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  • 1. Who: Tami Reller, chief financial officer, Windows, Microsoft Corporation When: May 28, 2009 Where: Cowan and Company Technology Media & Telecom Conference - New York, New York WALTER PRITCHARD: Okay. We're going to go ahead and get started. We're happy to have Microsoft here for the 3:40 session this afternoon. Representing Microsoft we have Tami Reller, who is a Corporate Vice President, and she's the CFO of the Windows business. So, I was going to focus most of my questions on that business. As you all know, it is quite an important business, about 25 percent of the revenue, but over half the profits. So, a very sizeable chunk of the business, the oldest business for Microsoft. And so, Tami, I guess you've been with the company for about eight years. Maybe if you could just walk us through a bit your background, where you came from and maybe roles you had immediately prior to this? TAMI RELLER: Yes, sure. Well, first let me say thanks for having us. I appreciate being here, and I appreciate the opportunity to talk about the Windows business. As you noted it is a very important business for Microsoft. So I joined Microsoft eight years ago through the Great Plains acquisition. You might recall that acquisition, those in the audience. And at the time it was about a billion- dollar acquisition. I was the CFO of the company at that time. And then I've had a variety of roles within the company since then, including financial positions, as well as more broad operating roles. Then I moved into this role about a year ago. WALTER PRITCHARD: Got it, great. So I guess the topic that everybody is interested around your business right now is Windows 7, and the release candidate now out, it's been out I guess since earlier this month. TAMI RELLER: Right. WALTER PRITCHARD: Could you give us a sense of -- I mean, we can all go back and look at Windows XP, Windows Vista, and try to get a sense of timing of the ultimate product release, just give us a sense of milestones from here, what we should expect between now and the time that we get a retail shipment of Windows 7? TAMI RELLER: Yes, well I think the release candidate is a big milestone. I mean, beta was a big milestone. And, frankly, the level of feedback and the quality of feedback, and the quality of interaction that we had from consumers, developers during the beta cycle was extremely useful. And that's also the case with the release candidate. So for those of you who have touched the product and participated in that process, thank you. That's been a key part of the process. And then before I even touch on things going forward, I also think it's important to touch on looking back even before beta, which is we came into the Windows 7 planning cycle really wanting to learn what we did well and did not do well in the Vista timeframe, and really take that learning and do things really well, and well
  • 2. orchestrated, and in good partnership with our partners to have just a very high quality release process. And that's really where our focus has been. So even before the beta process began we really worked closely with our OEM partners to make sure that we had a high quality process, and worked closely with them to make sure that we had compatibility, and we had design, and our goals were aligned, and all of that was happening as we led up to beta, and now we're at release candidate. And so as we've consistently said, and as we've consistently meant, it's really all about quality. And we'll move to the next milestone when we're perfectly comfortable that the quality is there and we're ready to move to the next milestone. But, the level of interaction that we've had and the level of engagement with those interacting has been very positive and very strong. WALTER PRITCHARD: At dinner last night with Kevin probably one of the biggest items of discussion was just PC market, impact of Windows 7 on the PC market. I think if you go back to Windows 2000 there were lines around the building people waiting to get the product, and I guess it was Windows 95 where it was a really big release. It seems to me now it's more of a case where PC spending may actually drive your business, as opposed to your release drives people to go out and buy PCs. I wonder if you can just give us a sense of how you look at the drivers in the market today, and what that means for the next 12 months in the PC market? TAMI RELLER: Right, well clearly if you look at the Windows business the single biggest driver is the health of the PC market. And as we break down the PC market we look at the business segment of the PC market, and the consumer segment of the PC market, and then further we look at developed market dynamics, and then what's happening in the emerging markets. So those are really the key orientations that we look at around the PC market. And so clearly what you said is right, which is the PC market's health is a direct correlation to the revenue dynamics of the Windows business, which is why the last two -- Q2 and Q3 have been -- it's been a tough environment, and there's clearly been some impact. There's been a bigger impact on the business segment than the consumer segment. And in part because netbooks, which I know you had a panel earlier in the conference, have helped buoy up the consumer segment overall. And that's been a positive from that angle. That's been a drag on our overall revenue per license, and therefore it's had some negative impact on that, but clearly it has helped the market overall. WALTER PRITCHARD: Got it, and just in terms of that business PC cycle, I mean, I think that's one of the biggest questions out there is, I think we were due around this year, maybe late last year, for more PC refresh type activity in business, and clearly a bad economy got in the way of that. I'm wondering how you all look at PC lifecycles being extended, and a new operating system launch, is there any impact there that potentially helps buoy the business more than just, say, you would see in a typical year? TAMI RELLER: Well, with enterprises there are so many different dynamics at play within each and every enterprise. There's a matter of sort of what's their deployment approach, are they going to do it in larger movements and phases, or are they going to do it a department at a time, how many legacy applications, line of
  • 3. business, mainstream ISVs do they need to test and bring in, and update them. There are so many different dynamics at play that it is -- it really is nearly impossible to apply a direct mathematical correlation to say if there's this much of an extension it has this specific impact. We do think that there's a couple of things. One is adoption and deployment of Windows Vista has been slightly ahead of where we had been during XP. So, you know, good progress on enterprise deployment with Vista. We also have a number of enterprises who are mid-cycle, so they've been doing a tremendous amount of testing and planning, and training and getting ready for Vista. That will clearly accrue to what they do with Vista and/or Windows 7. So that in and of itself accelerates some Windows 7 adoption. That being said, the heart of your question, which is will Windows 7 itself inspire refresh cycles -- WALTER PRITCHARD: Right. TAMI RELLER: There definitely is some level of motivation factor, but from a financial planning standpoint we don't bake a tremendous amount of that in. WALTER PRITCHARD: Got it, okay. That makes sense. And then it's been talked a bit about in the press, and I guess we haven't seen the official launch so we don't have all the details at this point, but the SKU strategy with Windows Vista, you segmented the product line a bit more than you had with Windows XP. TAMI RELLER: Yes. WALTER PRITCHARD: I wonder if you could talk about at least directionally as we look at Windows 7 what we should expect there, and what sort of mix that might induce versus what we saw with Windows Vista? TAMI RELLER: Yes, so looking at -- the planning cycle for looking at the SKU structure and the pricing strategy for Windows 7, we definitely did in a very thoughtful, planful, and heavy research way, both feedback from customers and partners. And one of the key themes that came through, and that we then put into the implementation was simplify and make it very straightforward to understand which SKU applies to which customer scenario. And that really is what we have, and that is that in developed markets for consumers it's Home Premium, and for businesses it's Pro. So it's very straightforward on what you have. And then for enterprise customers who will have an enterprise agreement with us, then it's enterprise. So there are those primary SKUs. Then there are some specialized SKUs, specifically Starter for netbook scenarios, that is also a critical part of the strategy. The difference, of course, with Windows 7 on netbooks is that any SKU runs -- any Windows 7 SKU runs on netbooks, and so there's an opportunity for netbook customers to choose which Windows 7 product will be best for them, and from a financial standpoint obviously there's some upside there that we can execute upon. Then, of course, in emerging markets, which are critical for us to continue to make progress across the board there, and we are, there will be some specialized starter SKUs to make sure we've got the right solutions for customers there.
  • 4. WALTER PRITCHARD: So is it a stretch to think that you could see a little bit more mix towards the high end with the netbook being able to run, or really any PC being able to run any version of the operating system? TAMI RELLER: Well, the netbooks category is early period. Whether -- trying to assess who the customer is that will be the ongoing consumer of netbooks, how much that will evolve, how much is additive, how much is not, I mean it's evolving. What I can say is we feel very good about the level of understanding and research that we've done on the netbooks that have been consumed to date. We know a lot from that. But, then to try to sort of take that knowledge and imply that that's going to carry through to the next wave of buyers, and the next wave of buyers, we're cautious. We want to be sure we understand that these are still very early days with netbooks. That being said, we are confident there is good ability to sell the Windows 7 value prop all up to a netbook consumer, because what we have learned is that they're -- what they want to use a netbook for, in terms of applications and usage, is actually not that much different than a notebook. They just use it in more bursts, they're shorter periods of time, and in -- and more on the go. So there's differences, but from what a Windows 7 product needs to do is very similar. WALTER PRITCHARD: Great. TAMI RELLER: But again, that's based on the body of knowledge we have on sort of who has purchased netbooks today. WALTER PRITCHARD: Right. And I think snacking was the word that was used in the panel. TAMI RELLER: Yes, I hadn't heard that, but that resonates. WALTER PRITCHARD: That was I thought an interesting way to characterize it. I guess looking at -- just following along on that. On the Starter Edition there has been talk about being limited to three applications, things like that, I'm wondering how you all weigh off something like that, which could impact the consumer experience, with not wanting to give away a full-featured version for a less than full- featured price. I know that's probably an ongoing negotiation, debate within Microsoft, but just sort of how you think about that sort of decision? TAMI RELLER: Yes, I mean, the principles are very straightforward, which is Windows 7 will be a success when it is widely accepted and loved by consumers. And so that's the ultimate judge of Windows 7. So, listening to the marketplace, and listening to customers is critical. Adding to that, listening to and talking to, and betting with our partners is a key part of that. And that -- what I feel very good about is that that listening is happening. And the right discussions are happening. WALTER PRITCHARD: Right. Got it, okay. Moving on a bit to just talking about on the corporate side we talked a bit about the potential upgrade cycle, or not. One thing that has happened over the last -- I don't know if you've given statistics in the last year, but enterprise agreement adoption on client has come up. Originally when that offering was brought to market a lot of us didn't think you'd see much attach, and I think the attach rate has come up nicely. Can you talk a bit about what's
  • 5. driven the attach rate to where it is, and as we look into Windows 7 is that attach rate potentially much higher, or is it topped out at current levels? TAMI RELLER: Yes, not topped out, definitely not topped out. That is the short answer, and the last three years we've been on a very good journey. And there's really been two things. One is that we've just gotten better at executing on the sales side: having the conversation with our enterprise customers, bringing clients into the equation, in addition to the other key solutions. And so that's been a key piece of it, is we've really gotten that sales motion moving, and it's made a difference. Even bigger than that, or certainly equally so, is the value proposition. For an enterprise customer to have an enterprise agreement that then allows them to be able to get all of these desktop management, and optimization areas that they need, BitLocker, and a number of other things that have really become standard and critical for so many enterprises, that's been a core driver. You add to that the fact that now Windows 7 probably has a bit more bottoms-up appeal from the users, and frankly I just think consumers have more influence within IT departments than ever before. So if there's more demand for sort of more Windows 7, and more Windows, then there will be more adoption. So, definitely more upside potential there, but it's an ongoing journey, and it will pick up over time. WALTER PRITCHARD: Okay, and is Windows 7 necessarily a catalyst for that, or is it just an ongoing -- it sounds like getting the sales force aligned and so forth is a process that could go on with or without a new operating system, at least I'm trying to get a sense of the Windows 7 impact there. Is there any -- TAMI RELLER: I think there's demand impact. I think that if you have consumers with an inherent interest and spoken demand for a product that will further help IT make a decision to sort of adopt more around it, and move faster to a new version. WALTER PRITCHARD: Got it. Got it. And then one thing I think, in modeling out Microsoft in your business, there's a segment of the business that is retail purchases of Windows. TAMI RELLER: Right. WALTER PRITCHARD: Or people doing upgrading PCs, which with Vista really fell off, it seemed, I think partially because the hardware requirements were quite rigorous with the operating system. And, you know, one of the touted features of Windows 7 is the lightweight nature of the operating system, to be able to run any operating system on any piece of hardware. I'm wondering if there is potentially a pickup in that revenue line, or in that area of the business, where you may see consumers, or businesses, instead of upgrading a PC actually just upgrade the operating system? TAMI RELLER: Yes. So, I think there's two important elements to look at for the upgrade opportunity with Windows 7. You know, one is the actual revenue and unit opportunity that it brings, and that's not insignificant. And we really look at it as sort of the first nine months or so after the release is when you see that activity happening. You know, largely at retail, though there are other mechanisms, as well to get the upgrades. And, you know, we do think there's going to be strong uptake.
  • 6. And, you know, it's one of these things where when you look at the potential upgrade pool, there can be some significant swings on the percentage. So, it's a large opportunity, and we'll work hard to capitalize on it. The second thing I would say is that in addition to the specific revenue opportunity, it's also, you know, really a bellwether to the acceptance of the product, sort of that early burst into the retail channel, but then how much sells through. And that's something we watch very carefully, which is not just the retailers picking it up, but then how much is actually selling through the channel. So we will watch that very carefully both for the specific revenue opportunity as well as for what we think it represents for Windows 7 momentum. WALTER PRITCHARD: And then just last, I think we've kind of beat the Windows 7 topic to death, but the last question I wanted to ask related to that topic, if you're an investor, you know, as many or most here in the audience are, looking at just the potential success of this release, I think in front of Vista there were lots of signals pointing in lots of different directions in terms of how successful the platform was going to be upon release, if you were in our shoes, what would you look at? You've got reviews that are out there. You've got -- you know, in the early days of the product launch, as you mentioned, you've got retail, which could be an indicator. What would you look at as indicators of potential success of the new platform? TAMI RELLER: Yes. And I think those are definitely it. If I look at some of the things that we've really prioritized in planning for the release, how well we have planned for ecosystem readiness has been on the top of the list. And so, you know, I have to point that out, which is just how ready was Windows 7 across the ecosystem, application compatibility, hardware compatibility, and do the things that our customers want Windows 7 to work with, does it indeed work with those devices and applications, because that's how customers will judge their ability to deploy and use and benefit from. So, that's a big one. I would say the second one, which goes along the lines of reviews, but it's slightly different, but that is the key, the primary voices to enterprise on when deployment should happen, what they're saying. WALTER PRITCHARD: So Gartner? TAMI RELLER: Gartner, et cetera, you know, how long to wait, go ahead now, look for this. I think those statements, they mean something, and they certainly are one data point for enterprises. WALTER PRITCHARD: Right. TAMI RELLER: I think all of that together is a good way to assess how Windows 7 is doing. WALTER PRITCHARD: Got it. Great. Another topic I wanted to hit is, I guess, since I've covered Microsoft about four years, and a topic I've almost taken for granted is this leakage from piracy. You know, Microsoft loses that opportunity from piracy, and I've really never baked in an improvement there. And I'm wondering if you could just bring us up to speed on efforts around piracy to date, and then maybe just go back into the Windows 7 topic, talk a little bit about that going forward?
  • 7. TAMI RELLER: Yes. So, it's another area where we've learned a lot during the Vista phase, and I think have just gotten a lot more mature on the topic, and learning what we should do, what we can do, how we do it, what timing we do it in, et cetera. But I'll start this way, which is, you know, advancements we can make against piracy are a big opportunity. WALTER PRITCHARD: It's all incremental. TAMI RELLER: It's a big opportunity. It's incremental. And it's a journey. It's not a next year initiative, and then we're on to other things. I mean, it is a part of our Windows life, a part of our Windows execution model. And so what we've learned, to give a little bit more texture to that, is that we have to, we have to, first and foremost, listen to our customers. I mean, how do they -- how much do they -- what are the percentage of those that have pirated software, how do we most effectively communicate with them: at what time, what do they need to know, how do they think about when they want to go genuine. You know, there's just a lot we have learned through different things we've done, especially during the Vista timeframe, when really is the first time the software helped us in curbing piracy, Vista really was. But, yet, there's more to that. It's not just, oh, bake that into your bits, and then you're good. I mean, there's just so much more you have to do from a sales motion standpoint, marketing, working with your partners, working with governments in some cases, et cetera. So it's multifaceted. Some quarters we have really good progress, and then other quarters we'll take a step back. So, it will be an ongoing journey that will be always part of our life, but an important one. WALTER PRITCHARD: And in terms of -- TAMI RELLER: And we've made progress. WALTER PRITCHARD: Okay. Can you give us any sense in terms of -- TAMI RELLER: Well, I mean, on a quarter-by-quarter basis, as we release our results, look for the progress that we make on attach, and that's a good way, phrasing it in the way you did with how do we evaluate your Windows 7 success is, there's that. There's revenue that we also generate through what we call our legalization, or genuine SKUs, there's certainly that aspect as well. But then gauge our overall -- WALTER PRITCHARD: So, looking at what you say PC market grew versus what your OEM units -- TAMI RELLER: Is one way. WALTER PRITCHARD: If those are together, then that's for multiple -- TAMI RELLER: Yes. And then there's after the fact legalization, and other activities that come through other parts of our revenue that wouldn't be directly reflected in that. So, it's slightly better than that. WALTER PRITCHARD: Is it safe to say that piracy may actually have gotten worse in the downturn here? If somebody is on the edge of genuine or not genuine, and there's just less budget, or less money, or whatever it may have actually reversed some of those --
  • 8. TAMI RELLER: Logically, you'd think that there would be some of that. We don't have, you know, in Q3 which, of course, would have been the last reported quarter, we didn't see a large amount of evidence to that. So, you know, is it something that we certainly think about and watch for? Yes. And, I think that's a logical conclusion. Either piracy or under-licensing, where there may be SKUs that are purchased, and then different SKUs that are used. WALTER PRITCHARD: Got it. I just want to pause for a moment and see if there are any questions out here in the audience, either follow-ups to the things I asked about, or any other questions you want to ask Tami before I continue? We'll continue. I want to talk a bit about Apple and the success they've had in the market, and I'm wondering is it a -- how do you view their success? Is it a zero sum game, and every Mac that has been sold is a Windows unit that might have been sold? Do you think there's been a net creation of demand in the market by them? I'm wondering how -- let's talk about that first, and then I had a follow-up for that. TAMI RELLER: Yes. I mean, Apple, we have to, I have to respect what they've been able to accomplish. I mean, in certain markets, and with certain segments, they've been very successful. Frankly, they're a company that's made us better, and hone our approach, and think about some things. And so, that's a couple of different ways we look at it. The value proposition that they have, which is a higher end, higher cost, you know, PC is one that I just don't think resonates as well today as it may have a few quarters ago. And the one thing that we've seen with the latest round of advertising that we've done, which is the PC Hunter Campaign that some of you may have seen, you know, really goes after that specific value proposition that we have that's so strong, which is we do -- for a lower cost, we give higher functionality to a core segment of the market where they've been very successful, that transitioning customer who is going from high school to college, and sort of moving on to different parts of their life. And so, we think there's a real opportunity for us to have some impact in that specific competitive space. WALTER PRITCHARD: Got it. Got it. And then, if we look at the other side of competition, and there isn't -- I mean, I think there's been for years, even before I covered Microsoft, there's been talk of Linux on the desktop, and I think there are certain countries in Europe where you've seen maybe more traction, but certainly not the threat today that people have made it out to be five and eight years ago. I'm wondering how you look at potentially somebody standing behind Linux, I think the one that comes to mind most clearly would be Google with like an Android operating system that the consumer probably doesn't know it as Linux, they would know it as a Google operating system. How do you formulate a strategy to compete against something there, where it's actually more of a brand now as opposed to a grassroots, kind of anarchist effort? TAMI RELLER: I'll come back to the Windows value and the power of the Windows value proposition. You know, netbooks is a fascinating example, because it's so recent, and the uptake was just so fast. I mean, literally less than a year ago now we had close to zero percent attach on netbooks. They were Linux. And today, based on external data, the U.S. netbooks attach rate essentially rounds up to 100 percent, it's 97 percent NPD data.
  • 9. WALTER PRITCHARD: Right. TAMI RELLER: So, that's an amazing, consumer-driven, consumer-driven demand for Windows. So, having said that, we don't dismiss competition. You know, that's sort of how we've grown up is not dismissing competition. So, we still view it as such. But I think the netbooks example is a good example of the value of Windows. WALTER PRITCHARD: And how do you look at potentially the disruptive trend of the operating system and the computer maybe paid for by somebody else, whether it be -- you know, we talked a bit in the netbook panel yesterday about potential carrier subsidization of a PC. I don't know that you're going to go back to the days of pay somebody to surf the Web, but some sort of alternate model where advertising may subsidize part of the cost there. I know Microsoft, especially in the advertising arena, you're certainly on a journey there that has some ways to go, but how do you look at potentially alternate ways of a PC and an operating system being funded, and how do you compete with that if that is something that comes along? TAMI RELLER: Well, there's compete, and then there's partnerships. Part of some of the telco models, even telcos with our OEMs, there's some experimentation of different business models around netbooks, and even other notebooks. But I think it's early days, and very interesting experimentation to see what does drive consumer demand, and is it additive. So, similar to what I've said about netbooks, you know, I also see with some of these alternative pricing models in some ways is what you're talking about. WALTER PRITCHARD: Right, right. Got it. So partnerships with carriers sort of may be a subsidization type deal with a carrier? TAMI RELLER: Well, I mean, there's Verizon and HP that have some early models out there. WALTER PRITCHARD: It's probably done more at the OEM level, not necessarily at the Microsoft level? TAMI RELLER: Correct. We obviously are a key part of that equation, and a key part of the conversation, but I think there's some interesting business models that are being tried. WALTER PRITCHARD: Okay. Okay, got it. TAMI RELLER: So, we'll see. WALTER PRITCHARD: Great. I just want to pause again to see if there are any questions out in the audience, and then I'll continue. Profitability in your business has been one of the most profitable franchises in software. It's dipped in the last few quarters a bit with the revenue. I'm wondering as we look forward, you know, software businesses are generally fairly fixed in terms of the cost, and so you would expect that as revenue goes, profitability goes. I'm wondering if you could help draw a finer point on that, especially as we look at potentially launch expenses that come up this fiscal year, and so forth?
  • 10. TAMI RELLER: Yes. So, you've hit on it, which is the beauty of a high margin business is, it's a high margin business. The downside is, as revenue goes, so does the profitability, largely because you can't cost-cut your way to success. WALTER PRITCHARD: Right. TAMI RELLER: That being said, we are being extremely judicious about spending across the company, including in Windows, you know, not cutting where it would ever hurt our ability to deliver Windows 7. So, then you're really down to looking at two big pieces on the Windows P&L, and that is revenue, and as we've talked about that is largely dependent on where the PC market goes. And, obviously, that will be still somewhat tenuous in the next amount of time as the economy does what it does. And so that on the revenue piece, clearly there are things that we can do with Windows 7 in terms of driving demand for Windows 7, driving demand in our premium SKUs, et cetera. So, there are activities we can take outside of the PC market that help revenue, and we're honed in, focused on that. Then on the expense side, we made a decision at the start of this fiscal year to increase marketing expense. And so, you know, that you've seen sort of flowing through in the quarters that we've reported. And that spend has really been in advance of launch, and really both to drive Vista as well as prepare for Windows 7. We really think about launches in a pretty different way than we did in the XP and Vista timeframe. It's much more of a season than a specific day, week, month. And so you won't see any sort of one massive spike around an event. It's really sort of sustained activity to make sure that we're driving all the initiatives we need to drive across the enterprise, across small business, across the consumer space, you know, with a pretty heavy emphasis on consumer, as it has been this fiscal year. WALTER PRITCHARD: Okay. And how should we think about just magnitude of launch expenses relative to, I guess, the most recent data point that is probably relevant is Vista, I don't know if looking back at XP is relevant, but just magnitude of the expense, and it sounds like timing may be more spread out as opposed to concentrated, but just the magnitude of the expense? TAMI RELLER: Yes, and I really would go back to the point that we just really look at it in a completely different way. I mean, clearly, in our COGS line you'll see some specific items to launch, because that's how you have to launch products. But, from a marketing standpoint, it's sort of all about marketing Windows. And there will be Windows 7 scenarios that get brought into marketing, but it's a continuous marketing line that's by and large more consistent than not, and incorporates Windows 7 when the timing is right. WALTER PRITCHARD: Right. Got it. Got it. I'm going to pause a last time here to see if any -- Rick, can you just step up and ask it into the microphone? QUESTION: Tami, a couple of questions, if you could talk about the premium mix, I'm not sure that I understand, maybe you could articulate what the case is for the premium SKU for Windows 7, why that might be compelling, and whether we might see a mix shift to the more higher end product? And also, you were talking about the -- I lost my train of thought there --
  • 11. TAMI RELLER: Want me to do the first one? WALTER PRITCHARD: Let her answer the first one. QUESTION: Yes, I'll come back to the second one. TAMI RELLER: Okay. So, this is an important question. Here is where we really needed to make some good progress with Windows 7, and we have, in terms of defining where the compelling value prop would have been. So, in developed markets, the majority of customers do opt for Home Premium versus Home Basic. And so the move to sort of all Home Premium in developed markets is one that we've made for Windows 7, and feel very good about that. There are some key scenarios in there that also appeal to consumers in emerging markets as well, things like Home Group, so being able to essentially have a community of PCs in your home environment that can share whatever you need to share, you can send music off to different PCs, share photos, share whatever other scenarios, and sort of have a home environment with Home Premium. It's a very compelling piece. There's more, but those the types of things that we've really thought about, and enabled with Home Premium. And then, on the Pro side, there's two big ones that I'll point out, and then there's many other medium and small items, as well. But, one is being able to run in XP mode on Pro. It's a need. It's a need in small business, it's a need in medium business, and even a need in enterprise. So that's a compelling scenario for pro. WALTER PRITCHARD: That's an app compatibility? TAMI RELLER: Correct. And so if you have applications run in XP, but not in the others, you can very easily fire that up within your Windows 7 environment. And then the second is a basic one that's been there with Vista as well, but we've enhanced, is domain join. So for most small businesses, clearly for mid-market businesses, you need. And so Pro really is the obvious SKU for business. WALTER PRITCHARD: In RTM versus the coupon program, and how long is it, three months between RTM and the actual availability of the product? TAMI RELLER: Yes, so there's not a sort of fixed, proscribed amount of time. And with Windows 7 in particular, we've just been very consistent that it's all about the quality and it's all about the feedback that we get at each milestone, and sort of one milestone at a time. We did go a step further a few weeks back, and Bill Veghte talked about the fact that based on the feedback that we've gotten through the beta process, and early feedback through RC, we're increasingly comfortable that Windows 7 will be around for the holidays, here for the holidays. So that's the one statement we've made beyond that. WALTER PRITCHARD: Once you release it to manufacturing, how long before we can buy it? TAMI RELLER: A few months.
  • 12. WALTER PRITCHARD: A few months, okay. And would you start couponing as soon as you RTM, or might that be a separate event? TAMI RELLER: We have not announced the tech guarantee program is the one that you're thinking of, which is what we did with Vista. So, we have not announced anything specific to that, but yes, what I can say is that we were happy with that program with Vista. And with Vista it came before RTM. WALTER PRITCHARD: Could you just -- I was actually going to ask -- that was going to be my last question, just to remind people I think Chris Liddell on the earnings call when asked talked about that for the fiscal year the impact is all in Fiscal Year '10, so there's no impact from the tech guarantee program on the year. You're just taking it from one quarter and putting it in another quarter. Can you just help us understand -- remind us with Vista on a quarterly basis the impact there, and actually just start with that, so people remember sort of what the impact was back at that point? TAMI RELLER: Yes, I mean, the basic concept of a tech guarantee is for certain Vista products, so the more premium products, if you purchase XP within a certain period leading up to launch then you are entitled to then also receive an upgrade to Vista. So that was the basic concept behind it. And so then the accounting for that is for those units we would defer -- it's a little more complicated than this, but approximately 50 percent of the revenue. That's the basic concept of tech guarantees. WALTER PRITCHARD: And recognize it upon retail shipment? TAMI RELLER: Correct. Correct, and then it all comes forward. WALTER PRITCHARD: Okay, so it sounds like you're essentially saying the expectation is that we should see something similar to that? TAMI RELLER: Yes, again, we haven't announced anything, but pleased with the program, and it's a logical program. WALTER PRITCHARD: Got it. Last question I want to ask, we have a couple of minutes here, just sort of on a little bit of an off topic, but as -- there's a lot of debate in the community on the PC market, and functions that are done today on the PC, for example media consumption, being done on other devices, or e-mail, consuming e-mail or other types of content being done on other devices. Could you help us understand as that moves into the living room, so Microsoft has Xbox 360 which has been a success, the mobile side which to me still feels like a work in progress to get it to be a cool product, but the volumes are certainly there, and on the online side a work in progress. Do we need to see an additional product from Microsoft to help fill in sort of all these different use scenarios for consuming content, and what's done today on a PC, or do you all look at the PC is essentially migrating its function into the living room, for example? TAMI RELLER: Yes, I mean, it's a fair question. And with Windows 7 we really have increased our synergy, how we work with so many groups within the entertainment and devices arena, whether that's mobile, whether that's all of the Media Center, and Xbox opportunities, et cetera. So I think that from a Microsoft
  • 13. standpoint there still is a lot of upside in us being able to sort of bring more of those scenarios across devices that we have today. And clearly that would be upside to customers, and a demand of customers, as well. So we'll keep taking that forward. And some of the home group scenarios I described earlier on home premium, absolutely the Xbox is a key part of that. WALTER PRITCHARD: Great. All right, well, I appreciate, Tami, you coming, and presenting here. TAMI RELLER: Thank you for the questions. WALTER PRITCHARD: And thank you all for coming. TAMI RELLER: Thank you for the engagement. Thank you. WALTER PRITCHARD: Yes. END