of the issues there. If you
want to grow faster than the other guys, it's going to be taking share, not because the macro economy is
better or worse. And it depends on our ability, as you highlight correctly, to activate our installed base. Can
we activate?
I probably got more questions I would say over the course of the day is, come on, they're all out there.
Come on, shake them a little Steve. They'll buy something from you if you just shake them a little bit more.
And sure, that's probably true. And believe me, it's not like anybody in this room is going to beg me to
spend more OPEX to shake people. But, some people did actually. People said, hey, I've got my favorite
idea, add it to the pool and shake them. And is there a chance? Sure.
What's the—are we doing everything we can? Does Kevin feel the pressure every day to do everything he
can? Does he correctly transmit that? We had a more inspired sales force coming out of our sales meeting
last week than in years, and it's in the middle of a down economy. People were pumped, man. They saw
that pipeline.
But, I'm not going to sit here and give you one-year optimistic guidance. I'm just not going to do it. But, it's
not that I'm not optimistic. I just say, hey, look, we'll do our best. We've got great products. We're going to
sell. It's not a quota discussion, right. We're going to do our very best. And, you know, there is still also a
phenomenon, let's face it, we make a lot of money, even with the decline in the economy, we make a lot of
money. And so if you want to grow our base, what did you show for FY '09, 21 or something operating
income? And we know we have headwind from some tough comps in the first quarter. Do what you want to
do with that. But, whatever you want to do with that, if you want to grow a big number, you've got to have
a lot of things going on, because 10 percent, not that I'm saying we would grow 10 percent, and this is a
down economy, they are just big numbers.
So, we've got to be—we've got to have a broad pipeline. We've got to have great products. We've got to
have great execution on share, and on kind of getting customers excited. I think we've got great prospects
on that. But, I'm not going to give you a sales forecast and I'm not going to give you high guidance. I'm
just not going to do it, or Chris won't let me come back to FAM next year. But, I hope you don't sense a
lack of enthusiasm.
BILL KOEFOED: So, I think that's a good one to end on. And we will adjourn to St. Helens, where these
guys will be available.
Thank you so much I know many of you traveled for a long way to be here. And thank you for attending the
Microsoft 2009 Financial Analyst Meeting. Have a great evening.
CHRIS LIDDELL: Thank you all. (Applause.)
Due to the varying sound quality and subject matter of tapes, the information in this transcript may contain
inaccuracies.