Who: Bryan Lee, corporate VP, Entertainment and Devices Division


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Who: Bryan Lee, corporate VP, Entertainment and Devices Division

  1. 1. Who: Bryan Lee, corporate VP, Entertainment and Devices Division When: September 5, 2006 Where: Citigroup 13th Annual Global Technology Conference, NY BRENT THILL (Analyst, Citigroup): So I'm pleased to introduce our keynote speaker from Microsoft, Bryan Lee. Bryan is the Corporate VP of Entertainment and Devices Division. He's in charge of their music, television and video initiative. Prior to that time, he was Chief Financial Officer of the Home and Entertainment Division at Microsoft since fall of 2002. Lee joined Microsoft in 2000, and prior to that time spent 13 years at Sony in the music and video business. He negotiated all contracts related to the company's motion picture business, and I think he shares a pretty unique perspective in terms of what's happening from that business. Joe Binz, Director of Investment Relations, is also with us today. So with that, I'm going to turn it over to Bryan. Bryan is just going to give you a snapshot of what he's responsible for. I'll follow up with a few questions, and then we'll open it up also for your questions in the audience. BRYAN LEE: Well, thank you very much, Brent, and thank you, everyone, for letting me join you here today. I'll just start with a little bit of a context on Microsoft and what we are doing in entertainment to make sure we're level set on that, and then talk a little bit about what I do specifically, and then, as Brent said, open it up for questions. So if you follow Microsoft, you know that last year we organized ourselves in three key business units -- that's not new news. The first one really is around the platform, the other one is around business software, and the third one is around entertainment and devices. And the reason that I do take a moment to highlight that is, when you think about that and you think about a company with Microsoft's tradition, Microsoft's focus on software platforms and applications, and to think that the entertainment and devices group is now organizationally on parity with that, it's a pretty significant notion. And it really does carry forward into a lot of things that we as a company want to do, a lot of our aspirations, a lot of our investment strategy. And that group is run by Robbie Bach. That group includes a lot of things. It includes gaming. As I'm sure you know, we invest pretty heavily in the gaming space, and we're excited about seeing that pay off over the next couple of years. It includes what we do in the mobile and embedded devices group. It includes what we do in the consumer, hardware and software group. And then, as Brent said, it also includes entertainment. So in entertainment specifically I really manage three parts of the business, and then have a bunch of aspirations that I get to chase, so it's a pretty cool job. One, I manage our Media Center Edition PC version, so what's going on there. If you've been following the space, our uptake rate here in the U.S. in desktops is well over 50 percent. We're seeing OEMs and consumers gravitate very heavily toward
  2. 2. this premium version of Windows. And as we look to Vista coming out, the functionality of Media Center will be in our premium home version of Vista. I also have the opportunity to manage what we're doing in the TV space with Microsoft TV where we produce software platforms that are used by network operators, whether those be traditional cable companies or, as you're probably seeing, the telcos, particularly in North America and in Europe, are investing very heavily as they lay fiber, and they want rich media experiences. So we've offered a software platform which allows them to take that to market. The third project that I get the privilege of managing is our efforts in the portable media space, where we will be bringing a product called Zune to market this holiday. We haven't disclosed a lot about that. We'll be able to talk about some kind of high level notions there, but really stay tuned over the next few weeks for a lot of details on that. And then anything that the company chooses to do in the entertainment space, in the traditional entertainment, music, video, television, I get to spend a lot of time thinking about that; so a pretty cool job. BRENT THILL: One of the most pressing issues right now from our client base is why did you come to the decision you needed to pursue a strategy with Zune in the portable music space? BRYAN LEE: So we think about entertainment holistically. So let's take Zune, but let's step up a level and talk about why Microsoft thinks entertainment is an interesting space to be in today, and an interesting growth opportunity throughout the future. So we look at entertainment and actually see a lot of parallels to what happened in the enterprise space over the last 25 to 30 years. If you go back in time and you think about a series of relatively intelligent devices, relatively intelligent pieces of software, but very little connection between them. An individual word processing device that had individual word processing software, et cetera, and you think about how that transitioned and how that added tremendous value to productivity, to consumers, to enterprise via the connection of all of them by adding a software platform, we see a lot of similarities as we think about entertainment. It's very interesting when you think about entertainment today where you have devices that are on the cusp of being very intelligent but aren't quite there yet, but they've got tremendous scale. So think about the television, which has tremendous scale, hundreds of millions of televisions spread throughout the world, yet the core smarts of it aren't really there. When you think about portable devices that are out, MP3s, iPods, things out in the market today, a level of intelligence, it actually is a breakthrough that you can carry around your jukebox of thousands of songs in your pocket, but where's the intelligence that allows it to learn, where's the intelligence that allows it to make your other media experiences better? We see a lot of opportunities in those spaces, so for us it's very much about taking the world we see today, adding a software layer, creating an environment of connection, and creating a layer of intelligence that allows for much richer consumer experiences.
  3. 3. So Zune is just another example of where we see the market sizing up. Apple has done a fantastic job of creating beautiful hardware, a fantastic brand. They've trained consumers on how to expect a very simple integrated experience, and we applaud them for all that they've done; we just think that there's a lot more to be done. We see this space as having the potential scale not of today's market which sells 30, 40 million devices, but of something closer to the cell phone market where you sell hundreds of millions of devices. And for that type of scale, that type of intelligence, we see it being square in the middle of what we want to do. BRENT THILL: As a follow-up to Apple, they have roughly 70 percent market share in the device and music download business. How do you view Zune being differentiated, and how do you break -- I've purchased four or five different iPods, so how do you switch a consumer like myself to actually engage with your device? BRYAN LEE: Well, I'd actually say the challenge is even more daunting. Depending on how you count the math, they have 70 percent market share, up to 95 percent market share, which they have in the higher end video devices. It isn't easy. I think a lot of it is because consumer choice is all focused around one scenario right now. As we've gone out and talked to consumers about Zune, we've asked them, "Do you feel you have choice in this space," and we get a resounding, "Yes, we have a lot of choice, you can get a Shuffle, a Nano, a Video iPod," which just amplifies the challenge that we face. We think that if we can provide to consumers an alternative first of all, so we've got to be as good as Apple in the core functionality, we've got to have that simple end- to-end elegance, we've got to have a good sexy physical design for the device, we've got to have a cool brand. If any of you have teenagers, like I do, you know that a lot of those things are really the forcing function for the purchase decision. Once we get to that, we think of the opportunity, like I said before, to really connect things. We think of the idea that my experience gets better because you have one, because I have one, because Joe has one, that we can learn from each other, that the device can learn from me and it can learn from each of us. And when we get specific on features and things that we're doing, you'll see a lot of emphasis on community, on a shared type of experience. BRENT THILL: And the name Zune, a lot of questions around what was behind the name. BRYAN LEE: So Zune is a new name. It doesn't mean anything. It was a name that we looked at and said it does connote some action. There are a lot of things people have already kind of come up with different twists. I saw some retail stuff put together by one of our partners that said, "Coming Zune". And you can see all kinds of little plays on that. The real interesting thing for us was how we thought about it relative to the brand equity we had. We certainly have brand equity in the name Microsoft, we have brand equity in the name Windows, we have brand equity in the name Xbox. And we looked at all those and said, should we bring any of those to market. And it was pretty easy to see that the Windows and the Microsoft thing, while interesting and while to varying degrees will be sub-brands, they weren't appropriate for this type of consumer facing entertainment experience.
  4. 4. Xbox was the one that caused a little thought. We have created a tremendous amount of brand equity, so I get a lot of questions about why didn't you just use that. What we discovered, and really what we saw when we asked ourselves the question the second time was what we were offering, was it true to the brand equity we'd created in Xbox, and was the brand equity we were bringing going to be true to this experience. And we found that both of them were probably more challenging than they were opportunities. Our real focus is going to be to be true to the entertainment experience itself, so this will be a music device. We want it to be the best music experience you can have. That's really we want to celebrate the art, we want to celebrate the artist. Unlike our competition, we view a lot of what we're doing a little bit more as a frame for the experience than the experience itself. We know that we have to build some great hardware, but we don't want the consumer's experience to be so focused on the hardware. We want the consumer's experience to be focused on what they do with it. And so it became very important that we not offer a brand which contradicted that experience. BRENT THILL: Some of the critics when you unveiled Toshiba had mentioned that it's just a repackaged Gigabeat. Can you talk a little bit about the strategy in choosing Toshiba, and how this will differ from their current device that's out today? BRYAN LEE: Well, I can talk a little bit; I can't get into any device specifics yet. We're going to be unveiling that very soon. Toshiba has been a great partner of Microsoft in varying ways for a long time. We knew that we needed some contract manufacturing, someone to help us. Much like with the Xbox business, we don't literally run the factories that screw the device together. We do a lot of the design. So we picked Toshiba. They brought experience in this space that we didn't have. They brought some of the foundational technology but the device that you see will not look or feel or smell very much like the product that they've taken to market thus far. BRENT THILL: When you entered with Xbox a handful of years back, you didn't put an ROI in terms of the investments that you would need to make or the timing of when that would start to pay off. Is that the way we should think about Zune as well, that it's a floating date, you're going to need a considerable amount of investment upfront and that will be very analogous to what happened with Xbox? BRYAN LEE: Well, it will be similar. I'll draw a couple of distinctions. We've said that you should think of this certainly not as a 12-month or 18-month investment horizon. That's not a very realistic timeframe when someone has so much of the market as our competitor does in that space. And our notion is to invest for the longer term. Our notion is to invest for this vision of connected entertainment, not to invest for what might happen just in a short period of time. There are some fundamental differences in the business model that exist in this space versus the business model that exists in console gaming. In console gaming the basic business model is to invest very heavily in hardware, to sell the device at a loss, and then make it up in the software. And the Xbox strategy even amplifies that because the strategy was to differentiate based on power that required a lot of hardware investment. The device relative to the PlayStation 2 was three times more
  5. 5. powerful, it had twice as much memory; I mean, we could go back through a lot of things that caused an already challenging business model to be stressed further. In this space it's not the same notion. The technology is advanced but not as cutting edge as game consoles. Our competitor sells the device at a very nice margin. I'm not sure I'll be able to replicate all their margins coming out of the gate, and I will disproportionately spend to build brand, I'll disproportionately spend in development for the longer term, but the investment magnitude probably shouldn't be anywhere near what the Xbox business was. BRENT THILL: If we can just shift to the Xbox, by the end of the year you'll have 10 million shipped units, 160 plus games, really have given Sony a hard run for their money. If you look at one of the things that I thought was striking reading one of the videogame mag rags was the head of the PlayStation magazine, she mentioned she wasn't going to buy a PS3 when it came out, because it was too expensive. In terms of just beyond cost, what do you think some of the other challenges are with Sony coming to market later this year with the PS3? BRYAN LEE: Well, that business model is based on cycles of somewhere from five to seven years, depending on how you count, and there's a virtuous cycle nature to it. To the extent that you get an install base lead, you naturally incent the publishers to develop first and foremost to your platform, which then makes the content that much richer, which then naturally incents consumer behavior, and the install base grows, so it's a cycle. The cycle worked against us at Microsoft last time. Sony had between a 12 and 24- month head start, depending on the region you were in. But we were very public for years that we were certainly not looking to give them a head start this time. We didn't know when they would come to market, but we knew that they would not beat us to market. As it turned out, for whatever choices they made or choices that got kind of placed on them because of their technology decisions, they're going to come to market roughly a year after us. So, as you said, we'll have a head start. We expect to be at least 10 million units ahead in terms of install base. As interestingly, we expect the game development to have had the time that's seasoned with the product itself so that more can be pulled from the device. Sony actually also made a couple of strategic decisions; good or bad, time will tell. They invested in two kinds of proprietary technologies. They invested heavily early on in the Cell processor. We chose to take something which was a little more on the roadmap, which meant that execution guarantee was a little bit better, and scalability in terms of costs were better. They, for whatever reasons internal to their company, chose to build something from scratch. We believe we made the right decision because we actually believe that our core processing technology is actually more powerful than theirs, there's a lot of rich debate about that. But whether we're more powerful or less powerful is pretty close. But because we built something that developers have worked with -- kind of in a logical roadmap, it took the work that we'd done on the basics on Xbox 1 and took it to the next level, so developers were able to work with a system where they had some familiarity.
  6. 6. From a business model standpoint, we also picked something which we think will have a better cost curve than doing something totally proprietary. So most of the analysts look to Cell as one of the reasons that their cost is what it is. The other one is Blu-ray where again Sony chose to follow a proprietary technology. It will be proven whether or not it's a good choice, bad choice. We didn't see many, if any game scenarios that actually benefited from Blu-ray. Certainly if you're into high-def movies, it gives you an opportunity, at least in theory, to consume high-def movies in a better way. But again we didn't see anything that benefited gaming. So it's caused Sony to be faced with the Hobson's choice of take a larger subsidy than natural or pass that along to consumers. It looks like they've chosen, at least initially, to pass that along to consumers. I'm sure that they will still have great demand through the holiday season and will sell every one they can build. The real issue will be, going beyond that, whether at these price points it challenges their ability to scale. BRENT THILL: How are you looking at the balance between internal game development and leaving that to your partners, such as Electronic Arts and Activision? BRYAN LEE: Well, our internal game development has been based on really less about making sure that we have a certain percentage of the market or anything mathematical like that; we've really charged our internal development team with three goals. One is to produce games that move consoles, right, whether those be exclusive games where they have new groundbreaking features, whatever it is. We really want games which make the platform that much richer. The second one is a close cousin, which is produce games which really showcase the key features. We invested very heavily in Xbox Live as a platform very early on, really before games would naturally go there, there was no proven business model. So the carry-on then was to ask our first party group, our internal development to invest very heavily in games which showcase that feature. In the 360 timeframe you'll see very similar things. And then, of course, because we are a business, the third criteria that we looked to our internal development is to make a reasonable return. We're not competing in the publishing space in the same way, we look at publishing as a viable business, but we look at how it moves the platform overall. So those are the three key levers we look at. BRENT THILL: The last topic I want to touch on, and then we'll open it up to questions, is IPTV. What is it? How should we think about it? How do you define the landscape and the competitors in that space? BRYAN LEE: So at its simplest form, IPTV is the best way to consume television, bar none. A few things it's not, because it's a confusing title to some people, and has a lot of history: It's not TV on the Internet, and it's not Internet on the TV. The competitive set is cable, satellite or other types and means of distributing television content.
  7. 7. So what an IP network does is it gives you several capabilities that go beyond the existing system. Certainly from a user experience standpoint you can think about since everything is IP-based, since it all sits at the server, the quantity of programming, the quantity of content is effectively unlimited. Everything that's out there in the world, content being created is available. You have no capacity issues in terms of distribution like you do with traditional means of cable or satellite. The other thing is it can make for actually richer experiences, so simple things like instant channel change, which doesn't sound like much until you see it, and then you can never imagine going back. It makes things like DVR capabilities effectively limitless. While devices will have local storage, again the same notion, since everything fits on the server, it may feel like DVR capabilities, but everything is really always available. Search: If you've gone through any of the current systems where trying to search for a piece of content that may sit on your hard drive, it may sit in over-the-air programming, it may sit in a VOD system, you have to execute separate searches for those. Because it's IP-based you can search instantaneously across distribution capability. For partners the cost structure, it's a much more efficient system to run, again all IP- based, integrates with a lot of systems. We'll scale very well over time for consumers. The core set-top box functionality is very easy to produce in time on a single chip, so an SOC model for a set-top box is very capable, so a lot of scale for the partners providing the service. And then finally integration with other experiences. If you want to manage your experience from your PC at the office or at home, or through your cell phone, or think about connections that make sense back to your PC, your Media Center PC as another way to share experiences, your Zune device over time, your Xbox over time; all those things are much more capable when you're in an IP-based environment than a QAM-based or a satellite or something like that. So we see it as a huge opportunity. The business economics at a macro level are very interesting also, as you see telcos looking to invest in other ways to offer rich experiences to consumers. So we've created this platform, which really scales. It's being adopted by most every major telco in the Western world. Our competitive landscape primarily is whether consumers will adopt this technology, the pace at which consumers will adopt it, and whether certain telcos feel that they would rather go in-house and develop these things or whether they'd work with us. There are a few competitors out on this side, but that's our main competition is really consumer adoption and the desire for in-house production. BRENT THILL: Okay, before we turn it over to your questions, just as a risk disclosure or disclosures for the companies that we follow on for Microsoft are at the registration desk, if you need to check those disclosures. We'll open it up.
  8. 8. QUESTION: Software on the IPTV software stack, where do you stand on getting that released to a large number of your carriers in terms of production for production release? And then secondly, if you could explain how your ad software will work in that business model in terms of revenue generation for Microsoft. BRYAN LEE: Okay. The questions, in case anyone didn't hear it, really how does IPTV go to scale, and then how does advertising software weave into that. Is that a fair kind of quick summary? So I don't really want to get ahead of any of the partners, but by the end of this calendar year, several of our partners will be rolling out scale on IPTV. They should manage their own timeframes on that on how they announce it. But our software is coming in, we're working with them. They feel very confident about really adhering to the statements they've made to you and the rest of the world about that. So we feel very good about that, and I think they would all confirm that. Advertising is this interesting model where over time your question about why is this better, I failed to mention revenue opportunities like this. When you think about an IP-based system and you think about the capabilities of targeted advertising, you can really unlock an enormous business model there. Literally every device, every set-top box is a separately addressable terminal for advertising, so to the extent that more information is gained about the consumer, to the extent that the business models allow this, you can dramatically increase both the aggregate amount of inventory effectively, and the cost curve when you think about rolling out advertising. It's certainly a long term advantage that the people entering the IP space feel they have over more traditional broadcast partners. Microsoft is, as you know, working on platforms that help advertisers through our adCenter work, that help ad serving on the Web, and they'll help it in a variety of other places. So you can imagine the underlying technologies are very similar, and our partners that are network operator partners, they'll be rolling out IPTV, are very, very interested in figuring out how they can get a leg up on these advertising opportunities, and our job is to help them do that. BRENT THILL: The next question here. BRYAN LEE: Go ahead; I'll repeat it. QUESTION: (Off mike). The top 25 telcos, everybody has either decided to go with an MSTV platform or Linux-based platform. I was wondering if you could kind of give us an idea of how many of those 25 you might have right now. BRYAN LEE: I don't know if I can quote specific numbers on that. I would say that for the majority of the major ones, they are rolling out with our platform in one form or another. They like the solution that we're bringing to the table, and they like a lot of the upside capabilities like the advertising point that was mentioned before. And because we're producing a platform which generally scales between providers, each one obviously wants their own special things to focus on, but because we're building a platform that then we can export from provider A to provider B, it makes a lot of sense for them to look to what we're doing; so a very healthy number.
  9. 9. QUESTION: And then I guess lately Deutsche Tel and AT&T have both said they're 50 cities, 20 cities, and your software from your vantage point is all set to scale to those numbers in the next three to six months? BRYAN LEE: Yeah. I mean, I'm sure we'll have a couple of quirks here and there, but nothing that neither of us feel uncomfortable with. For both of us the key is about a great consumer experience, it's about making sure that the base functionality works extremely well, and then we layer on additional differentiators. So neither of us would want to go out to the market with anything which we didn't think hit that bar. So that's really the way we're looking at it together. QUESTION: And then just lastly, do you get a revenue per box that sits on the set- top or on the TV set, or is it a project-oriented revenue as these things ramp into the millions? BRYAN LEE: It's more revenue per box type model. There are some sustaining components to it as well, but the scale comes in the revenue per box. QUESTION: Actually a follow-up to that; that was half of the question I was going to ask. Is it a linear revenue per box or is it bracketed once you get to a certain penetration? I'm not asking for specific numbers but just conceptually. BRYAN LEE: Each one varies a little bit. Probably more conceptually it's linear, it's not going to be purely mathematically linear, but it's going to be more linear than something which has a huge top off to the curve. BRENT THILL: We had one over here I believe. QUESTION: Telephone companies have never offered TV before, so it's a new thing of all new technologies, new rollouts have challenges. As currently constructed, are the telephone networks ready to handle IPTV or is this going to drive demand for significant upgrades of their networks? BRYAN LEE: It will obviously vary by provider, but I believe the way that they're staging it is they're only rolling it out where the upgrade, where the infrastructure upgrades have already occurred. So take AT&T, which has an enormous footprint, they're not going to roll it out to every city on day one, they're going to roll it out where the infrastructure has been created. And really the same answer that I gave before, they're very, very focused on the consumer experience here, and they wouldn't be rolling it out in markets where they didn't feel comfortable having met the bars for quality. BRENT THILL: I see one over here. QUESTION: What are you expectations for the sell-through of the premium edition of Vista for the home, which includes the Media Center? BRYAN LEE: I don't think I could break out anything specific on that. I can tell you that up to now the Media Center Edition, I think I mentioned this before, it's attaching in the U.S. on desktops at over 50 percent, and the trajectory on that is doing nothing but increasing. We're seeing similar types of increases outside the U.S., although not quite as dramatic. So if that's an indicator, I would assume that it will be very strong, very healthy. I don't think we've broken out anything, and I'm a
  10. 10. little hesitate to break out things on the Windows space where I don't have pure knowledge of what they've said and haven't said, so my apologies. QUESTION: (Off mike). BRYAN LEE: I'm sorry? Yes, they haven't broken it out. QUESTION: Amazon.com listed some prices last week; I don't know if those are in lockstep with what your thinking is on the pricing in terms of home. BRYAN LEE: Again, I'm a little uncomfortable trying to get ahead of what the Windows group is saying. My understanding is that pricing will be roughly comparable to pricing for XP, and certainly the value proposition just escalates when you talk about this type of software. This is really a breakthrough in what it brings to the table. QUESTION: Just as a follow-up, I think you have said that one of the bigger opportunities with Vista is to actually go into some of the small business and home markets where they've adopted a lower-end version, so there's a big cross-sell opportunity to bring them up to the higher priced SKU. BRYAN LEE: Yeah, the SKUs have really been catered around offering a variety of choices. You can get basic, you can premium, you can get ultimate, which wraps everything, and that follows both a consumer side and an enterprise side. So we see the option for small business to take advantage of more premium SKUs being there, and our suspicion is that they'll look at that value proposition and see it as phenomenal, and then want uptake to that. BRENT THILL: There's a question over here. QUESTION: Hi. I'm curious about what is Microsoft's view of the download of movies via the Internet, and whether you anticipate that to happen, the rate at which it does happen, and how will it manifest. BRYAN LEE: Well, my view is just going to be my view. There may be a variety of ways it plays out. In general, we see that distribution of content naturally flows to a bunch of different forms. We've certainly seen it with music where it's more than a flow, the dam has burst on a lot of kind of content distribution. But if you think about the way that you might get movies today, you might choose to go to the store, rent a DVD, you might buy it, you might use some service like NetFlix, you might use a VOD service from your cable or satellite provider. All those are a variety of models, and a lot of them didn't exist just a few years ago. We certainly see more of probably download through the Internet, although they'll be very managed experiences, otherwise the content providers will be very hesitant to offer it. So we see those complementing the existing models. So we see tremendous upside in that space. Consumers really don't want to be locked into any one model holistically. Every one has its pros and cons. The pros of that one are an unlimited library. The cons might be time to download, at least in today's infrastructure, and depending on your usage rights, it may be captive or you may get burn rights or not.
  11. 11. So we see a lot of these as just great opportunities to expand. And back to Microsoft's role, to the extent that we can provide a software platform that allows for a lot of the experiences to be best for how each consumer wants to enjoy them, that's really what we see our role. Ideally we'd like to see a world where "buy once, play anywhere" is kind of the model, and consumers get to choose how they ingest their entertainment. They can look to watch some of it on a cell phone or watch some of it on their 60-inch plasma. That would be their choice. We'd like to really help the industry by making usage rights free enough and comfortable enough for the underlying intellectual property producers that those models open up. BRENT THILL: Until someone jumps in, I'll ask one. What's your view on mobile gaming? BRYAN LEE: The mobile gaming space has been really growing. If you think about portable gaming as two different ecosystems today, the more managed ecosystem of Nintendo DS or a Sony PSP, that industry has been growing, but the one that's been taking off is around the cell phone space. The gaming there is very light, usually it's something which doesn't rely on a lot of processing power. We actually think both of them are very interesting businesses, have very interesting upside. Certainly what we refer to as mobile in terms of cell phones, the demographic reach is very broad there. It's not as male-oriented as some of the other gaming experiences. It's also not quite as tied to gender -- I mean, to age demographics. So we see a lot of opportunity there. We believe in the expansion of gaming as a medium overall. We said about a year ago that through this cycle we would like to actually see a billion people experience gaming in some type of environment today. That includes the console space, it includes the PC. We've done a few things in that space, which we think enhance it. What we've done with Xbox Live Arcade has brought a more casual, a shorter timeframe version of gaming to that space. We've seen tremendous uptake there. We think mobile is another area. Our general belief is we'd like to see the gaming space elevated to be a medium that's on par with all the traditional medium of film, television, print. So we see it as nothing but good for the industry. A lot of our efforts that we've done as a platform company have focused on the core technologies to make it that much easier for developers to build a game, and then publish it out to various forms. So our effort that we announced a couple of years ago called XNA does include how do I take a game, build it so that it can work on a console, and where appropriate can start to work on even a mobile device. So we'll continue to push the landscape there while making that a very easy technological effort for game developers. BRENT THILL: At the analyst day Steve Ballmer mentioned that he doesn't think of Microsoft becoming a hardware company, but yet we've had an Xbox, we have Zune. Is the PSP or mobile platform something that you would evaluate? BRYAN LEE: Well, to go back, the reason that we have become a hardware company is actually less about an aspiration to do it and more a necessity of the business model. In the console gaming space the fundamental business model, as I
  12. 12. said before, is about building a piece of hardware that oftentimes is subsidized, and then the business model makes itself right through the software side. If you try to split those, you don't necessarily get the kind of business which works, you don't get the consumer experience. So Microsoft has participated in the gaming space in a variety of ways, from the core technologies, the things that were built around DirectX to PC gaming, but when we decided to enter the console space, it was a necessity to build the hardware. It's fairly similar when we think about what we're going to do with Zune. Consumers, as you said, by the market share numbers around iPod, today are voting on one consistent experience: I want to know the brand, I want to know the software, I want to know that the entire experience is effectively plug and play simple around how I enjoy music and video. So here again we're supporting many models. Our PlaysForSure compatibility program is still out there, it's something we heavily support, it's something we believe very much in as a platform company. If your business is based on building a device that you would like to connect to multiple services, you need to ensure a level of compatibility. Or if you build a service that you need to connect with multiple devices, you need that same compatibility. We're a big believer in that, and we'll continue to invest very heavily in that. In this case though we focused on a complementary business model which has an integrated hardware/software/service/brand experience to it, and to do that we felt it was necessary to build the hardware. So we've done it a little bit more out of necessity. As to future plans, there's certainly a lot of opportunity. I can't really say anything about it today, but who knows where the world might take us. BRENT THILL: There's a question over here. QUESTION: Just to follow-up on that, in order to take advantage of the Zune ecosystem, which is I guess where you go with that, do you need to have the Vista Media Center version or will any Vista version allow you to take full advantage of the Zune ecosystem? BRYAN LEE: You'll be able to take advantage of all the functionality with Vista, whether it has with the premium with MCE functionality, and you'll also be able to take advantage of it with XP. So we're not tying it specifically to Vista. Over time, Vista will offer scenarios that are even richer, but we didn't want to limit the audience just to being focused on having Vista. QUESTION: Bryan, I don't know if you can answer this question, but in order to consider Zune a success, would you be happy capturing the incremental digital music user or content user, or do you feel like you need to invest to get people to move away from iTunes towards your solution? BRYAN LEE: I actually think of success in a slightly different measure than either of those. Today, I think of success as first of all relevance, that you look out and you say, wow, in the space of digital media you cited some big numbers with iPod; we'd like you to say, yes, iPod will probably be the market leader six to 12 months from now, I don't think we will take them that fast. But if you look at the market and you
  13. 13. say, okay, but I now see a second innovator on the landscape, iPod has done a tremendous amount of innovation, and actually not to disparage any of the other partners, there's a lot of innovation going on in the marketplace, but when you look to deep integration around connection with experience, around connection with my friends, around bringing some community, around bringing kind of Web 2.0 mentality and focus to this space, I'd like you to look back and say, yep, Zune broke through that, and now we see a new big investment, big market potential player on the horizon. It's not unlike what happened in the game space where Sony was a very dominant player, probably not quite as dominant as Apple is today in this space, but where the Xbox entered, Sony stayed the market leader for years beyond that, but Xbox became a viable alternative, became very relevant in the ecosystem, publishers, developers dedicated a lot of effort to making sure that they were building great titles for Xbox, consumer awareness was there, and then we began to innovate in spaces particularly around online and really kind of redirected the agenda for what was happening in this space. If you flash forward a year or two years and you look back, and you can say, that's what you accomplished in the Zune space, I'd be very happy with that. BRENT THILL: One last question? QUESTION: So the Zune player, is that something that will work with the current competitors to iTunes' services like Rhapsody or Napster, or are you just trying to cerate that integrated solution and to the exclusion of those current providers? BRYAN LEE: Well, we're providing an integrated solution from the device to the player to the service that sits behind it. The closest model would be what Apple has in the market today with their iPod and iTunes. Those are an integrated one-to-one connection between device and service. And that's the model we'll look to. Now, the core underlying DRM, a bunch of the technologies are all shared, they're all the same. So there might be some interesting scenarios to think about over time. Again, our business model is based on that; therefore focusing on compatibility with other services or other devices is not really something that we're after right now. BRENT THILL: Great. Bryan, thanks for your time. BRYAN LEE: Thank you. BRENT THILL: Joe, thanks to everyone. END