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Transcript(40KB) - Microsoft Corporation

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  • 1. Who: Charles DiBona, General Manager, Strategy Server & Tools Business; Todd Setcavage, Director, Investor Relations When: Tuesday, November 2, 2010 Where: UBS Conference Call BRENT THILL: Good afternoon, everyone. It's Brent Thill from the software team at UBS. We wanted to host this call today to better understand Microsoft's role in cloud computing, what has been built, and the opportunities Microsoft has going forward as it relates to cloud computing. I'm joined by my colleague Brian Pitz, who is UBS' Senior Internet Analyst. I'm also joined by Charlie DiBona. Many of you know Charlie. Charlie is the GM of Server and Tools Business in terms of strategy. He has been at Microsoft almost 18 months now. Prior to that time, he spent almost nine years on Wall Street, and is ranked one of the top sell side research analysts in software. Again, many of you know Charlie from his role back then. So, from a perspective of the agenda today, we have a handful of slides that we'd like to go through that sets the foundation of Microsoft's role in the cloud. Charlie will deliver that message, and then we'll go to Q&A from anyone that has questions. Please feel free to jump in. So, with that, Charlie, thanks for joining us this morning. CHARLES DIBONA: Thanks for having me. It's good to say hi to everyone again. We did send a deck out of just six or seven slides that I just want to go through pretty quickly, and then we can get to Q&A because I think that will be a lot more productive for people as the conversation can go a whole bunch of different ways. For the people on the decks, if you can go to Slide 3. I guess other people, Brent, you can e-mail it to them if they don't have it? BRENT THILL: If you want, e-mail me at Brent.Thill@ubs.com, and I'll be happy to send you the slides. CHARLES DIBONA: It's also, I believe on the Microsoft website posted up there already. So, turning to Slide 3, and I think people probably have seen this slide, or at least a similar form of it a number of different times. It's the way Steve talks about the business as a whole at Microsoft really having eight primary focus areas, Xbox and T V; Windows Phone; Bing; Windows; Office; Office 365 and Windows Intune which are online properties; Windows Server and Windows Azure, which are STB; and then SQL Server and SQL Azure, which are also in my group. And then, there's a number of smaller businesses off to the right, which are supplemental to this, but not really strategic focuses of the company with the one sort of outlier here being Dynamics, which is really not big enough to be a strategic focus in and of itself, but is somewhat certainly bigger than some of the things like mice and keyboards, and MSN for us.
  • 2. I think the interesting thing about this slide, when I get into my talk I'll be really focused on the bottom two boxes, and particularly on Windows Azure and SQL Azure, but almost all, in fact, all eight of the key strategic areas of focus for the company have some element of cloud to them, and it's important to understand that in terms of the company as a whole, and certainly Server and Tools, our focus is particularly when we talk about our strategies, it's all about how do we accentuate the company and the cloud and pursue strategies that promote our position there, because we really do believe that is the future for the company. If we move to the next slide, as we start to think about the enterprise space in particular, which would include the Azure properties, as well as the Office 365, and Intune properties, and some of the Windows, and a portion of the Office business as well, the key to remember from our perspective is that our current addressable market from IT is about $400 billion. It's just a tiny sliver, frankly, of the overall IT spend in the global IT market. It's only about 15 percent of that. We expect in 2014 that the overall IT spend will be about $2-1/2 trillion as opposed to the $400 billion that we currently address. And that the cloud enables us to address much a more substantial portion of that $2-1/2 trillion, not the 100 percent of it, but certainly more than the $400 billion that we currently address. And if we go to the next slide, five, we think of the cloud as being accretive to our profit opportunity. It allows us to sell to more users, capturing additional customers within -- new customers to us, and also coverage increasing our footprint within the customers to which we already sell. It also allows us to garner sort of a bigger mind share of developers, both ISV and breadth and Web developers across the board. Secondly, we think it's an opportunity to earn more per customer both by covering a bigger footprint within the customers, by cross-selling and upselling to those customers, and, frankly, addressing a whole new class of scenarios and applications that are simply not addressable by current technologies. And then, finally, we think of the cloud as being an opportunity to increase our customer satisfaction which we think engenders more retention of the customers, and more adherence to the Microsoft platform. Frankly, you get with the cloud great capabilities, and greater agility, and keep the customers on a current platform really at no labor cost to them, because the platforms are automatically updated, and it keeps customer satisfaction at higher levels. Turning to Server and Tools in particular, the way we think about the cloud computing landscape is on Slide 6, and we position some of our competitors on this landscape as well in this slide. But, if we think about the cloud offering moving up the Y axis, we start with infrastructure as a service, which is essentially the component part of what could be, frankly, offered on premise -- things like operation systems, database, networking -- really broken down as pieces of a puzzle and offered online as a service through the Web. If we move up the stack there, then we get the platform as a service, which really takes those component pieces, wraps them into a coherent platform that's more consumable, and more automated for the end user. And if you think about the analogy, it's as if infrastructure as a service, it would be like the pieces of a PC, the disk drive, the memory, the motherboard, the processor. Whereas, platform as a service wraps that into a single device and, frankly, wraps it into an operating system that's much more consumable for the end user, and for the development community as a cohesive whole.
  • 3. And then, finally, on top of that, of course, is software as a service, which is the ultimate delivery of functionality, service-based functionality, to end users like you and I as opposed to developers. And we think about there being three ways that these services can be delivered to the customer. They can be deployed on a customer's premise, they can be deployed using third party service providers, like a Rackspace, or an Amazon. That's how we view Amazon, certainly. And then there are global providers who have more reach. And, again, Amazon sort of bridges both of those types. But we would think about us and Google, for instance, being global service providers of scale. If we think about sort of -- we've positioned four of our main competitors here on this matrix, because this is really how we segment the world. We have at the top and coming down from SAAS, you really have Google and Salesforce.com, both of them have platform- like offerings, about they're really derivatives of the SAAS applications that they originally started with; in the case of Google, Google Docs. For Salesforce, obviously the core CRM application. Meanwhile, you have VMware really starting as an IAF player, virtualizing the customer on premise primarily, but obviously pushing aggressively into the service provider world, and then trying to layer on some platform as a service type capabilities on top of that, but sort of growing up from IAF and pushing into platform as a service. And then, Amazon doing much the same thing, but clearly not in an on premise or service provider world, but in their own data centers. Again, starting as IAF provider, that being the bulk of their business today, but then layering on some platform-like features and capabilities onto that stack. If we move to the next slide, we think the big differentiation for Microsoft is that we really cover this entire terrain. We have infrastructure as a service around Windows Server, and Hyper-V, and System Center Management platform. We have platform as a service natively built in Azure, so it's really a platform as a service built to be a platform, not growing up organically from IAF, or not being pushed down as an artifact of the SAAS offering, and then, on top of that we have, of course, things like Office 365, and applications, SAAS applications that we deliver over the Web. And we allow customers to choose their deployment methods. We can deploy that on-premise for them, we can deploy it in service providers, and we can deploy this certainly in our own data centers as we do today. The next slide really summarizes, again, this is a Server and Tools view of the world. It doesn't include some of the Office products and such. But, if you think about the topography of our offerings, we have on the left hand side server platforms, which really start with our Windows Server offering, including the SQL Server offering, and then with Hyper-V we've sort of moved towards what is commonly called a private cloud or even potentially a third-party hosted public cloud that is really a highly virtualized environment. That is more, again, infrastructure as a service with some artifacts of platform as a service, but starting up from the infrastructure as a service offering. Meanwhile, we've attacked the problem from the other side starting on the far right with Windows Azure and SQL Azure, which are in our global data centers, natively built platform as a service offerings. Starting with that vision of what a platform should look like and really recreating what pass should look like. And we are pushing that towards the on- premise world and into the third party hoster world through the Windows Azure Platform Appliance. I'll probably slip into calling it WAPA occasionally, but that platform appliance is really Azure packaged up in an appliance and then shipped to our customers. Across the whole spectrum of this we are looking at the sort of unifying fabric of developer tools, common development environments and tools, common management protocols and
  • 4. tools, and a common set of identity assets really derivative of Active Directory. And that spans and really brings the entire offering that STB has from the server all the way up to the global data center. It unifies them into a cohesive whole that allows developers and consumers of the service to see a sort of common face of Microsoft across the breadth of our offerings. And that is a unique value proposition that, frankly, no one can match. And then finally on the last slide, I did what we're always supposed to do, which is show you a whole bunch of things that we're doing to show the momentum here. There is a list that is a lot longer than this. It's available on our Web site. But, I picked a bunch of things that I think are more relevant and sort of more weighty here. We've got a lot of product on momentum. The Office 365 announcement of a couple of weeks ago, frankly, is the step of moving our Office products into a service environment for the enterprise. It is a huge step for the company and a huge step for our customers. In STB we announced about six -- not quite six months ago the Windows Azure platform appliance, with some early testers in HP, Dell, Fujitsu, and eBay, adopting that to test that with us. And then last week at PDC, which I think is available online for anyone who wants to listen to the various components of that, we announced a whole bunch of progress on the Windows Azure Platform in our data centers, including the ability to host in the Windows VM role, in other words take a standard Windows VM and host it on Azure. That's really an infrastructure as a service offering enabled by our platform. Also, the opportunity to do what we call an extra-small instance, which is smaller -- a smaller bite of the Azure apple, which is really targeted at smaller Web-like applications, and we think will open up a whole new breadth of developers to our platform, a bunch of networking -- virtual networking components, which will allow you to span the network from on-premise to the Azure cloud, a marketplace for data, and some developer portal enhancements, as well. And we've been attracting a lot of attention of customers. I mentioned the Azure platform appliance early adopters here. We also are around 20,000 subscriptions on Windows Azure now. We announced last week that Pixar animation studios is moving RenderMan onto the Azure cloud, which is a huge statement about the capabilities of Azure, and a huge customer win for us. ADP has built NVoicePay on our Azure cloud, as well. So, there's a lot of customer adoption of very serious, very meaningful applications to the Azure environment. Meanwhile, BPOS has roughly tripled their customers. It's available in 40 countries and there's been obviously a lot of press around some substantial customer wins in the State of California, Minnesota, New York City, and DuPont, and Godiva, and again, I think a whole list of other customers wins are available on the website. We think these are really great signs of the early momentum that we have in the cloud, which we think is an artifact of the unique set of offerings that we have and the unique positioning that we have as a company spanning the entire breadth of infrastructure as a service, platform as a service, and software as a service. And giving customers the choice of how they want to consume those services and where they want them deployed. Brent, I think that's probably enough blathering on with the early slides. I'm happy to take whatever questions you or your clients have. BRENT THILL: Yes, a couple of quick questions from me and I'll turn it over to Brian and then we'll open it up. I guess the first question is one quarter ago you quantified that you had over 40 million paying subscribers. I'm curious if you have an updated number, or is
  • 5. the number blurring so it's hard to give out a metric. That's a question we get a lot from investors. CHARLES DIBONA: I think that metric is probably blurring. What we think we'll do, and the IR guys will come to some sort of regular cadence on somet hing eventually. But, really we think talking about the adoption, case studies of the adoption from places like Pixar is a much more meaningful thing to watch at this point. So, we are sort of going to emphasize those individual case studies of adoption and, again, I think you're right, that 40 million number is becoming sort of -- it's hard to talk about that on a regular basis, because it is blurring. BRENT THILL: Okay. Another big question revolves around you commented earlier that this is a accretive to the Microsoft model, that right now you see new users being brought in. And I guess the big question is, why doesn't this cannibalize some of the existing base, and if it did, is that even a bad thing, considering the profitability that this business can generate. You know who the customer is, you can cross-sell easier to the customer. The delivery is lower. So, inherently a lot of the benefits of the cloud should suggest that you can have higher attach rates and potentially higher ASPs over time. CHARLES DIBONA: Yes, I think that's the case. I mean I don't think anyone can rationally say that the cloud will not have any cannibalization of on-premise software. That's not a viable statement. We think that the cloud is the future, and we're set ting up so that we can succeed in a cloud environment, recognizing that there is an element of cannibalization there. That is cannibalization we are actually, given our position in the cloud, happy to take. We think that the opportunities are much, much great for the company in aggregate than the risk is to the company. And we're eager to move our customers where they want to, the ones who want to, with the workloads they want to, into the cloud. We're going to enable that for them. And we think that openness is what's going to keep customers on the Microsoft platform, whether that's Windows Server or Windows Azure. BRENT THILL: Great. And my last question, then I'll turn it over to Brian, is when you talk to the partners and the developers they're obviously going through a transformation. They've known you for many years as the on-premise existing solution. So, getting them to shift gears may be one of the hardest things you have right now. You have a lot of the products available, but one of the things we consistently hear is, it's just the awareness. So, maybe if you could just give us a sense of -- and correct me if I'm wrong, but it seems like the products are shipping, they're available, but now you have to go out in terms of transitioning that partner ecosystem to learn and adopt, and sell this model. CHARLES DIBONA: Yes. I think there are sort of two elements to the ecosystem, and you touched on both of them. There is sort of the partner ecosystem around channels and go to market, and then there's the developer ecosystem, which is obviously very vital to us. Let me first clarify that, yes, a lot of these products are shipping. The Azure appliance is not RTM, it is in an early stage, but we have early adopters helping us work through that product. Obviously Windows Azure is shipping, or is shipped in the data center and Windows Server obviously is a long-standing product of ours along with Hyper-V. In terms of the developer ecosystem, I think we are really working hard here to make it as seamless as possible for the developers to move from the on-premises world to the cloud and to the services world.
  • 6. We really do view our developer tools, our developer ecosystem, our developer capabilities as being something that spans -- we want to make it so that developers can really as easily write for Windows Azure as they write for Windows Server in a common environment, in a comfortable environment, which they have already adopted. And we also want to reach out to other developers. I know that we've talked about supporting Ruby On Rails on the Azure cloud. So, we want to reach out to developers who maybe have either never been part of, or have left the Microsoft ecosystem and bring them back to what we think is the most capable cloud platform out there in Azure. In terms of the partner ecosystem, yes, that starts to become a transition for a number of our partners, and we are going to work with them closely, particularly ISVs and SI partners, to allow them to develop applications and product areas around Azure. But, again, first of all this transition is not going to be overnight. We are going to continue to support our Windows Server environment, as well, and that will -- and we're going to give our partners the same choice that we're going to give our customers, that they can help their customers deploy across the entire breadth of the Microsoft set of offerings. And we think that's going to be a compelling value proposition for them, as well. Obviously, services have a slightly different dynamic. Customers are going to have to adjust their own business models accordingly, just as we are. But, we think it's a manageable transition and one we're certainly going to work hard to help our partners make with us. BRENT THILL: Just a quick follow up on the partner side, can the partners make as much money as selling the on-premise, considering the subscription model a customer would pay over time? So, are the economics in it for the partners and I guess what's the best way to describe that model for them? CHARLES DIBONA: This is one of those business models that I think everybody moving to the cloud and everyone in the cloud is sort of wrestling with. You're not in the license maintenance model. So, there isn't this big up-front payment that you share with your partners. But, there is a stream of income that you can work with to make a viable business model for everybody involved. And it's a matter of, how do we think about that change in the way, frankly, customers pay, end customers pay for the products and the services in this case, that is what I think everyone is wrestling with. We do think that there's enough -- there is enough in the entire ecosystem to make -- to satisfy partners along with us. Frankly, we will not be successful if we don't allow our partners to be successful with us and we understand that and we're going to work with them to make sure that happens. BRENT THILL: Great. Thanks, Charlie. Brian. BRIAN PITZ: Sure, just two really quick questions from an Internet perspective on competition. Maybe you could talk about how do you differentiate in the marketplace versus Google, what's your sales pitch for Microsoft Office Online when competing with Google and I just have a follow up with respect to Amazon. CHARLES DIBONA: Again, I'll take a stab at the Office 365 sales pitch. I'm not in that group. But, look, Office, the on-premise version of Office is an extremely capable set of applications, much more capable than anything that's available online today, except for Office 365. Okay.
  • 7. So our sales pitch is, you have an enterprise capable set of productivity applications that are superior to anything out there in our opinion, and I think in, frankly, the marketplace's opinion. It is now available to you as a service. We think if you want to consume this as a service, you can consume it as a service. You can consume it as you always have as well. We're giving customers that flexibility. But, we think that ultimately the differentiation comes down to how capable our products are, which is the way we've historically competed in the productivity applications space all along. And we are happy to stack up Office 365 against Google Docs. BRIAN PITZ: Okay. And then, just a quick one on Amazon. I know they're in some respect partnering with you, but can you talk about any pressure on pricing due to increased competition, namely from Amazon, on the basic storage and compute -- and, I just want to highlight the are in free trial -- or is that segment that they're kind of focused on too small business really for what you guys are targeting? But, just any context for how we should be thinking about that would be great. CHARLES DIBONA: I think the key thing here is, first of all, Amazon is actually quite a good partner for us. They sell a lot of Windows through AWS. So, there's sort of a dual relationship here with Amazon. But, in terms of pricing pressure, first of all, I would not say that what they're trying to do is target customers who are too small for the Azure cloud, that's not true. But what I will say is, they target them in a very different way than we do. They are selling infrastructure as a service. It's a bunch of, frankly, just aggregating component parts that customer can string together as they see fit, but they have to do that stringing together. They have to do all the work of essentially managing that infrastructure, not the actual physical deployment, but they manage the consumption of that infrastructure and they manage their applications on top of it. That is a very different proposition than Azure. We fundamentally do not believe that platform as a service competes with infrastructure as a service, because platform as a service gives customers a much more robust value proposition, a much more automated offering, a much more robust offering than simple infrastructure as a service. And we think that that is the future. And I think where we differentiate ourselves from AWS, and frankly a bunch of the IAF guys, VMware as a tool supplier to that, but also all the other various IAF vendors who are sort of trying to creep up the stack is, we aren't trying to sort of retrofit platform as a service onto an IAF offering and try to make it look like it's a platform. We built a platform. We started with the idea that this is a platform first, and it is built to be a cloud platform. It is the most forward-looking offering certainly for enterprises that we see out there. And, as a result, we don't feel that sort of straight up direct pricing pressure from Amazon, because we're giving customers more. I mean, if you really want to talk about what you need, even just buying the constituent parts of what Amazon provides, I mean, you have to buy Cloud Watch, and a whole bunch of other little components just to even give yourselves the tools to do what we give you in an automated fashion on Azure. So, we think that it's really a different creature. PAAS is a different creature than IAF, and we think that that's the future, and where our customers want to go. BRIAN PITZ: Great. And just as a follow-up to that, how do you view Amazon in the context of the bigger cloud picture? Are they a legitimate player versus where they were a couple of years ago, would you say they're one of the top players in the space on the IAAS side, or just any relative commentary would be helpful?
  • 8. CHARLES DIBONA: Again, on the IAF side, yes. I think just if you look at raw numbers, they obviously don't break them out, as you know, but just by rough sizing they're a pretty substantial player here. We know that they're a good customer of Windows in that space. So, yes, there's certainly a substantial Web IAF vendor. And as such they are both competitor and partner to us. Does that answer your question? BRIAN PITZ: Yes, absolutely. All right. So, I think we should probably turn it over to our clients, and see if they have any questions. (Operator Direction.) QUESTION: Thank you for your time. Charlie, enterprises have a lot of investment in Windows-based applications running on premise today. What steps are you taking for them to, if they want to leverage it and move it to the cloud, how is it for them to take it and start developing the applications, or rewriting the applications for Windows Azure? CHARLES DIBONA: Well, first of all, good to hear from you again, Harry. First of all, we just announced the VM role in Azure. So, you can actually move. You'll be able to run a Windows-based application on Azure. You won't get the full platform as a service offering benefits, right, but you will be able to actually deploy that into our cloud so that you get at least the first order of savings around hardware and some of the IT labor, and such. It does take a bit of work to move from the Windows environment into the Azure, to an Azure instance. And I couldn't tell you how much development effort that takes, it really varies by application, by the specifics of the application. However, we are enabling you to do that within a common set of tools and frameworks that you're comfortable with around .NET, and then, also, frankly, if a Windows-based application is running on some other platform on those as well. But it does take some work. You can't just take a Windows application and drop it into Azure unless you encapsulate it in the VM. But we think over time customers will do some of that. We do expect that there will be a lot of applications that don't get ported to Azure, but that really are running more in a VM role. But, for certain applications, we think that the benefits of the true PAAS offerings around the scalability and the management, and the management of the instance itself, will actually encourage end users to do that bit of work to move their applications onboard. QUESTION: Would it be fair to say that among the competing platforms, if I want to cloud-enable my Windows-based application Windows Azure is probably the better platform? CHARLES DIBONA: You know I'm going to say yes. QUESTION: I'm just trying to get your perspective in terms of rewriting per se. CHARLES DIBONA: If it's a .NET application, you're comfortable with .NET, we've clearly -- that will be a relatively easy transfer. If you look at the other PAAS offerings, such as they are, again, I would say that most of the other ones that sort of are
  • 9. deemed -- the ones that are sort of PAAS flapped on top of IAF, I think they're just inherently not as robust as Azure. If you look at GAE, or something, it will be a much more substantial rewrite. There's a whole bunch of constraints on the GAE applications that we don't think are particularly suitable to the sort of enterprise applications that have been built on Windows, frankly. So, we think that if you look at the swamp of competition, we think in general it will be easier if you're going to make the PAAS move to a true PAAS offering, it will be easier to do it in Azure, and we think, frankly, there's no surprise that you'll hear me say that we think that our PAAS offering will give you the greatest benefit as well. QUESTION: Great. Thanks, Charlie. (Operator Direction.) QUESTION: Hi, Charlie. This is Jennifer. Thanks for taking my question. CHARLES DIBONA: How are you? QUESTION: Good. I'm good. I wanted to ask you about the rate of adoption in developed markets versus emerging markets, and what your expectation is there. We all know that your products are very prevalent in places like China, but they don't always monetize as well there, and I'm just curious if the cloud is going to be a vehicle for better monetization in the emerging markets for you. CHARLES DIBONA: Yes. I would say, first of all, it's likely that the early adoption is going to be stronger in the developed world for these cloud offerings, if only because the sort of IT intensity is so much higher that it makes sense to put data centers in the developed world first. But we have data centers globally, you're going to see, we think, higher early adoption in the more developed countries. In the less developed world where we do think that the cloud will be an opportunity to sort of improve our monetization rates. It's not a complete slam-dunk. There are obviously all sorts of regulatory issues around data centers in various countries. But we think that it is an opportunity to really get paid for our product, get paid for our services. So, we are encouraged by the opportunity, and by our early exploration of that, but it will take some time. QUESTION: Great. (Operator Direction.) QUESTION: Hi, Charlie. Thanks for taking the call. I had a quick question just about Office 365. You mentioned that it was kind of positioned at the large enterprises. I'm just trying to understand, as we move further down the line, and the enterprises get comfortable moving to 365, are we going to get to a point where a company is forced to make the decision whether they want to be purely cloud -- i.e., Office 365 -- or they can run a combination of both where there may be some form of synchronization between the cloud and on premise?
  • 10. CHARLES DIBONA: I'll start with this one in reverse. First of all, yes, you will not be forced to make the choice. The whole idea is that we will give customers the flexibility for a hybrid deployment, and there will be an exact way to describe the synchronization and such. Again, that's not my product area, but that's clearly the roadmap we're on there. I may have misspoken when I said it was an enterprise-oriented offering, I really meant all enterprises. QUESTION: Sure. CHARLES DIBONA: Certainly, the consumer offering Office 365, but it certainly is intended to go out to small and medium business, and to be attractive to them for certainly an area where we think we can get better monetization of those customers as well. QUESTION: And just a quick follow-up question, in terms of the hybrid or the synchronization, is the roadmap along not only for a private cloud, but also from the public cloud perspective, or is it only from the private cloud where you may have the hybrid synchronization between the on demand and the desktop offering? CHARLES DIBONA: It's certainly should extend into the public cloud. So, with -- I'm drawing a blank on the name, Office Web Apps, sorry, drawing a blank. It's not my product area. But, it's clearly not meant to be just a -- we think of our offerings as being sort of a continuum, and we want to enable people, our customers, to really move within the Microsoft ecosystem as freely as possible, and that goes for the Office offerings, the various Office and productivity app offerings as well as the platform offerings that STB produces. QUESTION: Thanks. (Operator Direction.) QUESTION: Hi. Thanks for taking the question. Can you talk a little bit about how your pricing on Office 365 in terms of different services, whether it's e-mail or Office apps, or whatnot, and kind of the thought process behind how you set the pricing? CHARLES DIBONA: You know, actually, again, that's not my area. I've got to turn it over to Todd, Todd probably has a better read on this because he's been more in touch with the Office guys. TODD SETCAVAGE: Hey, Greg. The way we've priced, we've actually tried to hit a sweet spot for every segment of the market. For example, small businesses, we have an offering that gets all the way down to $6 per user per month. But if you want the full meal deal, which includes Office Professional Plus, SharePoint, Exchange, Lync, all of the back office productivity services, that hero SKU is all the way up over $20. And so what we're trying to do is provide the right solution for the right customer at the right price point. It just depends on what they'd like to consume, and it's something that we think we can, at greater than a $20 price point, we can drive some significant value for the company. QUESTION: And how much did Google's presence in the market with their pricing, how much did that influence how you priced your product? TODD SETCAVAGE: Not a whole lot. You look at what we're doing, we're taking a very different approach. Nn a lot of ways, for the small and mid-market, what we're doing is
  • 11. trying to distribute a lot of our enterprise class products, like SharePoint and Exchange and Lync, down to a segment of the market that doesn't have an organized IT, but certainly has the needs of organized IT. And so, when they look at what we can offer in our own data center, providing things like control, reliability, a financially-backed SLA, all these things really matter regardless of your size. And so, competitive pricing is certainly a factor, but it's not the overriding factor when we think about what price point we come to market with Office 365. QUESTION: Okay. I mean, was there a general philosophy behind the pricing relative to kind of adoption and market share versus profitability at least here in the earlier stages? TODD SETCAVAGE: The pricing dynamic is -- all pricing theory takes all those considerations into account. We obviously think we have enough value at the right price points. I mean, $6 per user per month, and you get free website -- it is an incredible value. And so, we're trying to be aggressive, and at the same time we think we can be pretty darned accretive at the end of the day as well. QUESTION: Okay. All right. Thanks, guys. (Operator Direction.) BRENT THILL: And for our clients, if you have questions, please jump in. We'll ask a few follow-ups here. I guess, Charlie, just from a perspective, you know, watching the World Series, you're now seeing advertisings for your cloud strategy, and we're all in. And it's obviously reaching well beyond just the business users. I guess, just form a perspective of how the company has transformed itself around the cloud, can you give us a sense of the engineering resources that have shifted over? And there have been various quotes on the wire talking about what Steve Ballmer had been quoted about the percentage of the engineers now focused on this. I was curious if you could just give us an update on that? CHARLES DIBONA: Yes. I would be hard pressed to find an engineering group of any size around here that isn't, if not wholly then at least primarily, focused on how they play in the cloud, whatever product they're working on is adapted into a service. So, it is really a complete mind shift around here, I assume, because I've only been here 18 months. But it is actually -- having come in from the outside, it is pretty pervasive when you see it on the ground here about how much focus there is, not just in engineering, but certainly led by engineering in terms of moving into services. BRENT THILL: Okay. BRIAN PITZ: I've got one more -- I'm sorry, go ahead. BRENT THILL: I guess it just seems like some of the winds that you've announced, I mean, these aren't small wins. I think you announced Toyota the other day. You've had some fairly large, 100,000-plus seat count wins. So, I guess, when you look at a tipping point for some of these large enterprises, is it fair to say that some of the large enterprises with the big, recognizable names now are starting to come in now, and that perhaps creates a -- I don't want to call it a tipping point, but it certainly creates a reference-ability program that you now have this really kind of kick-started, so that the ball is rolling, and it's only going to start rolling faster. CHARLES DIBONA: I think that's clearly true. I think you know, it's going to be workload by workload, clearly productivity apps are something that has moved more quickly to the
  • 12. cloud. There are going to be other workloads that don't move as quickly. But, look, we are very encouraged by our progress as a company in the cloud, but I think you're talking really, generally speaking, I think that we're seeing companies become more comfortable with the concept of the cloud, and then we think we're very proud of our implementations, and think that they're going to be very competitive, industry-leading, frankly. And so we are encouraged that customers are starting to become more open on a broader array of workloads to moving things into the cloud, because we think that's a real opportunity for us to compete with what are industry-leading offerings. Again, it is clearly -- I would say that certainly for things like -- the tipping point has been reached in a bunch of things. There are going to be applications that take a lot longer to move, and there are going to be legacy applications which will stay put for long, long periods of time. BRENT THILL: What has moved faster? I mean, what were the groupings, and these services that have had the highest adoption? CHARLES DIBONA: Clearly mail. Mail was the first one. So e-mail has moved, and is moving faster. I would say productivity apps are certainly moving quickly. Web Apps, there's a lot of activity in our data center, but also in Amazon, and from everything we can see in third party data centers, and Google around Web apps that are Web-facing apps like that. I think when you're starting to talk about real more back-end systems where there are data issues, I mean, it's not just -- the concerns about data have moved from being more about just is my data secure out on the cloud to being, well, okay, if my data is out on the cloud and you geo-replicate does it move into a geography where that's not allowed with that HR data, or with that financial data. So, if you're a German company and you move your HR data, it replicates to a Chicago data center that can be a problem. So, you're really getting the sort of second order questions getting asked now, even about more fundamental applications and workloads. BRENT THILL: And just in terms of the infrastructure now to support some of these big customers coming online, I think back in '08-'09 your CAPEX really grew quickly and the CAPEX is now slowing down. You're still spending, but it's not at the same rate. Is it fair to say that you've put a lot of investment into these data centers to provide the backend support and that now customers can move forward comfortably knowing that you can scale with them? CHARLES DIBONA: Yes, certainly we will scale with our customers and they can move forward on that premise. We've got $2-1/2 billion of CAPEX for this year. There's obviously going to be ongoing investment in providing that scalability to customers. And, again, I think we've talked about this before. There's very few providers out there who can do that and that's yet another benefit, I think, to going with our offerings. BRENT THILL: You mentioned earlier Salesforce. To give them a lot of credit they were one of the first companies out there really pounding this message well over 10 years ago. I guess when you look at Force.com, how would you differentiate your services to what Force is doing, and they've clearly now aligned with some other powerful forces in the industry, like VMware, to help build out their ecosystem. So, I guess when you look at it it's not just the Salesforce versus Microsoft now, it's a Salesforce VMware combination at least is the marketing goal. CHARLES DIBONA: Yes, look, I think Salesforce is -- Force.com is an interesting platform. It's particularly interesting if you are extending off of the Salesforce.com applications
  • 13. offerings. But, I think what we've endeavored to build is a much broader, multipurpose PAAS offering that isn't really an artifact of the SAS offering that we have, as Force is an artifact of the Salesforce applications. And we have, as a result, built it to be much more -- we feel more developer friendly, right, catering to an ecosystem of developers that we have worked with for years in the Windows Server and Windows Client areas. So, I certainly wouldn't take any cheap shots at Salesforce, and at Force.com. We view them as a very viable competitor, and certainly we view VMware as a very tough, hard-nosed competitor. We just feel that our offering is better suited as a true sort of multipurpose platform cloud, really build organically, as opposed to VMware's solutions, organically to be a cloud-based platform, which we think gives us inherent advantages at a product level and gives our customers advantages from a deploy-ability, usability, and develop-ability, if you will, level, as well. BRENT THILL: Brian, did you have a follow up question? BRIAN PITZ: I just had a follow on, actually, to one of your questions, Brent, which was you talked about adoption into new partners. To what extent are some of the tougher verticals like finance, or government, are they even starting to lean, or is that still a tougher sell among those types of clients? CHARLES DIBONA: Yes, I mean you've seen governments deploying the Office 365 offering. We have the Federal offering. We've got New York City, the State of California. So, you are certainly seeing a government move. The workloads around -- I guess when you asked about finance were you talking about the finance vertical, as an industry. BRIAN PITZ: Yes, I'm talking about commercial banks, et cetera. CHARLES DIBONA: Well, frankly, in a lot of respects the finance verticals is one of the more forward-thinking verticals out there. You're seeing a lot of adoption early on, certainly early days, of applications, of productivity applications, but also of moving workloads off. I'd say the finance vertical is obviously a pretty broad spectrum, but sort of the banks, the commercial bank sector being pretty forward thinking. I think it's really more of a workload issue than it is an industry issue. I think it's harder to move some of that -- it's probably culturally harder to move some of that proprietary data out onto the cloud. And then it's also, like I said, there's regulatory restrictions on some data, and keeping track of it, and where it's physically located can be important. Some of those complications make things a little harder with certain types of workloads. But, I think, again, when you get the productivity applications and things like that, I don't think that there's a lot of industry variation, frankly, on who is adopting. We have Home Depot. I don't know if you -- you've got all sorts of -- a whole breadth of both government and commercial companies moving those applications to services. BRIAN PITZ: Great. Thanks. BRENT THILL: Operator, can we poll for audience questions? (Operator Direction.) BRENT THILL: Todd, Charlie, we appreciate your time. This is helpful to give our clients and analysts an update on the strategy. So, we really appreciate your time and to look forward to catching up as we go on the strategy.
  • 14. CHARLES DIBONA: Thanks for the opportunity to talk to everyone and I appreciate it. BRENT THILL: Thanks, again. CHARLES DIBONA: Thank you. END

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